Table of Contents
- 1 11 rental property tax deductions you need to know
- 2 What you can’t deduct
- 3 How to claim your rental property tax deductions
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A rental property can be a great source of income — and it provides some nice tax benefits too.
By taking certain rental property tax deductions, you can reduce the amount you owe to the IRS every year. And the higher your tax bracket, the more valuable these write offs can be.
To take every deduction you’re allowed, you’ll want to know what deductions are available and the rules for claiming them.
Here are 11 rental property tax deductions you should know about, along with some costs you can’t deduct:
11 rental property tax deductions you need to know
Good news: You can claim the following rental property tax deductions whether you take the standard deduction or itemize. That’s even true for expenses with limited deductions on personal returns, like property taxes.
The IRS treats rental property income differently from other types of income, such as work income and dividend income. So even if you can’t get a mortgage interest deduction on your home, you can still deduct interest on your rental.
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1. Mortgage interest
If you take out a home loan to finance your rental, you’ll be able to deduct the mortgage interest.
Be careful, though, if you ever do a cash-out refinance on your rental property. If you use some of that cash for an unrelated purpose, like paying off consumer debt, the interest on that part of the loan won’t be deductible.
2. Property taxes
Buying a rental property means paying property taxes: they’re an ongoing expense of ownership. The money goes to the local government, which allocates it to things that benefit the residents of that area. Think road repairs, park maintenance, and public schools.
Whether you like how the money gets spent or not, you have to pay property taxes. If you don’t, the tax authorities can seize your property and auction it off. But since you can deduct property taxes, they will cost you a little less.
Depreciation refers to a natural decrease in tangible property’s value over time due to normal wear and tear. It also refers to an IRS rule requiring property owners to write off a little bit of an asset’s value every year until the asset is worthless and you’ve deducted its full cost. That asset can be the structure and any capital improvements you make to it, but not land.
Depreciation rates depend on the type of property you’re depreciating.
- The rental structure itself: 27.5 years
- Fences, driveways, and landscaping: 15 years
- New appliances, flooring, and furniture: 5 years
You can claim depreciation starting on the date the property is ready to rent. If you buy a fixer-upper and spend time improving it first, you can’t claim depreciation right away. But you can deduct the costs to manage and maintain your rental property during that period.
You may offset that capital gain by adding to your cost basis the value of the improvements you’ve made.
4. Repairs, maintenance, and cleaning
Repairs, maintenance, and cleaning costs are deductible expenses. Make sure you’re on the same page as the IRS about the items you think fall into this category. If they count as improvements, you’ll have to depreciate them instead.
Examples of items the IRS considers repairs and maintenance vs. improvements:
|Repairs and maintenance||Improvements|
|Patch a roof leak||Getting a new roof|
|Painting a room||Adding a room|
|Getting the furnace inspected and cleaned||Replacing the furnace|
|Having the lawn mowed weekly||Tearing out the lawn and replacing it|
|Getting the carpets shampooed||Replacing carpets with vinyl flooring|
Tip: A good rule of thumb for budgeting annual maintenance and repair costs is to set aside 1% of the property value. So, if your rental property is worth $300,000, you’d budget $3,000 per year for repairs. Save any money you don’t spend in a given year for future years.
5. Insurance premiums
Rental property owners can deduct one year’s worth of insurance premiums as a rental property expense in the year they pay them. You can’t prepay future years’ premiums as a strategy for increasing your deductions in a given year.
Fire, theft, flood, earthquake, and liability insurance are all deductible. If you experience a loss that your insurance doesn’t cover, you may be able to deduct it as a casualty or theft loss.
6. Professional services
Handling every aspect of renting a property by yourself might be more than you can take on. Relying on the expertise of others will save you time. And, while it will cost you money upfront, certain expenses, like property management fees, may be tax deductible. Plus, getting things done right the first time may save you money in the long run.
You might use, and be able to deduct, the services of professionals like these:
- Tax preparers
- Property management companies
- Real estate agents
As a landlord, you might pay listing fees to online services to advertise your rental. You might even put an ad in the paper or buy a sign to put in the yard. Expenses like these are ordinary and necessary when you’re a landlord, so they’re tax deductible.
If you’re a DIY type, you might need to buy various supplies to maintain your rental property: cleaning products, paint, air filters, and so on. You might also buy these items even if you hire someone else, like an independent contractor, to do the actual work. You can deduct these expenses from your rental income.
Tenants are often responsible for their own utility accounts and bills. But sometimes landlords pay for utilities. Tenants might reimburse landlords directly for these expenses, or landlords might include utilities in the rent.
Either way, if you pay utilities as a landlord, you can deduct them on your tax return.
10. Office space
Whether you have a home office or rent commercial office space, the costs you pay for it are deductible. You can also deduct associated expenses, such as internet service, printer ink, and office utilities.
If you want to claim the home office deduction, be aware that the space only counts if you use it regularly and exclusively for work. It doesn’t have to be an entire room, though. A corner of your den qualifies as long as you don’t use that corner for anything else.
You can deduct the costs of local travel between your home and your rental property if your main place of business is your home office. Local travel costs to collect rent and to maintain and manage your property are also deductible. You can deduct either your actual expenses or the IRS’s standard mileage rate, which in 2021 is 56 cents per mile.
The IRS recognizes that some people try to claim business expense deductions in this category that are really personal expenses.
What you can’t deduct
Some costs that might seem deductible actually aren’t, so don’t rely on your first instinct when it comes to rental property tax write-offs. Along with the exceptions we noted earlier, here are some rental property expenses you can’t deduct:
- Improvements and travel costs related to improvements: You must recover the cost of improvements through depreciation instead. Examples of improvements include adding a room, replacing the roof, and insulating the attic.
- Lost rent during vacancies: If your property is vacant for a period of time, you can’t deduct the value of rent you would have earned during that time had it been occupied.
- Unpaid rent: If your tenant stops paying rent, you can’t deduct the lost income (unless you use accrual accounting rather than cash accounting). This rule makes a lot of sense, because you also don’t owe income taxes on rent you never receive.
- Commuting expenses: If you don’t have a home office, driving from your home to your rental property isn’t considered local travel; it’s a commuting expense.
- Points or origination fees you paid for your mortgage: You must deduct those over the life of the loan; you can’t deduct them in the year you paid them.
Tip: Consider hiring a tax professional to help you avoid mistakes on your return. With their expertise, you might also discover money-saving deductions you’ve missed.
How to claim your rental property tax deductions
To claim your rental property tax deductions, you’ll file the following forms with your regular annual tax return, which is Form 1040 or one of its variants:
- Use Schedule E to claim your rental property tax deductions.
- Use Form 4562 to claim depreciation for assets you place in service during the tax year.
- Use Form 4684 to report a casualty or theft loss involving your property.
Tip: Save every document and record that will support your deductions in case you’re ever audited. You can choose to save paper documents, electronic documents, or both. If you go paperless, back up your documents with a cloud service so they’re not stored only on your hard drive.
Here are some of the documents you’ll need to keep to substantiate your deductions:
- Annual mortgage interest statements (Form 1098) or monthly mortgage statements
- Property tax bills
- Property tax assessments
- Detailed invoices for property improvements such as new appliances or a new roof
- Detailed repair and maintenance receipts and tenant requests for those items, when applicable
- Insurance bills
- Bank and credit card statements
- Invoices for professional services
- Copies of tenant leases
Tax deductions aren’t the only way to save money when you own rental property. To reduce your operating expenses, you may be able to refinance your rental property. With a lower interest rate, you can cut your monthly costs and free up cash for other things. Credible can help with this.
As an online mortgage broker, Credible allows you to easily compare personalized refinance rates. In just a few minutes, you can see loan details from all of our partner lenders and choose the best one for you. We also provide transparency into lender fees that other brokers typically don’t.