One of the many benefits of owning a rental property is being able to deduct normal operating expenses from gross rental income to reduce taxable net income. Utilities are generally tax deductible for a rental property, even if the property is a short-term rental (STR) or only occupied part of the year.
In this article, we’ll discuss how tax deductions for rental property utilities work, along with the best way to keep track of deductions and expenses to help make tax reporting easier.
- Utilities paid by a landlord may be tax deductible for multifamily rentals, property that is partly owner-occupied, and even a vacant single-family rental (SFR) property.
- Most utility companies offer a landlord account that allows services to be transferred into a landlord’s name when a property is in between tenants.
- Tax deductible utilities and other rental property expenses are reported on Form 1040, Schedule E, Part I.
How to deduct utilities on a rental property
Utilities may be a tax-deductible expense for landlords who own both multifamily and SFR property. Let’s look at how utility expense deductions work in 3 different situations:
Multifamily rental property
Oftentimes, utilities, such as water and gas, for a small multifamily property are on a master meter. In a situation like this, a landlord will pay for the utilities directly and then recover the cost by factoring the utility expense into the monthly rent.
For example, assume a landlord owns a small 3-unit triplex that has one meter for water service that is used by all 3 units. If the total water bill averages $150 per month, a landlord may increase the rent by $50 per month per unit to include water as part of the rent.
Some landlords opt for including the utility cost as extra rent charged to the tenant, while other landlords may choose to charge a tenant a single fixed monthly rental fee. A good property management company can advise on which method is customary for the local rental market.
Assuming the gross monthly rent collected is $1,000 per unit, a landlord would record $3,000 as total monthly rental income and deduct the amount paid for utilities based on the actual utility bill, along with other operating expenses and mortgage interest if the property is financed.
Owner-occupied multifamily rental property
Sometimes, a real estate investor will purchase a multifamily property and live in one unit while renting the other units out. Occupying one of the units as a primary residence may make it easier to qualify for FHA or VA financing rather than having to apply for a rental property loan.
In a situation where one of the multifamily units is owner occupied, a landlord could only deduct the cost of utilities used by the tenants. If the monthly utility bill was $150 and each unit of the multifamily property is about the same size, a landlord may only be able to deduct $100 as utility expenses, because the remaining $50 (or one-third of the actual bill) is directly used by the landlord.
Utilities in an SFR home are normally paid directly by the tenant. However, there will be times when the property is vacant between tenants and the utilities are still turned on. When this occurs, a landlord can deduct the actual cost of utilities paid when the home was vacant and waiting for a new tenant.
For example, assume the total monthly utility bill for water, sewer, gas, electric, and trash service is $200. If the property is vacant for the entire month, $200 in utilities could be deducted as a normal operating expense since there is no tenant to pay for the utilities.
Utility companies often will offer a “landlord account” when a property is used as a rental. When a tenant moves out, the utility company will temporarily transfer the services into the landlord’s name, then back out again when a new tenant moves in. This makes accounting for tax-deductible utility expenses much easier and more accurate.
Other rental property tax deductions
In addition to deducting utility expenses, there are a variety of other rental property tax deductions a landlord may be able to claim to reduce taxable income:
- Advertising and marketing
- Leasing fees
- Property management
- Maintenance and repairs
- Trash collection
- Pest control
- Snow removal
- Mortgage interest
- Property taxes
- Homeowner association fees
- Legal and professional fees
- Personal property
- Travel and transportation
- Continuing education
- Home office
Example of deducting utilities and other rental property tax deductions
Here’s how deducting utilities and other expenses might work with a small, 3-unit, multifamily property. In this example, we’ll assume that the property is master metered for water, sewer, and trash and the landlord pays the utility bill. Each unit has an individual electric meter so the tenants can pay directly.
- Monthly rent (includes utilities paid by landlord): $3,000
- Pet rent: $150
- Total gross annual rental income: $37,800 ($3,150 x 12 months)
- Leasing fees: $1,000
- Property management: $3,024
- Maintenance and repairs: $2,400
- Utilities: $1,800
- Landscaping: $900
- Pest control: $600
- Mortgage interest: $8,600
- Property taxes: $2,250
- Insurance: $1,000
- Legal and professional fees: $750
- Depreciation: $8,727
- Total tax-deductible expenses: $31,051
Pretax net income
- $37,800 gross rental income – $31,051 tax deductible expenses = $6,749 pretax net income
How to track rental property tax deductions
Accurately keeping track of rental property income and tax deductions can quickly become complicated, even with just one rental property.
Some of the most common ways to track tax deductions for a rental property include a basic spreadsheet, general purpose accounting programs, and software like Stessa, a Roofstock company, specifically designed for real estate investors.
This rental income and expense worksheet is a good example of an Excel spreadsheet for rental property. However, because income and expense information needs to be manually entered, it can be easy to overlook a valuable tax deduction or accidentally enter the same expense twice.
Off-the-shelf software such as QuickBooks or Wave are good general purpose programs for business and personal use, but they aren’t really designed for rental property. For example, to use a program like QuickBooks, an investor will need to have a good knowledge of accounting, create a chart of accounts, and learn the terminology, such as calling a tenant a “customer” and monthly rent an “item.”
Many real estate investors find that Stessa is a great choice for automatically tracking rental property income and expenses. After signing up for a free account and linking bank and mortgage accounts, transactions are automatically synced and posted to the correct accounts. There’s no guesswork involved, and financial reports, such as income and net cash flow statements, can be generated for an unlimited number of properties with just one click.
Stessa works with SFR homes, residential multifamily properties, and short-term and vacation rentals. A free Stessa account also includes secure online access to organize and store real estate documents, iOS and Android apps to track expenses on the go, and free access to the Stessa Tax Center, which includes tax resources from The Real Estate CPA and a TurboTax discount.
Tips for rental property tax deductions
While there are a variety of potential benefits to owning a rental property, such as recurring rental income and long-term appreciation, there are also tax responsibilities as well. The IRS offers several tips on rental real estate income, deductions, and recordkeeping that every investor needs to know.
What is rental income?
- Payment received for use or occupation of a rental property.
- Includes normal rent payments, advance rent, lease termination fees, and landlord expenses paid by the tenant.
- Security deposit only if the deposit is used as a final rent payment or to pay for unpaid rent.
Deductions rental property owners can take
- Ordinary and necessary expenses for managing and maintaining a rental property.
- Includes maintenance and repairs, management fees, mortgage interest, utilities paid by landlord, insurance, and depreciation.
- Capital improvements capitalized over the useful life and recovered through depreciation, unless a landlord is claiming bonus depreciation.
How to report and store rental income and expenses
- Form 1040 or 1040-SR, Schedule E, Part I to list total income, expenses, and depreciation for each rental property.
- Form 4562 to calculate the amount of depreciation reported on Schedule E.
- Records maintained to document a paper trail of income and expenses in case of an audit, including receipts, canceled checks, bills, and travel expenses.