11 Rental Property Tax Deductions

Rental property deductions are business-related expenses that landlords and real estate investors who own rental properties (and rent the space out to tenants) are eligible to claim as tax deductions on their annual tax returns. These deductions can reduce your total amount of taxable gross income, potentially lessening your tax bill. Landlords and commercial real estate investors can claim these rental property expenses on Schedule E of their yearly IRS income tax return.

Deductible expenses related to this income stream include property management costs, depreciation costs, legal fees, management fees, mortgage interest paid to lenders, and insurance.

Consult a tax professional or tax preparer for the best advice on which operating expenses are eligible for you to claim as tax deductions.

It’s important to develop good recordkeeping habits and stay apprised of the ever-evolving rental property deduction checklists in the areas where you own property. Here are some of the tax breaks and tax benefits that you can claim as write-offs on your rental real estate, which are subject to change depending on the tax year:

1. 1. Closing costs: Closing costs associated with acquiring new properties for rent are often eligible for tax deductions. Closing costs refer to the small fees that homebuyers incur when setting up or closing a new mortgage, which usually includes a combination of title fees, lender fees, property fees, and insurance fees. If your CPA says these costs are not eligible for deductions, they may qualify as acquisitions costs.
2. 2. Employee wages: You can deduct any wages paid to employees, independent contractors, and other professional services working for the rental property from your income tax return, from property managers and repair workers to CPAs. Expenses paid to a management company are also deductible.
3. 3. Home office operation: Tax laws allow for a home office deduction, enabling you to deduct expenses associated with setting up and running your home office. However, you must own the rental business to claim the deduction. (Self-employment is mandatory to claim the deduction.) These home office costs include internet service, office furniture and equipment, and computers.
4. 4. Insurance: Any insurance premiums associated with your property may be eligible for deductions. These premiums include liability insurance (which covers lawsuits related to the property), mortgage insurance (which protects a mortgage lender from the recipient defaulting on the loan), and rent default insurance (which covers tenants defaulting on rent).
5. 5. Maintenance: You can deduct any professional fees associated with the upkeep of your rental property, including repairs, landscaping, pest control, and trash removal. Improvements that add to the property's value—like adding new cabinetry, appliances, or flooring—are "capital improvements,” which add to a property’s value and offset depreciation costs.
6. 6. Mortgage interest: Any interest paid to your mortgage lender on the outstanding mortgage balance for your rental property is tax-deductible. Unlike for homeowners with a primary residential property, there is no limit to how much you can claim as an interest deduction on a rental property.
7. 7. Property depreciation: A building’s value depreciates over time, and the IRS allows rental property owners to include a small depreciation deduction each year on their tax returns. This percentage is equivalent to a portion of your property's initial appraised fair market value. This value portion spreads across a period of twenty-seven-and-a-half years, so you can deduct one-twenty-seventh-and-a-half of a property’s value each year over that period, averaging out to about 3.64 percent annually.
8. 8. Real estate taxes: Landlords operating rental properties can claim all taxes associated with their property as deductions, including property taxes and occupancy taxes. Some states impose an occupancy income tax (similar to a sales tax) on business owners collecting rental income. In states like Arizona, Florida, and New Jersey, landlords can count these occupancy taxes as a business expense on their tax returns.
9. 9. Tenant screening: The process of screening new renters may include running credit checks, criminal background checks, or employment and income verification on prospective renters, all of which you may need to pay for. All of these expenses are tax-deductible. You can also include these costs in your new tenant fees and have the tenant pay for them directly.
10. 10. Travel expenses: If you travel to manage your rental properties, you can claim certain travel expenses as business deductions, including gas, airfare, meals, or public transport costs. The standard mileage rate for deductions is five cents per mile traveled.
11. 11. Utilities: If you pay for any rental property utilities, such as water, gas, electric, trash disposal, or internet, you can deduct these costs from your tax return.

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