Top 10 Tax Deductions for Rental Property Owners

When you own rental property you are essentially running a small business. Here are 10 primary tax deductions for rental property owners that you can use to reduce your rental income for income tax purposes.

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1. Mortgage Interest

Just as you would report your mortgage interest on your primary residence on Scheduled A of your income tax return, you can do the same with mortgage interest from rental property. However the interest deduction is reported instead on Schedule E, Supplemental Income and Loss, where the interest is fully deductible against rental income.

2. Real Estate Taxes

Likewise, real estate taxes are also fully deductible as a business expense of the property.

3. Utilities paid by the Landlord

Any utilities paid on the property directly by the landlord are considered deductible for tax purposes. For example, the tenants may pay their own heat and electric, while the landlord pays for water and sewer and trash removal. The landlord can deduct the expenses for water and sewer and trash removal, but not the heat and electric.

4. Insurance

You can also deduct the cost of any insurance for the property. Homeowners insurance can obviously be included, but so can flood — or earthquake-insurance if is either are necessary.

Private mortgage insurance (PMI) is also deductible for landlords, even though it is not usually deductible for individuals who live in owner occupied homes.

5. Repairs and Maintenance

As the owner of a rental property, there will always be maintenance costs as well as occasional major repairs. Maintenance costs can include engaging the services of a lawn service, a pest or termite service, cleaning services in between tenants, as well as the cost of painting and other minor repairs.

Major repairs, such as the replacement of the roof or any major component systems such as air-conditioning or heaters, are considered capital improvements that must be depreciated over several years.

6. Homeowners Association Dues

This is a common fee associated with condominiums and with swim and tennis neighborhoods. There is usually an association that maintains common elements in the community, such as the physical structures in the case of condominiums, or the pool and tennis courts in a neighborhood. The neighborhood association will assess monthly or annual fees in order to pay for the maintenance of these amenities.

Those fees can be fully deducted as a business expense if the rental property is located in such a neighborhood.

7. Depreciation

One of the finer aspects of depreciation is that it can eliminate an actual profit on a rental property. For example, after collecting rents for the year and deducting all expenses paid, you might show a $5,000 profit. But once depreciation is factored in as an expense, the profit is gone and the tax liability disappears with it — even though the property actually made money for you.

Generally speaking, depreciation is based on the purchase price of the property. It is calculated based on physical improvements on the property only. For example, let’s say that you purchased the property for $250,000; out of that $50,000 represents the land value of the property, and $200,000 are the improvements.

Depreciation is calculated on the value of the improvements, or $200,000. As residential rental property, this value will be depreciated over a period of 27.5 years according to IRS charts. Any improvements to the property subsequent to purchase are set up on a separate depreciation schedule, based on the expected life of that particular improvement.

8. Management and/or Broker Fees

As the owner of rental property, you may have management fees or even broker fees. Management fees are fees you pay to a property manager who manages your property for you. Usually they collect a certain percentage of the rent income, so the expense can be substantial, and it is also fully deductible.

Broker fees can apply if you ever use a real estate agent or apartment broker to help you find tenants for your property. Brokers typically charge a percentage of the annual rent, or even a full months rent as a fee for their services, and this fee is also fully deductible for tax purposes.

9. Your Travel Expenses

As the owner of rental property you will have to make trips between your home and the rental property. You can deduct these expenses. You can either deduct the actual cost of expenses you pay for your car, and allocate a percentage to your rental property activities, or you can take the standard mileage allowance. The IRS allowance is 55.5 cents per mile for 2012.

If the property is located more remotely, you can deduct airfare, hotel costs, and any other expenses related to your trips.

10. Incidental Business Expenses

You will probably have general business expenses not specifically related to the property itself. These can include a home office, bank account fees on an account specific to the rental activity, postage, office supplies, and an allocation of the percentage of your tax preparation fees related to your rental business.

Each of the expenses listed above — and some that aren’t — can be deducted for rental property purposes. In the event that the expenses on the property are higher than the income, resulting in net loss, there are special rules that apply as to whether or not the loss can be fully deducted. The calculation is fairly complex, but it is fully addressed in IRS Publication 527.

About the Author

By , on Feb 2, 2014
Kevin Mercadante
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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Leave Your Comment (7 Comments)

  1. Tyler says:

    There is a free service I thought would be worth mentioning here to help people get bigger tax refunds this year:
    http://www.findmydonations.com.

    It automatically finds donation and purchase receipts that are in a person’s Gmail account, which hopefully will help them save a few bucks (e.g. uncover that tax deductible donation or business expense from several months ago that they forgot about).

  2. Tim says:

    I was wondering what the differences would be for a landlord that lives in part of their rental. I now own a duplex and live in half and rent the other. Would I still get the same deductions even though I live in part of my rental?

    • Kevin Mercadante says:

      Hi Tim – You can deduct the landlord portion of mortgage interest and real estate taxes on your Schedule A as a personal deduction, but you will lose the pro-rata portion of all the other expenses, such as utilities, depreciation and repairs and maintenance.

  3. Alan says:

    This is good information. I am hoping some day I will be able to use it, lol.

  4. Hi Kurt–Yes, you’re correct about depreciation lowing the basis. That will raise the profit on sale, but if you plan to hold the property indefinately, it won’t matter to you. Once the mortgage on the property is paid, the property will be a cash flow machine that you may not want to sell.

  5. Great list! Makes it clear why some rental property can generate tax-free positive cash flow. Or maybe I should say tax-deferred–the owner has to keep in mind that capital gain tax will be due when the property is sold, and all that depreciation will reduce the basis. Am I right about that??

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