Most real estate investors purchase rental property for the monthly income, potential appreciation in property value over the long term, and the available tax deductions. In this article, we’ll take a quick look at how deductions on a rental property work, then review 30 rental property tax deductions, including a few that many investors overlook.
- Rental property deductions are available for necessary expenses for managing and maintaining a property.
- There are 25 main rental property deductions that most real estate investors can take to reduce taxable net income.
- Expenses may be deducted for items such as normal operating expenses, owner expenses, and depreciation.
- Depreciation of a rental property is a non-cash expense used to recover the cost of the property and capital improvements.
What are Rental Property Deductions?
As the IRS reminds, an owner of rental property has a federal tax responsibility to report all rental income on the tax return and deduct the associated expenses from the rental income. Common deductions a rental property owner can take include:
- Necessary expenses for managing and maintaining a rental property
- Ordinary expenses such as mortgage interest, taxes, advertising, utilities, and insurance
- Certain materials and supplies
- Depreciation expense to recover the cost of the building and improvements
A Quick Look at How Deductions Work
A simplified version of an investor’s rental property income and expenses reported on Schedule E might look something like this:
Rents received = $18,000
Operating expenses = <$10,000>
Depreciation = <$5,000>
Owner expenses (such as visiting the property) = <$1,000>
Income reported on Schedule E = $2,000
Any remaining taxable net income (or loss) from the rental property is then reported on Form 1040, Schedule E, Part I and is added to an investor’s total taxable income.
However, even though the income from a rental property has already been reduced by deducting operating expenses and owner expenses, an investor can still claim additional deductions included on Form 1040 such as a standard or itemized deduction before paying personal income tax.
In this example, even though the rental property itself generated a positive cash flow of $8,000, taxes are paid on less than $2,000 (after accounting for the investor’s standard deduction or itemized deduction).
25 Common Rental Property Deductions
Many beginning real estate investors are pleasantly surprised to learn that tax law in the U.S. is extremely friendly to rental property owners. Deductions can be made for normal expenses incurred in owning and managing a property, while non-cash expenses like depreciation can further reduce taxable net income.
Here’s a list of 25 common rental property deductions for real estate investors, listed in alphabetical order:
- Advertising & Marketing
Printing and installing “For Rent” signs, building and launching a property website, professional photography and videos, and fees paid to rental listing websites are fully tax deductible.
- Closing Costs
Interest, mortgage points, and real estate taxes can be deducted the year they are incurred. Other real estate closing costs such as recording fees, transfer taxes, and title insurance must be added to the cost basis of the residential property and depreciated over 27.5 years.
- Continuing Education
Fees paid to attend real estate seminars, money spent to purchase books on real estate, and tuition for continuing education like the Roofstock Academy are tax deductible owner expenses.
- Depreciation – Building
Real estate investors can help offset the cost of rental property through deductions for depreciation. IRS Publication 946 explains how to depreciate residential real estate over 27.5 years to reduce taxable net income. For example, if the value of a single-family rental home is $110,000 (excluding the lot), investors can claim a depreciation expense of $4,000 per year.
- Depreciation – Segmented
The IRS also allows rental property owners to depreciate items such as new appliances and carpeting over 5 years, office furniture and equipment over 7 years, and roads and fences over 15 years.
- Dues & Subscriptions
Many investors take advantage of free online resources for learning about real estate such as the Stessa Blog and Roofstock Blog. In addition, paid subscriptions to real estate publications and reports and dues to a real estate club are fully tax deductible.
- Home Office
Real estate investors who work from home may qualify for a home office deduction. The IRS offers a simplified home office deduction that is easy to calculate and expense from rental property income.
Landlord insurance premiums are another tax deductible expense real estate investors can claim. Rental property owners purchase this policy to help protect the home and for extra landlord liability protection.
- Mortgage Interest
Interest paid on a mortgage and interest on a business credit card used to purchase services, materials, and supplies for the property is tax deductible. At the end of each year, the lender will send a statement itemizing annual interest expense to make booking the deduction easier.
Recurring expenses paid for cutting the lawn and trimming shrubs and trees are fully deductible, as are seasonal costs like gutter cleaning and snow removal.
A commission paid to a real estate agent to find a new tenant is fully tax deductible the year the fee is paid. Leasing commissions on rental property are generally equal to one month of rent, while renewal fees are typically one half of one month of rent.
Annual costs for a sales and use tax license, a local business license, and annual registration for a limited liability company (LLC) are deductible expenses for owning and operating a rental property.
Routine maintenance expenses such as semi-annual heating and air conditioning service, inspecting smoke alarms for proper operation, and replacing air filters are three examples of deductible maintenance expenses for a rental property.
- Office Supplies
Written lease and legal forms, pens and paper, and printer ink are expenses many property owners incur that are fully tax deductible.
- Professional Fees
Hourly rates, flat fees for service, or retainers paid to a tax advisor or real estate attorney are another rental property tax deduction.
- Property Management
A good property manager handles day-to-day tasks such as rent collection, tenant communication, vendor coordination for repairs, and routine property inspections. Property management fees vary from place to place, but usually run about 8% of the monthly rent collected and are fully deductible.
- Property Tax
Property taxes on a mid-sized single-family rental home may range from a few hundreds dollars a year to several thousand or more, depending on where the property is located. Fortunately, property taxes can be fully deducted from income generated by a rental property.
- QBI Pass-Through Deduction
The Qualified Business Income (QBI) deduction allows many rental property owners to deduct 20% of the income from a rental property business from the total taxable business income amount. Claiming this pass-through deduction for real estate can be complicated, which is why many investors seek guidance from a tax professional.
Fixing a plumbing leak, repairing a light socket that’s shorting out, and unclogging the kitchen disposal are examples of tax deductible repair expenses on a rental property.
- Sales Tax
Some municipalities require a landlord to collect a sales or use tax on rent paid by a tenant. Taxes are collected as part of the rent payment, and remitted to the city or state once a month.
Many rental property owners purchase a cell phone specifically for business use and pay for the monthly service using a business credit or debit card.
- Tenant Screening
While many landlords require a tenant to pay to be screened, others consider the cost of tenant screening as a normal business expense. Fees paid by a landlord for tenant screening reports such as a credit check, rental history and eviction report, and criminal background check are rental property tax deductions.
- Travel – Local
Auto costs such as going to a property for showings, meeting a contractor for an estimate, and picking up supplies using the standard mileage rate deduction of 57.5 cents per mile or the actual expense incurred.
- Travel – Remote
Long distance travel expenses to visit a rental property in another city or state or attend an out-of-town seminar are generally tax deductible. However, the IRS requires the purpose of the travel to be mainly for business, and expenses to be reasonable.
Sometimes, a small multifamily property like a duplex or triplex has a master meter for electricity, water, or gas. Landlords who pay for utilities include the cost in the tenant’s monthly rent, then deduct the utility cost as an operating expense.
How to Keep Track of Rental Property Deductions
With more than two dozen potential rental property expenses, keeping track of every tax deduction a real estate investor is entitled to can be a job in and of itself.
Manually entering income and expenses on a spreadsheet might work at first. But eventually, most investors look for an automated solution to save time and money.
A good and absolutely free way to automate income and expense tracking is by using Stessa. Investors learn how to maximize revenue with real-time insights and personalized recommendations based on the portfolio and their unique investment strategy.
After signing up for a free account, simply enter the property address, link bank and mortgage accounts, and run the income statement, net cash flow, balance sheet, and capital expense reports in just one click.
Transactions are auto-categorized for easy reporting, and receipts can be scanned and uploaded on the go with the iOS or Android app. Performance dashboards make it easy to monitor financial activity at the property and portfolio level for single-family rentals, residential multifamily property, and short-term rentals.
When the end of the year rolls around, the Stessa Tax Center makes tax prep a breeze. Registered investors can access a suite of tax resources created by The Real Estate CPA, a certified public accounting firm that specializes in real estate investment.