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11 Rental Property Tax Deductions

By Alison K Plaut

Published on 30 Jan 2024 6 min read

If you own an investment property, you can benefit from both long-term appreciation and short-term positive cash flow from rental income. But earnings come with an increased tax burden. Fortunately, there are also numerous tax deductions you can avail on rental properties that can reduce the rental income tax you’ll have to pay.

If you’re a real estate investor or have recently become a landlord, don’t miss these 11 rental property tax deductions.

Which Rental Property Tax Deductions Are Available to Landlords?

Rental property tax deductions available to landlords range from basic deductions like property tax or mortgage interest, to travel expenses, office space, and insurance premiums. It’s an excellent side hustle for tax write-offs. Read on to understand how each could work for you. 

Mortgage Interest

If you purchased the property with a mortgage, the interest you pay on the mortgage is a major tax-deductible expense. While you cannot deduct the portion of your monthly mortgage payment that goes to pay the loan principal, you can deduct the full interest payment, which will appear separately on your mortgage payment. 

For example, if you have a $300,000, fixed-rate, 30-year mortgage with a 7% interest rate, your annual interest deduction could range from $20,903 in year one to $884 in year 30. That’s a significant deduction over most of the lifetime of the mortgage. 

If the mortgage interest and principal payments remain the same throughout the loan, you can multiply your monthly interest payment by 12 to get the annual deduction. You can also consider consulting an accountant or financial advisor to help determine the exact allowed deductible amount for your property. 

Property Taxes

Nearly every state and local municipality collects property taxes that you’re required to pay monthly or annually. These taxes could cost between hundreds to thousands of dollars. You can check your escrow summary or with the state tax authority to determine your property tax amount. You can deduct up to $10,000 from sales and property taxes. 

In addition to standard property taxes, you can deduct the cost of any state rental licenses, landlord or vacation rental licensing fees, or occupancy tax. You can also deduct sales tax on business-related items, wages, and Social Security taxes for employees.

Asset Depreciation

Wear and tear reduces the useful life of a property. You may deduct rental property depreciation from the home or property value, but not on the value of the land, as the land won’t depreciate. According to the IRS, rental homes or properties can depreciate over 27.5 years. You can take the deduction and spread it over the expected life of the property.

You can also take rental property depreciation on any equipment used to run your rental business, like a computer, car, lawn mower, furniture, property renovations, etc. For an expense to be a deductible expense you can depreciate, it must be expected to last for more than a year. It also must add value to your business but lose value over time.  

Operating Expenses

Operating expenses include utilities like gas, electricity, water, heating, air conditioning, internet, cable, or satellite are all deductible if you pay them for your tenants. Likewise, operating expenses like maintenance, management fees, insurance, property taxes, handyman expenses, or other repair or operational costs are also deductible. 

As long as these expenses are related to the rental business, you can deduct them. However, if you require tenants to cover things you cannot take the deduction. 

Maintenance and Repairs

IRS Publication 527 outlines examples of home improvements like additions of bedrooms, bathrooms, decks, garages, patios, and porches, as well as interior upgrades, landscaping, heating and air conditioning, plumbing, insulation, and other repairs. Major renovations are deductible through depreciation.

Minor repairs that keep the property in rentable condition but don’t add significant value are deductible through a direct deduction. You can deduct labor costs of repairs, but the costs of tools or equipment are necessary. You may also deduct homeowner association and condo fees.

Office Space

Rent of office space is a business expense that may be deducted from total business income. You can deduct the accompanying costs of a rental business, whether you rent a commercial property or use a spare bedroom in your home. You’ll need to keep receipts or documentation of the purchases you make and a record of the time spent managing a rental property. 

Travel Expenses

If you have to travel to multiple properties or have a property far from your residence, you can deduct transportation expenses. You can also deduct transportation related to collecting rental income, showing the property, or working on the property, but not regular commutes for other work or usual trips to the property. To deduct travel expenses, you can take the actual expenses or the IRS’s standard mileage rate.

Insurance Premiums

Insurance premiums required to secure a mortgage are also a deductible business expense. In addition, any form of insurance considered ordinary and necessary for a rental property is thus deductible, including homeowners insurance and liability insurance. You can also deduct health and workers’ compensation insurance for any employees for the rental business. 

Legal and Professional Fees

You can also deduct any legal or professional fees incurred for the rental property. For example, you can deduct the cost of an accountant or CPA or the cost of accounting software. If you have to hire a lawyer or any other professional, those business costs are also deductible. Additionally, you can deduct costs of advertising or the cost of advisor services. 

FICA Taxes

FICA, or the Federal Insurance Contributions Act, are taxes employers must pay for employees, like Social Security and Medicare. If you have employees, you may deduct all FICA taxes from your business income to reduce tax liability. 

Pass-Through Deduction

Thanks to the 2017 Tax Cuts and Jobs Act (TCJA), if you do business through a pass-through business entity like an LLC or sole proprietorship, you could qualify to deduct up to 20% of your net business earnings from your income tax. Commonly referred to as the pass-through deduction, if you qualify as a real estate investor, you can deduct up to 20% of qualified business income. Learn why you might want an LLC for each rental property here. 

Which Rental Property Expenses Are Exempt From Tax Deductions?

You can’t deduct certain expenses, including personal expenses, fines, fees, or uncollected rent. You also cannot deduct unaccounted-for cash, normal trips to the property, or expenses incurred during vacancy. 

How to Claim Rental Property Tax Deductions?

To claim rental property tax deductions, you will need to file property tax deductions using Form 1040, Schedule E. If you use the rental property as a primary residence at any time during the year, you cannot use Schedule E. However, you might be able to choose itemized deductions with Form 1040, Schedule A. It’s important to keep all receipts and have clear records, but here you can find some deductions you can take without receipts. 

Maximizing Rental Property Deductions

Rental property deductions are diverse and comprehensive, offering landlords many opportunities to save. One of the most important aspects of any deductions you take is clear record keeping. It’s essential to maintain accounting records with receipts of all deductible expenses. 

If you want to make tax season deductions easier, consider doola Books. It offers simple bookkeeping services designed to help busy founders like you. Get doola Books to streamline bookkeeping and free up valuable time to focus on your core business. You can also get doola’s tax package to save even more time!

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