As a Texas rental property owner, you can typically reduce your tax bill through specific deductions for mortgage interest, property taxes, expenses, insurance, and depreciation. Using these tax benefits can effectively cut your tax obligations and boost your rental property returns. 

Let’s examine the most valuable tax deductions available to Texas property investors.

Texas rental property tax deduction rules

Texas follows unique rules for rental property taxation. Understanding these state-specific guidelines directly impacts your profits at tax time. Here’s how to claim appropriate deductions and retain more of your rental income.

The Texas tax advantage: no state income tax

As a Texas landlord, you avoid paying state income tax on your rental earnings—a clear advantage over landlords in states like California or New York. 

You’ll only report rental income on your federal tax return, keeping more money in your accounts immediately. 

But don’t celebrate too quickly. You still face Texas-specific tax obligations that affect your profits.

Property taxes for Texas landlords

Texas property taxes rank among the highest in the nation, but they also provide one of your biggest potential deductions. Counties, cities, school districts, and special districts all collect these taxes locally.

Let’s assume you own a rental property in Dallas with a $5,000 annual tax bill. You can deduct this entire amount on your federal return as a business expense, potentially saving you $1,200 if you’re in the 24% tax bracket. Unlike the $10,000 SALT deduction cap that applies to your personal residence, rental property taxes usually face no such limit.

Rental properties don’t qualify for homestead exemptions that reduce taxes on your primary home. Contact your local appraisal district about other exemptions your rental might qualify for based on its location or characteristics.

Hotel occupancy taxes for short-term rentals

If you’re renting your property for less than 30 consecutive days, you’ve entered the world of short-term rentals (STRs), which comes with additional tax obligations specific to Texas.

Your short-term rental is subject to the 6% state hotel occupancy tax, plus any local hotel taxes imposed by cities or counties. These taxes are typically collected from your guests and then remitted to the appropriate government agencies.

• If you include the occupancy tax amounts in your reported rental income, you can deduct these tax payments as business expenses when you remit them to tax authorities.
• Even if you don’t include collected taxes in your income, the costs associated with managing these taxes—software subscriptions, accountant fees, filing services—can still be deducted as business expenses on your federal return.
• While platforms like Airbnb often collect and remit these taxes automatically in many Texas jurisdictions, the ultimate responsibility for compliance falls on you as the property owner.

Texas franchise tax for rental property LLCs

Many Texas landlords hold their rental properties in LLCs for liability protection. If you’ve structured your rental business this way, be aware of potential franchise tax obligations.

Texas charges a franchise tax on businesses operating in the state, including LLCs. The good news is if your rental business generates less than $1,250,000 in annual revenue, you won’t owe franchise tax (though you’ll still file a “No Tax Due” report). 

If your rental business exceeds the $1,250,000 threshold, you can subtract business expenses before calculating your franchise tax, often reducing your tax bill significantly.

Appraisal protests: your right as a Texas landlord

Texas has a robust system for protesting property tax that’s codified in state law. This isn’t technically a deduction, but it’s a powerful tool to reduce your property tax burden.

Each year, you have the right to protest your property’s assessed value through your local appraisal review board. The Texas Comptroller’s office provides detailed guidance on this process. Successfully lowering your property’s assessed value directly reduces your property tax bill and increases your rental property’s profitability.

The costs associated with appraisal protests, including hiring property tax consultants, are generally deductible business expenses on your federal return.

Additional rental property tax deductions available in Texas

As a Texas landlord, you can use federal deductions to lower your tax bill. Without state income tax, you’ll apply these deductions only to your federal return—creating simpler paperwork than landlords face in other states.

Maximizing deductions with Schedule E

Schedule E (Form 1040) is where you report rental property expenses to the IRS. This form tracks your rental income, expenses, and calculates your profit or loss.

Texas landlords can deduct these common expenses, among others:

• Mortgage interest: All interest paid on rental property loans remains 100% deductible, with no dollar limit (unlike primary home mortgages).
• Insurance premiums: Property insurance, flood insurance, and even landlord liability policies are fully deductible.
• Maintenance and repairs: From fixing a leaky roof to repainting between tenants, these expenses are generally deductible in the year you pay them.
• Property management fees: If you use a management company to handle your Texas rental, those fees are completely deductible.
• Professional services: Accounting, legal, and tax preparation fees related to your rental activity are deductible business expenses.
• Utilities: Any utilities you pay for your rental property (water, electricity, gas, garbage collection) qualify as deductions.
• Travel expenses: Trips to your rental property for management or maintenance purposes may be deductible, including mileage at the standard IRS rate.
• Advertising costs: Expenses for listing your property on rental sites, placing ads, or marketing your rental are deductible.
• Home office: Even if you manage just one rental property, you might qualify for a home office deduction for the space dedicated to your rental business activities.

Depreciation: perhaps your most valuable tax deduction

Depreciation lets you gradually deduct your rental building’s cost over 27.5 years. For Texas landlords, this offers two unique benefits:

1. You claim depreciation even while your property value increases.
2. You get tax savings without spending any cash.

To calculate depreciation, you’ll need to determine your property’s basis (typically purchase price plus improvements), allocate value between land (non-depreciable) and building (depreciable), and apply the appropriate depreciation method.

Let’s say you purchased a rental property in Houston for $300,000. Your county tax assessment values the land at $60,000 and the building at $240,000.

Your annual depreciation calculation works like this: 

• Building value: $240,000 (land can’t be depreciated)
• Annual depreciation: $240,000 ÷ 27.5 years = $8,727 per year
• Tax savings: $8,727 × 24% tax bracket = $2,094 annually

This gives you about $175 monthly in tax savings without spending a penny. When you eventually sell, you’ll pay some “depreciation recapture” tax, but often at lower rates than your current income tax bracket.

Tips for managing Texas rental property taxes, income, and expenses

Tax season doesn’t have to be a nightmare. Stessa’s property management platform offers specialized tools designed to make tracking rental income and expenses simple:

• Automatic transaction categorization: Stessa connects directly to your bank accounts and mortgage providers, automatically importing and categorizing transactions by property. This helps you capture more deductible expenses while creating a clean audit trail if the IRS has questions.
• Texas-ready financial reporting: Generate professional income statements and Schedule E worksheets that align nicely with IRS requirements. These reports make tax preparation straightforward whether you’re filing yourself or working with a CPA.
• Receipt scanning on the go: The next time you make an emergency repair or buy supplies for your property, simply snap a photo of the receipt using Stessa’s mobile app. The receipt is automatically linked to the property and available at tax time.
• Custom expense tracking: Unlike generic accounting software, Stessa is built specifically for rental property owners. Track Texas property tax payments, insurance premiums, and HOA dues with customized categories that match your Schedule E.
• Tax-time preparation: When April approaches, Stessa provides a comprehensive Tax Package with reports and documentation to help you file accurately, potentially saving hours of sorting through paperwork and spreadsheets.

Proper documentation isn’t just about compliance – it’s about maximizing every possible deduction you’re entitled to as a Texas rental property owner. With the right tools in place, you can focus more on growing your rental business and less on paperwork.

Get started with Stessa for free today.