Familiarize yourself with these top landlord tax deductions that can help reduce your tax burden to the IRS.
Depreciation is one of the biggest and most important deductions for rental property owners because it reduces taxable income without impacting actual cash flow for your real estate.
Since land cannot be depreciated, the preferred strategy is to allocate as much of the property’s purchase price to the building as possible to maximize your depreciation expense.
One way to increase your depreciation deduction is by utilizing cost segregation studies and bonus depreciation to greatly increase your depreciation deduction, and if you qualify as a real estate professional for tax purposes, you can even use these passive losses to offset ordinary income from other sources.
Note 100% bonus depreciation is available on eligible property placed in service between 9/27/17 and 12/31/22. Bonus depreciation drops down to 80% for property placed in service on 1/1/23 through 12/31/23, and phases out 20% per year through 2026.
It’s common for landlords to travel to rental properties located within driving distance. You might also travel to the bank, the hardware store, or to meet with your broker, your attorney, and other key partners and suppliers.
If you have an official home office and plan to take a tax deduction for local transportation, it’s important to keep an IRS-compliant log or use software like MileIQ and Stessa to properly track all miles driven for business purposes.
The standard mileage rate for 2022 is 58.5 cents per mile for 1/1/22 – 6/30/22 and 62.5 cents per mile from 7/1/22 to 12/31/22. The Internal Revenue Service (IRS) has updated the optional standard mileage rate in 2023 to 65.5 cents per mile for business travel.
3. Repairs and Maintenance
When you incur repair and maintenance or renovation expenses, you’ll want to classify as much as possible as standard repairs and maintenance to deduct them in the year incurred. More significant projects that qualify as capital improvements are depreciated over several years, which reduces the value of your current year deduction.
The best practice here is to have all of your renovation, repair, and maintenance invoices and receipts itemized by vendor. That way you or your CPA can easily determine whether or not each line item can be:
- Deducted as a repair or maintenance expense,
- Deducted under one of three safe harbors available to landlords,
- Deducted with bonus depreciation,
- Or must be capitalized and depreciated
4. Employees and Independent Contractors
Money paid to W-2 employees and independent contractors to help run your rental property business are fully tax deductible on Schedule E of your tax return.
You’re required to send and file 1099s for any independent contractor you pay more than $600 during the calendar year if:
- you’re a real estate professional for tax purposes,
- you provide substantial services to your short-term guests,
- you’re considering the 20% QBI pass-through deduction (199A)
5. Professional Fees
Professional fees including legal, accounting, property management fees and business expenses related to your rental properties are fully deductible and reported directly on IRS Form Schedule E of your tax return.
Interest on loans used to fund your rental property business including mortgage interest, interest from a home equity lines of credit (HELOC) used within your rental business, and any other interest is fully deductible on Schedule E of your tax return.
This is an important distinction for pure rental properties because interest is only deductible on up to $750,000 of principal for primary and secondary residences.
7. Taxes and Insurance
All taxes, with the exception of income taxes, incurred as a result of owning a rental property are deductible on Schedule E. These typically include property taxes, school district taxes, and special easements or land taxes.
Unlike your primary residence, there is no cap on the amount of property tax expense that can be deducted on properties held for investment purposes.
Insurance including homeowners, hazard, liability, and flood insurance are fully deductible on Schedule E of your tax return.
Education expenses are tax deductible when incurred for the purpose of maintaining or improving the skills needed in your rental property business.
These expenses are only deductible when incurred after you start your rental property business. For example, you can deduct the amount spent to attend a property management training program, and related travel costs, only if you already have an existing rental property business. If you have yet to purchase and place your first rental property in service, then these training expenses are not deductible.
Notably, training costs for courses to start a new business such as a “fix and flip” business are generally not deductible since it’s considered a new skill set and does not maintain or improve the skills used in your existing rental property business.
9. Misc. Expenses
Expenses such as HOA fees, bank fees, subscriptions, meals (50%), and other miscellaneous expenses related to your rental business are also deductible on IRS Form Schedule E.
10. Home Office
As a rental property owner you can dedicate a room, or a portion of a room, exclusively for home office purposes you a home office deduction. The presence of an official home office also allows you to deduct local transportation expenses including auto mileage. Without a home office, a trip from your home to your local rental properties will be considered a personal expense.
Per IRC § 280A, a home office must be used: (1) regularly and exclusively as the principal place of business; and (2) regularly and exclusively as a place to meet or deal with patients, clients, or customers in the normal course or trade of business. If your work is conducted in the field your home office must be used regularly and exclusively to conduct the administrative tasks of your business (e.g. bookkeeping).
Bonus Landlord Deductions for 2023
These deductions are not as common, but they’re becoming more popular among rental property owners.
1031 Exchanges allow you to defer both the capital gains tax and depreciation recapture from the sale of a property and invest the proceeds into another “like-kind” property, often called “trading up.”
While you ultimately have to pay tax at some point down the line, with the notable exception of inheritance, this allows you to use the entire proceeds to purchase a new property. You can thereby increase the size of your portfolio at a faster pace than would otherwise be possible if you were paying capital gains taxes upon each sale.
1031 exchanges have a very strict timeline that needs to be followed and generally require the assistance of a qualified intermediary (QI).
Check out more topics on rental property tax deductions:
- Rental Property Accounting Basics
- Business Travel Expenses for Rental Owners
- Pass-Through Deductions and Casualty Losses
- Rental Property Depreciation Overview
- Capital Improvements vs. Repairs and Maintenance Expenses
- Passive Activity Limits and Passive Losses
- Capital Gains, Depreciation Recapture, and 1031 Exchange Rules
- Short-Term Rentals and Related Taxes
While reasonable efforts were taken to furnish accurate and up-to-date information, we do not warrant that the information contained in and made available through this guide is 100% accurate, complete, and error-free. We assume no liability or responsibility for any errors or omissions in this guide.