Top 10 Rental Property Tax Deductions
Look forward to tax time every year as an investor!
Did you know that real estate investors actually look forward to tax time?
Can you imagine what it would be like to eagerly await the mid-April deadline, knowing that your rental properties are helping reduce your taxable income?
Welcome to the tax advantages of real estate investing!
We’ll discuss the real estate tax deductions that allow you to legally reduce your tax burden each year.
What does the IRS consider a rental property?
According to the IRS, a rental property is defined as a property that you rent out to others for 15 days or more each year. That means you get to have a maximum of 14 days of personal use.
Keep in mind that any days spent on repairs and maintenance do not count toward those 14 personal use days. So if you go to your vacation home in Bend to make some repairs to the deck or take care of some landscaping, those do not count toward your personal use days.
A rental property can be a:
Single house
Apartment
Condominium
Mobile home
Vacation home
Similar property
Rental income is taxed at the same rate as ordinary income. So if you’re in the 24% federal tax bracket and you make $10,000 in annual rental income, you would have to pay $2,400 of that in taxes…
…Unless you know about and use the many great real estate investor tax deductions!
These deductions are entirely legal and spelled out by the IRS in publication 527.
Instead of making you read a very dry IRS publication, we’ll summarize them for you here!
What does the IRS consider rental income?
According to the IRS, rental income includes:
Normal rent payments
Advance rent payments
Payments for canceling a lease
Expenses paid by the tenant in lieu of rent
Lease option payments
Rental income generally doesn’t include a security deposit if the taxpayer plans to return it to their tenant at the end of the lease. But if the taxpayer keeps part or all the deposit because the tenant doesn’t live up to the terms of the lease, then the amount kept counts as rental income in that year.
Now that we know what counts as rental income, let’s take a look at the top 10 rental property deductions.
Top 10 rental income tax deductions
Maintenance and Repairs
Utilities
Advertising costs
Interest payments
Property taxes
Insurance premiums
Depreciation
Travel expenses
Home office deduction
Professional and legal fees
Let’s look at each of the top 10 rental property tax deductions to see how they can offset your taxable income to the IRS.
Maintenance and repairs
These are expenses that you can deduct 100% in the same tax year as the expense. Think of these as quick fixes like paint, fixing a broken pipe, yard maintenance, snow removal, repairing a bathroom cabinet.
These repairs and maintenance items keep the home habitable for tenants and ensure all systems are in good working order.
There is an important difference between a repair and a capital improvement - improvements have to be depreciated over the useful life of the object. Think things like new water heaters, a new furnace, a new roof. Those are NOT repairs and maintenance and you cannot deduct the full amount in 1 tax year.
Utilities
All landlord-paid utility costs are 100% deductible from rental income.
Most single family home utilities are paid by tenants unless the landlord has to pay for services like garbage in some municipalities.
Multi-family properties often only have one water meter and those charges are generally paid by the landlord.
Even if you add the cost of landlord-paid utilities to the cost of the rent, you can still deduct what you paid for the utility charges.
Advertising Costs
You post your rental to Zillow Rentals and sometimes there’s a charge to list your rental. That cost is tax deductible.
If you buy “for rent” signs or pay someone to advertise your rental for you, those charges are also deductible.
Interest Payments
This is a big one. Any mortgage interest paid on a rental property is 100% deductible in that tax year. With rising interest rates, this is a big deduction that can help you get over the standard deduction and get to itemize, saving you money each year on taxes.
Another big savings - credit card interest. Any interest paid for items purchased on your credit card that are strictly for your rental property is tax deductible.
HELOC interest is also tax deductible.
Property Taxes
Your property taxes are also tax deductible for your rental property. If you have a vacation rental, any use or occupancy taxes are also a deduction on your taxes.
Insurance Premiums
You pay insurance on your rental property and you get to deduct that expense - whether it’s hazard insurance, flood insurance, or an umbrella/liability insurance policy to protect your asset. Also if you have employees and offer health insurance, you can deduct that from your taxes.
Depreciation
The depreciation deduction is how real estate millionaires are made.
Depreciation is a magical expense that doesn’t actually cost you anything out of pocket - the fancy name for that: a non-cash expense.
Essentially, the IRS says that by renting out your property to someone else, it’s depreciating…even while it’s likely doing the opposite.
Because of this, you get to depreciate the value of your property structures (not the land since land doesn’t depreciate according to the IRS) over 27.5 years.
That means you get to deduct 3.636% of the cost of your residential property value every year - without paying a dime out of pocket!
Depreciation alone may shift you into a lower tax bracket, meaning you have even less taxable income.
The only catch: there’s a depreciation recapture process that happens when you sell the property, unless you use a 1031 exchange - more on that in a future blog post!
Travel Expenses
Is your rental property in a different area than where you live?
If so, all of your travel expenses - flights, hotels, mileage, and meals - are 100% tax deductible!
You gotta be legit about this one and make sure to document clearly that the travel was for your rental properties.
Home Office Deduction
You’re running a business so you get to deduct the cost of your home office space!
Dedicate a workspace in your home for your business and you get to deduct the square footage portion of that space’s mortgage, utilities, and insurance from your taxes.
An example:
Say your house is 2,000 sq. ft. and your home office is 200 sq. ft. - that’s 10% of the size of your house.
So you get to deduct from your taxes as your home office:
10% of your mortgage or rent cost
10% of your utility cost
10% of your insurance cost
100% of the painting or setting up of your home office
Even if you’re a renter - you get to take the home office deduction!
Here are all the details on what the IRS says you get to deduct for your home office.
Professional and legal fees
Any fees you pay to others related to your rental property are deductible. These could be property management fees, legal fees, accountants, tax preparers, financial advisors, leasing agents - basically any professional who helps you with your rental property.
That’s the top 10 rental property tax deductions!
Now, a quick reminder on record keeping - it’s not fun but you gotta do it.
Keep a file every year to store things like:
Receipts
Canceled checks
Bills paid
Also remember if you rent to friends or family to ensure you follow the same rental processes with applications, credit and background checks - and most importantly: rent to them at fair market value. Otherwise the IRS may determine that the property was used for personal purposes and disallow all your rental deductions.
Looking for some easy ways to keep track of your rental expenses? Try software like:
Even if you use a professional accountant, CPA, or tax preparer, it’s important for you to know what deductions you can take for your rental property.
Want to work with investment-focused realtors who can help you with tax deductions AND find your ideal rental property?
Look no further than Suzanne + Sarah with Central Oregon Investor Network in Bend, Oregon!