If you're earning rental income from one or more properties, you may be eligible for various tax deductions when filing your taxes.
Even though managing rental properties is often seen as a source of passive income, landlords can incur various expenses during this process. Over time, costs such as property management fees, legal expenses, and maintenance can accumulate. The good news is that many of these costs are tax-deductible, helping to lower your overall tax liability.
To fully benefit from these investment property tax deductions, meticulous record-keeping is essential. By keeping track of your rental property expenses, you can pinpoint areas where you're overspending and find opportunities to enhance your cash flow.
In this article, we’ll briefly explain how rental property deductions function, followed by a review of 40 common deductions that many property owners overlook. To help you prepare for tax day on April 15, 2024, don’t forget to check out our free downloadable rental property deductions checklist—it’s a valuable tool for filing your taxes.
Table of Contents
What are rental property tax deductions?
How do rental property deductions work?
How is rental income taxed?
What expenses can I deduct from rental income?
Can you deduct your own labor on rental property?
Can I deduct remodeling expenses for my rental property?
Disclaimer: The information provided in this article is intended for informational purposes only and should not be considered a substitute for the guidance and expertise of a qualified legal or tax professional. Readers are encouraged to seek professional advice tailored to their specific circumstances before making any legal or tax-related decisions. The content herein is general in nature and may not account for individual variations or changes in applicable laws and regulations.
What are rental property tax deductions?
Rental property tax deductions refer to the various expenses incurred in owning and managing a rental property that can be deducted from your taxable income. These deductions can significantly decrease the amount of income subject to taxation, thereby reducing your overall tax burden. Common rental property tax deductions include:
Mortgage insurance and interest payments
Depreciation of the property’s structure over time
Repair and maintenance expenses
Property management fees
For a more detailed list of rental property deductions, check out our rental property deductions checklist below.
How do rental property deductions work?
Rental property deductions enable property owners to offset the financial burdens of managing their rental business. During tax season, landlords can deduct various expenses associated with their rental properties from their taxable income, ultimately lowering the amount they owe in taxes.
Typical deductions encompass mortgage interest, property taxes, operating costs, and depreciation. For example, mortgage interest can serve as a deduction, helping property owners account for the interest on their mortgage loans. Other operational costs, such as property management fees, utilities, and maintenance expenses, are also deductible. Additionally, the gradual decline in the property’s value over time, known as depreciation, constitutes another key deduction.
To maximize your deductions, it’s crucial to maintain comprehensive records of all rental property-related expenses. Our rental property deductions checklist below can assist you in staying organized.
How is rental income taxed?
Landlords must report all income received from tenants, not just rent. For instance, if you cover utilities and get reimbursed by your tenants, you’ll need to declare the utilities as a deductible expense while treating the reimbursement as income.
Security deposits that you plan to return to your tenant(s) at the end of their lease shouldn’t be reported as income. However, if the security deposit is used as a final payment of rent, it should be reported as income. If you retain part or all of the security deposit due to tenant-caused damages, that amount must be declared as income.
In addition to tracking income, landlords must also keep tabs on deductible expenses such as mortgage interest, operating costs, property taxes, depreciation, and repairs. To calculate your annual taxable income, subtract the total expenses listed in the rental property deductions checklist from your total income received. This figure will provide the overall income amount to report on your Form 1040, Schedule E, Part I.
What expenses can I deduct from rental income?
The IRS permits the deduction of ordinary and necessary expenses tied to managing and maintaining your rental property. Ordinary expenses are those widely accepted in the industry, while necessary expenses are deemed appropriate for the business. Below are examples of ordinary and necessary expenses for your rental property business:
Accounting & Bookkeeping: Fees for professional accounting and bookkeeping services are deductible as necessary expenses for managing financial records.
Advertising & Marketing Costs: Expenses related to promoting the rental property to attract tenants, such as online listings and signage, are tax-deductible.
Business Entity Pass-through Deduction: Deductions applicable to certain business entities that allow a percentage of qualified business income to be deducted from the property owner’s taxable income.
Capital Improvement Depreciation: Major structural changes or restorations that enhance the property’s value are considered capital improvements and must be depreciated over time.
Cell Phone & Internet Services: Costs for cell phone and internet services used to manage the rental property are deductible.
Closing Costs: Expenses related to acquiring or refinancing the property, including loan origination fees and title insurance, are tax-deductible.
Credit Card Debt: Interest on credit card debt directly linked to the ownership and operation of the rental property can be deducted.
Depreciation of the Building: The annual depreciation of the building structure, generally at a rate of 3.636% over 27.5 years for residential properties, is tax-deductible.
Depreciation of Property Classes: The IRS allows depreciation for new appliances, carpeting, and furniture over specific timeframes (e.g., 5 years for appliances).
Education: Expenses for educational courses that enhance your property management skills are deductible.
HOA Fees: Homeowners Association fees can be deducted when renting out your property.
Home Office: Expenses related to a designated home office for managing your rental property business are deductible.
Independent Contractors and Consultants: Payments to contractors or consultants for services related to the rental property can be deducted.
Mold Remediation: Costs associated with mold removal and remediation are deductible.
Mortgage Interest: Interest on the mortgage loan for the rental property is tax-deductible.
Mortgage Insurance Premium: Premiums paid for mortgage insurance can also be deducted.
Landscaping and Lawn Care: Expenses for landscaping and lawn care are considered business expenses and are deductible.
Landlord Insurance: Insurance premiums covering rental property risks are tax-deductible.
Leasing: Costs for finding and securing tenants, including leasing agent fees, are deductible.
Legal Fees: Fees for legal services related to the rental property are tax-deductible.
License and Registration Fees: Costs for licenses and registrations, such as LLC fees, can be deducted.
Maintenance: Routine maintenance expenses that keep the property in good condition are tax-deductible.
Office Supplies: Costs for office supplies used in managing the rental property, such as paper and ink, are deductible.
Pest Control and Extermination Services: Expenses for pest control services are deductible.
Professional Cleaning Fees: Costs for professional cleaning services for the rental property can be deducted.
Property Management Fees: Fees paid to property management companies are tax-deductible.
Property Tax: Property taxes for the rental property can be deducted.
QBI Pass-Through Deductions: Rental properties classified as trades or businesses under IRC § 162 may qualify for the Qualified Business Income deduction.
Repairs: Costs for repairs that maintain the property’s condition are deductible, while property improvements are treated differently.
Sales Tax: Sales tax on goods and services related to the rental property is tax-deductible.
Security Systems and Alarms: Expenses for security system installation and maintenance are deductible.
Snow Removal Services: Costs for snow removal from the rental property can be deducted.
Software Subscriptions: Expenses for software subscriptions used in managing rental finances are tax-deductible.
Tax Preparation Fees: Fees paid to tax professionals for tax preparation related to the rental property can be deducted.
Tenant Screening Fees: Costs for screening potential tenants, including background checks, are tax-deductible.
Trash Collection: Expenses for waste removal services for the rental property can be deducted.
Local Travel: Deductions for business-related vehicle use to visit your rental property are tax-deductible.
Long-distance Travel: Business-related travel expenses to visit your rental property are deductible.
Utilities: Expenses for utilities like water, gas, and electricity necessary for the property are deductible.
Vacancy Losses due to Nonpayment of Rent: Losses from tenant vacancies due to unpaid rent can be deducted.
While this list isn’t exhaustive, it provides a good overview of rental property deductions. At the end of each year, review your rental property deductions checklist with a qualified tax professional to ensure you've claimed all eligible expenses.
Can you deduct your own labor on rental property?
The IRS does not allow the deduction of personal labor as a business expense since you cannot pay yourself with after-tax dollars. However, expenses for repairs, insurance, and maintenance paid to external contractors are eligible for deductions.
Can I deduct remodeling expenses for my rental property?
You can generally deduct repair expenses for a rental property as business costs. However, if the expense enhances the property or adapts it to a new purpose, it is treated as a capital improvement and should be depreciated. For example, repairing a small section of a roof is considered a rental expense, while replacing the entire roof is a capital improvement.
Rental Property Deductions Bookkeeping
When claiming rental property deductions, it’s vital to separate personal and rental expenses. If you use your rental property for personal purposes, like a vacation home, you can only deduct a portion of the costs.
To document tax-deductible expenses accurately, keep detailed records, receipts, and invoices showing what you paid and when. In case of an IRS audit, you’ll need to validate your deductions.
By adhering to these guidelines, you can maximize your rental property deductions as permitted by the IRS. We recommend consulting with a qualified tax professional to stay informed about the latest tax laws and regulations affecting your rental property business.
Partnering with a Property Management Company
At Andren Homes, we simplify the process of owning rental property. We prioritize your needs, your property, and your tenants. Let us handle everything so you can enjoy peace of mind. Schedule a call today to discover how we can enhance your rental property business.
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Logan Andren
Logan Andren is the founder and CEO of Andren Homes Property Management. Since launching the company, Logan and his dedicated team have simplified the rental property experience for numerous Santa Cruz homeowners. Their mission is to enhance the lives of their clients and community, focusing on providing exceptional service and fostering lasting relationships. DRE #02002055
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