The IRS allows rental property tax deductions for any ordinary and necessary expense of maintaining and renting out your property. Investors and real estate professionals can save a significant amount of money on their taxes by taking advantage of tax deductions for things like depreciation, interest, insurance, and repairs.
While real estate investors usually cannot deduct a loss from their rental property, there is an exception for those with a modified adjusted gross income (MAGI) of $150,000 or less. Contrarily, real estate professionals who materially participate can always deduct losses.
1. Depreciation
The tax benefits of rental property depreciation make real estate an attractive investment opportunity for owners. You can claim this deduction using IRS Form 4562. Depreciation allows rental property owners to deduct the cost of the rental property (but not land) over a period. The cost of the property includes both the purchase price and cost of improvements, but not repairs. You need to understand rental repairs versus improvements since repairs are immediately deductible.
Depending on whether the property is residential or commercial, your rental property will be depreciated over 27.5 or 39 years, respectively, using the straight-line method and mid-month convention.
The main tax benefit of a rental property is that you can deduct depreciation even if the building’s value is going up. The earnings from the sale of the building itself may be treated as capital gains and taxed at a reduced rate.
Depreciable Real Estate Examples
Residential Rental Property | Commercial Rental Property |
|---|---|
Single and multifamily homes | Warehouses |
Condominiums | Office buildings |
Apartment complexes | Manufacturing facilities |
Mobile homes | Shopping malls |
Some depreciable real estate may also be eligible for the Section 179 deduction. And, if you do a cost segregation analysis on your property, you may be able to deduct more than just the building’s depreciation from your taxes. Additionally, you may be able to claim a deduction for the building’s components.
You can get bonus depreciation if the costs of certain fixtures and furniture are accounted for separately from the cost of the building as a whole, under the modified accelerated cost recovery system (MACRS). An engineer or an appraiser can look at the furniture and fixtures to give you an estimate of their fair market values (FMVs). Equipment might be eligible for quicker depreciation, providing you with a tax benefit sooner. Read our article on bonus depreciation for a full rundown and to learn which of your building’s components are eligible.
2. Mortgage Interest Payments
When you make a loan payment on your rental property, there are two components to that payment: a portion goes to the principal and another to an interest expense. While you cannot claim a deduction for the principal, you can deduct the interest you pay on your mortgage or loan. In addition, you may be able to deduct loan origination fees, points, and, in some cases, interest from credit cards:
- Mortgage interest: You can deduct home mortgage interest on the first $750,000 on Schedule E (Rental Income and Expenses) or Schedule C (for real estate professionals).
- Point and loan origination fees: Points may also be called loan origination fees, maximum loan charges, loan discounts, or discount points. Points paid on the purchase of a rental property can be deducted through amortization over the life of the loan.
- Interest on credit cards used for the property: The interest payments you make on the credit card used to pay for deductible expenses is deductible as interest expense.
3. Property Taxes & Fees
If you’re a rental property owner, you can claim a deduction for the property taxes and fees you pay at the state and local levels. Property taxes are calculated every year and may be one of the most expensive things you have to pay for if you own a rental property.
The good news is that you can claim a deduction for this expense. Unlike personal taxes deducted as itemized deductions, which are limited to $10,000, there is no limit on the amount or real estate tax you can deduct on a rental activity.
In some states and cities, you may need to get a license if you want to rent out a property. For example, in Howard County, Maryland, if you plan to operate a residential rental property, you will need to pay a fee of $20 to $93.50 to obtain a Rental Housing License from the Maryland Department of Inspections, Licenses, and Permits. You can deduct the cost of getting or renewing a landlord license or a similar license for the property.
Additionally, if you operate a short-term rental, like Airbnb or Vrbo, you may need a license to do so. Depending on your locality, this may cost around $1,200 the first year and around $600 the years after that, depending on the size of the property and the number of bedrooms.
4. Insurance
As the owner of a rental property, you may have bought more than one insurance policy for it. Any form of insurance you purchase is considered an expense and is also tax-deductible for the rental building. This includes basic hazard insurance and special perils insurance like flood or hurricane coverage as well as liability insurance.
Typical types of rental property insurance include:
- Liability insurance
- Hazard and fire insurance
- Sewer backup insurance, which can be added to your hazard policy
- Flood insurance, which covers water coming from any source outside the home and is required by most mortgage companies
- Loss of income insurance, which can be added to your hazard policy and will cover you in the case of lost rental income
An insurance policy for a rental property is generally 25% higher than a policy for an owner-occupied property. Costs vary depending on the size, cost, and location of the rental property. If you want to learn more, check out our guide to rental property insurance for landlords.
5. Utilities
If you have to pay for any utilities, such as gas, electric, or water, the expenses are deductible. Deductions for various common utilities can be claimed on:
- Heating bills
- Electricity
- Air conditioning
- Water
- Sewer
- Trash and recycling
- Internet, television, and phone services
6. Maintenance & Repair
As part of a property’s normal operation, you might need to replace a worn carpet or repaint rooms. These are deductible expenses. However, there is a difference between how things like cleaning, maintenance, and repairs are deducted versus how improvements are handled. Improvements are changes to the property that lead to its betterment, restoration, or adaptation.
Maintenance | Improvement |
|---|---|
Replace broken window | Replace all windows |
Fix broken refrigerator | Replace refrigerator |
Install new thermostat | Install new air conditioner |
Install new deck railing | Install new deck |
Replace outside spigot | Install a security system |
Repaint exterior door | Replace hot water heater |
Repaint entire exterior | |
Replace door locks |
7. Advertising & Marketing
There are two main sources of marketing deductions for a rental property. They include advertising to find tenants to rent the property and lease-up commissions to pay real estate professionals or property managers to manage the property:
- Advertising: Any money you spend to advertise your building, its availability for tenants, or anything else related to the property, such as trying to find an on-site manager or contractors, is deductible as a normal operating expense. This includes fees or subscriptions for websites like Zillow, where you might list your property for rent.
- Tenant placement and lease-up commissions: The commission paid to a real estate agent or property management company to find a new tenant or get an existing one to stay is a marketing cost that is often forgotten. Because this is often one month’s rent or more, it’s a significant expense well worth recording.
8. Homeowner Association Fees
If your rental property is located in a community that charges any kind of homeowner association (HOA) fees, condo fees, planned unit development (PUD) fees, and so on, these are deductible expenses. The IRS considers it necessary to maintain the property. HOA fees vary depending on the location, amenities included, and size of the unit, but the average HOA fees for a single-family home are $200 to $300 per month.
In addition, you may be able to deduct items required by your HOA. Some HOAs, for example, require expensive rental signs that meet specific specifications. These sign expenses would generally be deductible.
9. Auto & Travel
Business use of your car for your rental properties is deductible. If you have to drive to a property to show it, tackle repairs, or otherwise visit the property for a legitimate operational purpose, the mileage is deductible. Auto expenses can be deducted using the standard mileage method or the “actual” method.
For 2023, the IRS set the rate at 65.5 cents per mile driven for business. The “actual” method uses the percentage of all actual vehicle expenses used for business. Both require you to keep the necessary records.
There are also mileage tracking apps that make keeping records very easy and convenient. You don’t have to write it down or wait until you’re in front of your computer to record mileage that isn’t attributable to specific properties but may be deductible for the business as a whole. Business-related mileage, like going to the office supply store or post office, is deductible if documented properly.
Aside from using your car, other travel expenses related to your rental property may be partially or totally deductible. For example, if you fly to a property in another state to clean out the building between tenants, that’s legitimately business-related. The airfare would be deductible as would hotel stays, meals, rental cars, parking, and tolls.
However, only the business portion of the trip is deductible; you have to prorate that portion, which is clearly business, from that which isn’t. In the above example, if you stayed a week but only dealt with the property for two days, you can’t deduct all seven days’ worth of meals or hotel costs. However, if the primary purpose of the trip is business, you can deduct 100% of the actual travel to and from.
10. Supplies
The supplies category is a bit of a mishmash, with things like hardware and office supplies in it. Many supplies will be directly used on a given property and are deductible for the property itself. One example would be driveway sealant if the container was only used on one property.
Other supplies might be applicable to several or all of your properties and deductible for the business as a whole. One example might be computer printer paper, which can’t be assigned to a single property but can be used for anything related to the business.
Typical supplies related to your rental property include:
- Printer ink, which can be expensive at an average of $13 per ounce
- Printer paper, folders, binders, and receipt books to stay organized
- Maintenance supplies like paint, spackle, primer, and brushes
- Cleaning supplies like buckets, mops, vacuums, and cleaning solutions
- Building supplies like sheetrock, nuts, bolts, and plywood
- Hardware, including locks and keys, which can add up if you change them after each tenancy; locksmiths often charge upward of $125 to change locks
11. Property Management
You might be managing the property yourself, or you might have hired a property manager or a management company. If you embarked on the latter, this expense is tax deductible. Depending on the type of property, the fees usually are between 7% and 20% of the gross monthly rental income. You can claim a deduction for these fees when you file your tax return. Items like commissions for tenant placement should be noted as marketing and not management.
Tax deductions if you hire a property manager: Investors who own large properties with several units or apartment buildings often hire property managers who live on the property. Salaries and any benefits paid to these managers are fully deductible rental property expenses.
12. Legal & Professional Fees
Professional services like accounting and legal work are deductible expenses. Generally, these will be applied overall to your real estate investment business. However, if there is work clearly applicable to certain properties, then the expenses are deductible for the properties themselves. These professionals are often able to identify additional tax benefits of rental property for investors.
Some examples of professional and legal fees may include:
- Legal work to prepare limited liability company (LLC) entity
- Legal review or preparation of lease documents
- Bookkeeping services
- Tax filing preparation
Limitations on Rental Property Losses
There are a couple of important rules that might limit your rental property deductions when they exceed your income. First, your deductions might be limited by the vacation home rules if you or a family member use the rental property during the year. Second, the passive loss rules might limit your deductible loss unless you actively participate in the management of the rental.
Frequently Asked Questions (FAQs)
Yes, painting your rental property, both on the interior and exterior, is a deductible expense as it is necessary to keep the property in good working order. If painting is part of a larger renovation plan, then it might be an improvement that must be depreciated instead of being immediately deductible.
No, rental income that you did not receive for whatever reason is not a deduction. However, you can continue to deduct the rental expenses as long as you are working toward renting the property out, like performing maintenance and improvements or advertising it for rent. If deducting the expenses results in a loss, you might be able to deduct it depending on the passive activity rules.
Yes, appliances are a rental property deduction that is typically depreciated over several years using MACRS depreciation rather than in the year the appliance was purchased. However, real estate professionals might be able to deduct them immediately using the Section 179 deduction.
Bottom Line
Real estate investors have access to an abundance of rental property tax deductions. You do not want to miss the opportunity to maximize your deductions this tax season. Depending on how you hold the properties, you may be able to deduct expenses directly related to running the properties along with deducting expenses related to the overall business entity.
