Rental Property Tax Deductions: a Comprehensive Guide

IN THIS GUIDE

One of the best ways to get the most out of your rental property is to deduct everything you can during tax season. Successful rental property ownership comes down to return on investment (ROI), and the more you can deduct from your taxes, the bigger your ROI will be.

Here, we will cover some of the rental property deductions you should consider including on your tax return to ensure you’re getting the most out of your rental property.  


What Rental Property Expenses Are Tax Deductible?

It’s always a good idea to talk to your accountant or tax professional about what deductions make sense for your specific situation, but here are a few standard rental property tax deductions to consider. 


Office Space

Owning a rental property means spending a lot of time in the office following up on tenant requests, managing your books, and directing employees. Luckily, your office space ownership or rental costs as well as utilities and internet fees are tax deductible.

Work from home? No problem. The portion of your home you are using for rental property related work can be deducted from your taxes. Calculate the square footage of your home office compared to the overall square footage of your entire home. That percentage of your mortgage payments is deductible. 


Travel

When you own multiple rental properties in various geographical locations, traveling between them can result in significant expenses. Fortunately, these expenses can be deducted from your tax returns. In addition, any traveling expenses related to rental properties, even if you only own one, can be deducted. From trips to the hardware store to a flight across the country, if travel is related to your rental property business, you can include that to your deductions during tax time.


Advertising

Getting the most money out of your rental property means reducing the vacancy rate as much as you can. Vacancy rate refers to the amount of time a rental unit sits vacant, with no one living there or paying rent. To make sure your rental is full of renters paying rent, you will likely need to invest in some advertising. From listing your rental property on websites to digital advertising, all of these costs can be deducted from your taxes.


Supplies

Mulch, printer paper, nails, tools, and other supplies you need to run your rental business are tax deductible. Keep track of everything you buy for your business or use a specific credit card or checking account for easier bookkeeping.


Utilities

Sometimes your tenants pay for their own utilities, sometimes you pay them, and sometimes the cost is split. Anything you pay for as the owner when it comes to utilities like gas, water, and electricity is tax deductible. 


Insurance

If you own a rental property, you probably pay an insurance premium monthly that is tied into your mortgage payment. You may also pay for employee insurance if you have a team that helps you manage your rental property. Both of these insurances can be deducted at tax time. 


Maintenance

Part of owning a rental property means dealing with a litany of maintenance issues that arise from time to time. Plumbing issues, heating and cooling problems, and other repairs need to be done to keep your tenants happy. If a cost is related to maintenance, like hiring a plumber, it is tax deductible. If a project adds value to the property, like constructing an addition to add a rental unit, it’s not deductible.


Income

If you are a limited liability company (LLC), then you can deduct your business income from your taxes. This rule ensures that you are not taxed on the income twice. Once for your business and once on your personal tax return. 


Attorneys

Attorneys often play a critical role in acquiring rental properties. In fact, in some states, they are required to be involved in any real estate transaction. From reviewing documents to advising in negotiations, the attorney hours (and subsequent fees) can add up. Luckily, you can deduct these from your taxes.


Tax Preparation

A good tax professional has a wealth of knowledge that can help you get the most from your rental property when you pay taxes each year. It’s a good idea to consult one, no matter how well versed in tax law you may be. The fees you pay them for advice and tax preparation are deductible. 


Accountants

Tax professionals are the only number crunchers who can be a great asset to your rental property business. Accountants can assist year-round with profit and loss statements and a slew of other calculations and forms that help your business operate efficiently. Their fees can be deducted from your taxes. 


Property Management

Managing a rental property can be a lot of work (fielding tenant requests, coordinating maintenance and repairs, etc.). Managing multiple rental properties can be more than one person can handle. Hiring a property management company will cost you some profits each month, but it may be worth it. To take some of the stings out of the monthly fees, you can deduct what you pay them during tax time. 


Mortgage Interest

Unless you purchased your rental property with cash, you likely used a loan to get the deal done. Whether you used a conventional loan, a seller-financed loan, or a government loan, you likely have to pay mortgage interest each month. That adds up over the year, making mortgage interest one of the largest deductions you can take for a rental property.


Depreciation

As with all physical things, rental property buildings depreciate over time. The IRS decided that, for tax purposes, a residential rental property (one to four units) takes 27.5 years to depreciate completely. A commercial rental property (5 units or more) takes 39 years. 

Once you start renting your property, you can begin the depreciation clock, so to speak. Each year, you can claim depreciation of your rental property on your tax return. The amount varies based on how long you have owned the property or, in the first year of ownership, which month you started renting the property. 


Rental Property Tax Deduction FAQs 

How Do I Maximize Rental Property Tax Deductions? 

You can start by reviewing the list provided here and making sure you are taking every deduction possible. After that, consult with your accountant and tax professional about the best ways to file your tax for optimal financial gain. They will understand your local rules and regulations and the deductions that make the most sense for your specific rental property business. 


Can I Write Off Mortgage Payments On A Rental Property?

No, you cannot deduct your entire mortgage on a rental property. You can only deduct your mortgage interest and insurance. 


Can I Deduct Appliances For A Rental Property? 

Yes, washers, dryers, refrigerators and other major appliances can be deducted from your taxes. However, depending on when you buy them, you may not be able to deduct the entire amount from your taxes that year. 


What Is The Difference Between an Expense And a Capital Improvement?

An expense is something you pay to keep your rental property functioning properly. A capital improvement is something that adds value to your property. For example, repairing a leaky pipe would be an expense and adding a story to your property to increase the number of rental units would be a capital improvement. 


How Do I Claim Rental Property Tax Deductions?

Form 1040 (or a variant) is the main paperwork you will use to file your taxes. You will use a form called schedule E to claim deductions for your rental property. To claim depreciation for your rental property, you will use form 4562. Be sure to consult a tax professional before filing. 


Conclusion

Understanding rental property tax deductions, including what can be deducted and how to do it, will ensure that you keep as much profit from your investment as possible. Don’t wait until tax time to run your numbers. Account for all the deductible expenses outlined here as well as your depreciation schedule throughout the year.

Engage professionals from your team as well. Your account and tax preparer can help you make sure you are crunching the numbers correctly and filing your tax returns in a way that keeps as much money in your pocket as you can. 

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