Learn about the most common rental property tax deductions, as well as some costs that owners aren’t legally allowed deduct.
What Are Rental Property Tax Deductions?
One significant advantage of owning a rental property is the plethora of tax deductions available. These deductions allow you to reduce your taxable income, resulting in lower tax payments. The potential savings can be substantial, potentially amounting to thousands of dollars per year.
While business owners can always deduct expenses from their income, rental property owners are allowed a broader range of deductions. These tax deductions have to be relevant to your business. They should be costs that are generally expected when running a rental property business.
Fixing a broken dishwasher is a relevant expense, but stopping at a gas station to buy a snack on your drive to the property isn’t.
14 Common Rental Property Tax Deductions
Rental property owners can generally claim these deductions:
- Property Depreciation
- Mortgage Interest
- Property Taxes
- Maintenance and Repairs
- Appliances
- Travel and Transportation Expenses
- Utilities
- Insurance Premiums
- Office Space
- Advertising and Marketing Costs
- Landscaping
- Employees and Contractors
- Property Upgrades
- Software
1. Property Depreciation
You are allowed to depreciate the value of the property over time. According to tax law, your property has a useful life of 27.5 years.
This means that if your property (not the land, just the building) is worth approximately $275,000, you can deduct $10,000 per year! That’s an incredible tax savings bonus.
This deduction often seems strange to new property owners because property values increase over time! However, as properties get older, they fall into disrepair. Foundations crack, roofs break, and fences crumble. If you look at it from that perspective, then it makes a bit more sense that you can write it off as a business expense.
2. Mortgage Interest
Mortgage interest is another sizeable tax deduction, especially in the early years of your rental property.
In the early days of your mortgage, interest can make up 80% of your payment! Of course, that varies based on interest rates and down payment.
So, imagine that your mortgage payment is $2,000 per month in year one of your mortgage. At the end of the year, you could be paying $19,000 in mortgage interest.
You can often write off a good chunk of your rental income between mortgage interest and property depreciation.
3. Property Taxes
Your property taxes are also considered a business expense that comes with owning a rental property.
Each state has differing average property taxes, so the amount will vary for you. Hawaii has the lowest property tax at just 0.32% while New Jersey charges 2.23%.
If you’re in New Jersey and your property is valued at $400,000, you’ll pay a hefty $9,200 in property taxes. At least it’s all tax deductible!
4. Maintenance and Repairs
One of the most common tax deductions rental property owners take is for the maintenance and repairs of the property. If there’s a leaky pipe and you call in a handyman to fix it, those costs are tax deductible because it’s an expense directly related to your business. Don’t forget that you can deduct the costs of tools, cleaning supplies, and other items you purchase for ongoing maintenance.
5. Appliances
Purchasing new appliances is a bit trickier, as they often must be depreciated over a 5-year period. In other words, if you pay $2,000 for a fridge, you can write off $400 per year. The IRS allows the following appliance purchases to be depreciated:
- Washers and dryers
- Refrigerators
- Dishwashers
- Stoves
There are a few different ways to do the accounting on these (such as straight-line, bonus, and accelerated depreciation), so you’ll likely want to talk to an accountant and settle on how you want to handle the tax deductions here.
6. Travel and Transportation Expenses
If you’re traveling for business, you can deduct your costs! The IRS establishes that you can deduct 67 cents per mile or your actual costs.
Traveling from your house to your property is considered a commute and isn’t tax deductible. However, if you travel from your office to a property, or from one property to another, you can deduct those miles.
7. Utilities
Any utilities that you pay are tax deductible. Many property owners who make the tenants pay often have to charge less rent anyway. It might make sense to keep rent a bit higher and pay utilities yourself since you can write it off.
8. Insurance Premiums
Your mortgage lender likely requires that you pay monthly insurance premiums along with your mortgage. This cost is tax deductible, as well as other types of insurance like landlord or liability insurance.
If you have employees, any contribution to their health insurance and premiums you pay for workers’ compensation insurance is tax deductible as well.
9. Office Space
If you rent out an office to run your rental property business, you can deduct that cost and everything associated with it (e.g., internet, heating, A/C).
If you work from home, the costs become much harder to estimate. You are allowed to deduct costs associated with your business, but it’s usually taken as a percentage of your home.
For example, let’s say you have a home office that’s 150 square feet. Your entire house is 3,000 square feet. This means that you can write off about 5% of certain overall costs of your home as a business expense, such as your internet bill.
Similarly, if you buy a laptop but use it 50% for business and 50% for personal use, you can deduct half the cost.
10. Advertising and Marketing Costs
Anything you spend to attract tenants to your properties is considered a normal expense for a rental property owner. This could include printing signs, running ads, or paying for listings.
This can also include referrals you pay out for someone helping you find a tenant.
11. Landscaping
Similar to repairs and maintenance, keeping the property looking nice is essential to your business, meaning you can deduct the cost! This could involve hiring people to handle it or including the cost of a lawnmower, shears, herbicide, and other items.
12. Employees and Contractors
A few have already been mentioned, but anyone you pay is a deductible expense. This could include:
- Attorney
- CPA
- Property Manager (either a 3rd party company or an individual you hire yourself)
- Assistant
- Cleaning crew
- Handyman
- Labor for renovations
13. Property Upgrades
Any additions or improvements you make to the property are usually tax deductible. This could include adding a bedroom, bathroom, deck, porch, or more. Because these are big costs, they usually must be depreciated over time.
14. Software
The cost of any software you use to run your business is tax deductible. For example, you might purchase QuickBooks to handle your accounting or an online portal for collecting and tracking rent payments.
Which Rental Expenses Are Not Tax Deductible?
Not every cost a rental property owner incurs can be a tax deduction.
Unpaid Rent
Unpaid rent is not tax deductible because it’s not considered an expense. Rent is considered part of your income, and having a lower-than-expected income does not result in a tax deduction for you.
Vacancies
Like unpaid rent, you can’t deduct the cost of paying the mortgage yourself while the property is vacant. You have to pay your mortgage whether your tenant pays or not, and mortgage payments are not tax deductible. Not collecting rent means you have a lower income, which doesn’t count as an expense.
Fines
Any fines or penalties you incur cannot be tax deductible. Some of these could result from noncompliance with a city ordinance, breaking HOA rules, or breaking a law. A tax deduction would benefit you, which isn’t the intent behind a fine or penalty.
Personal Expenses
It’s easy to blur the lines between a business and a personal expense. The easiest way to think about it is if you had to defend your choice to the IRS, do you think they’d be okay with it? Is this expense actually necessary to running your business?
If it’s a big expense, it’s certainly worth discussing with a CPA. However, in many cases, the answer (if you’re not sure) is likely that it’s a personal expense.
