Top 15 tax deductions for landlords

Written on March 5, 2014 by , updated on January 16, 2018

Tax Deductions for LandlordsI pay taxes. It’s not my favorite thing to do, but I’ve come to grips with it.

Paying taxes is just part of American life.

Fortunately, the U.S. tax code has many rules that allow rental property owners to save money and reduce their taxes.

Owning property is a huge part of the American dream, and at times it seems the IRS is trying to reward such behavior.

In this article, I review the best federal tax deductions available to rental property owners in the United States.

With that said, I am not a tax professional, attorney, or CPA. Rather, I’m an experienced landlord who simply wants to build wealth and use every tax benefit that the government allows.

What qualifies as an expense?

There are two types of expenses: current expenses and capital expenses.

Current expenses

These are generally one-off items that help keep the property in good working condition and habitable, or help you operate your rental business.

The entire expense can be deducted from your taxes in the same year that it was incurred, hence “current” expenses. Repairs are generally expected to restore an item to its previous working condition.

To qualify as a current expense, it must be considered:

  1. Ordinary and necessary
    Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.
  2. Current
    Must have more short-term value than long-term value. Fixing a hot water heater has short-term value. Replacing the appliance has long-term value.
  3. Directly related to your rental activity
    The expense must be business related.
  4. Reasonable in amount.
    There’s a valuable lesson to be learned here:

    If you claim to have paid $500 for a toilet seat, you will get audited.

Al Williamson's Recurring Expenses

Al Williamson’s Recurring Expenses

Capital expenses

Anything that increases the value of the property or extends its life is categorized as a “capital expense” or “improvement” and must be capitalized and depreciated over multiple years.

Repairs vs ImprovementsMy general rule of thumb is any item that costs hundreds of dollars (or more) to replace should probably be deducted as a capital expense.

For a more detailed explanation and specific examples of each, read the article: Repairs vs. Improvements – What Can I Deduct from my Taxes?

Top 15 tax deductions for landlords

Before claiming any of these deductions, be sure to have detailed and thorough records to back them up. I recommend tracking your expenses as you make them. Trust me, your tax prep will be much more manageable if you’re organized throughout the year.

Cozy lets you track your expenses and categorize them as the IRS does, and even lets you take pictures of your receipts and attach them to each expense. Cozy even provides a simple expense summary report that matches the required fields on your IRS 1040 Schedule E.

The IRS scrutinizes these deductions (some more than others), and you need to be prepared should you get audited. If you fail to have proper receipts and cannot validate the business necessity of each expense, you will have to pay the amount due, with interest, if you get audited.

1. Loan interest/points

If there is a mortgage on the property, the loan interest will probably be your single largest deductible expense.

In 2013, I paid $19,000 in interest on one of my mortgages. Further, if you paid buy-down points on the property purchase or mortgage refinance, you’ll be able to deduct those as well.

  • Mortgage Interest (primary & secondary)
  • HELOC Interest for loans used to repair or improve the property
  • Credit card interest on items used for the property
  • Mortgage Points to purchase or refinance a rental property

Keep in mind, you can only deduct interest on money that was actually spent on your rental business. Therefore, you wouldn’t be able to deduct the interest of a withdrawn line of credit that is sitting in your bank account.

2. Depreciation of assets

There are, in general, three types of costs you need to capitalize and depreciate:

  • The value of the structure, not the land
  • The value of improvements – such as appliances, carpet, windows, countertops, etc.
  • Equipment/Computers/Laptops

These expenses cannot be deducted in a single year, but rather must be spread out (depreciated) over multiple years.

Otherwise, people would abuse the system by claiming $100K in repairs in a single year to remove all tax liability, and then sell the property the next year to recoup their renovation ROI.

3. Taxes

Often the real estate taxes are paid through the mortgage company, and therefore show up on the Form 1098 that is sent from the bank.

If the property is free and clear of any mortgage, CONGRATULATIONS!, but you’ll have to look up your tax records online if you didn’t keep receipts of those payments. Other business-related wage taxes, permit fees, or personal property taxes are considered allowable deductions as well:

  • State, County and City Taxes
  • Social Security Taxes for Employees
  • Medicare and Unemployment Taxes for Employees
  • Personal Property Tax/Vehicle Tax
  • Permit Fees/Inspection Fees

4. Repairs

In a previous article, Sh*t Always Breaks, I discuss paying for the repairs and improvements using a separate emergency fund for each property. Repairs are defined as any effort to maintain the current condition of a property or asset.

  • Painting/Spot Patching
  • Plumbing Repairs
  • Air Conditioning Repair
  • Fixture Repairs
  • Labor Costs/Contractors
  • Incidentals related to a repair
  • Rental Fees for Tools/Equipment

5. Maintenance

Maintenance costs are often confused with repairs, however with maintenance, you’re not necessarily fixing anything. For example, the lawn will always need to be cut but it is never really “broken.”

You can also hire a pest company to treat the property every few months to prevent further infestations, even if the original pests are long gone.

  • Landscaping and Tree Trimming
  • Homeowner Association Fees
  • Pool Cleaning, Chemicals and Maintenance
  • Pest Control and Treatment
  • Tune-ups on Lawn Mowers, Chain Saws, Leaf Blowers, etc.
  • Light Bulbs
  • Smoke Detector Batteries
  • HVAC Filters
  • Janitorial Items

6. Insurance premiums

All business-related insurance premiums are tax-deductible. When trying decide if the insurance is business related, I ask myself, “Would I buy this insurance if I didn’t own a rental?”

I have an Umbrella Policy which covers my personal assets and legal liability above and beyond the coverage on my rental properties. Because of the added risk involved with one of my less-polished properties, I decided to purchase this additional coverage.

I would not have purchased this policy otherwise, and therefore I can classify it, in good conscience, as a business expense.

  • Homeowners Insurance
  • Mortgage Insurance Premiums
  • Fire/Damage/Liability Insurance
  • Flood Insurance Riders
  • Theft Insurance
  • Workers’ Compensation Insurance
  • General Liability Insurance
  • Personal Umbrella Insurance

7. Utilities

You can deduct the cost of any rental property utilities that you pay for. You are still allowed to claim utility expenses even if the tenants reimburse you later, but you also have to claim that reimbursement as income.

  • Electricity
  • Gas
  • Heating Oil
  • Water & Sewer
  • Trash & Recycling

8. Travel expenses

According to a recent survey by Cozy, 50 percent of American Landlords do not live near their properties. Any long distance travel to visit your assets or to conduct rental business can be tax-deductible as a business expense.

  • Airline Fares
  • Car Rentals and Taxis
  • Hotels
  • 50 percent of meal expenses during long-distance travel

9. Vehicles

When expensing business vehicles, the actual asset must be depreciated over multiple years, however the upkeep can be deducted in the year the expense was incurred.

You have the option of deducting actual expenses, or utilizing a standard mileage rate of 56.5 cents per business mile driven (as of 2013).

  • Business Vehicles (depreciable)
  • Mileage or Gas/Maintenance/Usage of Business or Personal Vehicles

10. Management fees

Even the best landlords need help from time to time. If you hire a property manager, or even an on-site manager, you are allowed to deduct that expense.

  • Property Management Companies
  • Individual Property Managers
  • On-site Manager
  • Condominium Association Fees
  • Special Assessments

Note: You should try Cozy property management software. It’s free, and can automate some of the most time-consuming elements of running a rental business: tenant screening and collecting rent.

11. Legal and professional fees

If you need to hire a pro, be it a lawyer, accountant or tax professional, you can expense the cost. If you ever have to evict a tenant, you can expense all reasonable court and filing fees.

  • Accounting Advice
  • Professional Tax Preparation
  • Tax Preparation Software (like TurboTax)
  • Structural Engineering and Consulting
  • Legal Fees
  • Lease Review and Editing
  • Court Filing Fees

12. Office/operating expenses

You have to work somewhere. My office is in our spare bedroom. Some landlords actually rent commercial office space.

A home office deduction is one of the most commonly flagged deductions by the IRS – and for good reason. Many business owners abuse this deduction, but it should be utilized if you conduct business in your home. Keep great records for the time you spent using that space for business and logically subtract any personal usage.

Personally, I don’t expense the square footage of my home office. In my opinion, it’s not worth the headache.

  • Ink & Printer Paper
  • Pencils, Pens, and Staples
  • Rental Software (like Cozy)
  • Legal Forms
  • Rent Paid for Office Space
  • Square Footage of a Home Office
  • Phone Bills

13. Advertising

If you are still using printed rental ads, STOP! Between Craigslist and Postlets, you’ll cast a wider net than any newspaper ad.

  • Radio, Newspaper, Online Ads
  • Signs and Banners
  • Ads in Phone Books
  • Printing and Postage for Mailers

14. Commissions

Occasionally, I will offer a $50 incentive to my current tenants if they find a replacement tenant upon their departure.

  • Commissions to Managers and Salespeople
  • Commissions for Tenant Referrals

15. Start up expenses

 says, “Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins. Unlike operating expenses, start-up expenses cannot automatically be deducted in a single year. This is because the money you spend to start a rental (or any other) business is a capital expense—a cost that will benefit you for more than one year.”

The maximum allowable deduction for start-up expenses in the first year is $5000.

A $25K limit on losses

According to the IRS, if you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income.

For Example: Lets pretend, you had $60,000 in depreciation and expenses for a given property in a single year, however that property only generated $20,000 in rental income.

This leaves you with a $40,000 loss (ouch!).

You can claim $25,000 of losses that year, but then you are allowed to “recapture” the other $15,000 in losses against your income the next year. If you continue to have losses beyond $25,000 year after year, you can recapture the sum of the unused losses against the gains when you sell the property.

You can do your own taxes!

TurboTax Home and Business Fed, Efile and State 2013 with Refund Bonus OfferIf you are feeling adventurous, I challenge you to prepare and file your own federal taxes this year. It’s really not that hard when you have the right tools.

Tools I Use:

  • IRS Website – To research the tax law. They also have a great customer service phone number.
  • TurboTax Home and Business – to prepare (and e-file) my Federal and State taxes and all required forms.

Still need help?

If the idea of organizing receipts gives you the chills, then you should either further educate yourself on filing your own taxes, or consult a licensed tax attorney, CPA, or tax professional in your state.

  • Educate Yourself via IRS.gov
    If you unsure about your tax situation, you should check the IRS website which is an amazing resource chock-full of useful information or call the IRS’s Free Tax Hotline at (800) 829-1040.
  • Find a CPA or Lawyer
    Your state bar association will likely have a lawyer referral program to help match you with an attorney. The AAA-CPA can refer you to an attorney-certified public accountant in your city.
  • Find a Tax Professional
    H&R BlockJackson Hewitt, and Liberty Tax Services are the nationwide tax chains, but even TurboTax is offering full-service tax preparation now-a-days.

Learn more:

Internal Revenue Service

photo credit: IRS Logo by United States Department of the Treasury [Public domain], via Wikimedia Commons, kenteegardin, John-Morgan via cc
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161 CommentsLeave a Comment

  • Dexter

    Purchased new house and closed escrow in early November 2015. At the time was undecided whether to put previous house for sale or rent it out. Around early-mid December 2015, decided to rent it out. Started to do some minor fixes in early December 2015, however most of the major fixes/upgrades – new paint inside and out, new flooring on first floor and new floor on second floor was not completed until early/mid January 2016. Was able to rent the house beginning of February 2016.

    Would I be able to claim rental home deduct for the few expenses I had from the few fixes in December 2015 on 2015 return or would it be best to just claim that on my 2016 return? I have used Turbo Tax before – just not the one for Rental Prop

    Thanks

  • Allyn McMullin

    I just started renting out my home this year and already the losses are staggering. The sewer drain in the basement backed up causing damage and the sewer line was broken as well requiring a re-lining of $15k. Will this be deductible? This is going to easily exceed any income I’ll get from this rental. Can that be a deductible from my personal income?

    Thanks.

    • Lucas Hall

      Hi Allyn

      Sorry to hear about your losses. You should consider talking to a tax professional.

      Generally, you can take losses up to $25K before they have to be carried over to the next year. If reported on your Schedule E, it would have an affect on your personal tax liability (which is good in your case). But please talk to a tax professional (which I am not).

  • George Gibson

    I will begin renting a house from October until the end of year and beyond. Will the repair deductions for 2016 be prorated for only the three rental months?

    • Lucas Hall

      Hi George,

      You can typically only expense repair costs while the property was considered a rental, or you were preparing it to be a rental. The property doesn’t necessarily have to have a tenant in it but you have to be trying to rent it. I suggest you talk to a lawyer if you’re not sure.

  • KG

    This is a great article. Thanks! Quick question. Are there income limits that would prevent me from being able to these deduct rental expenses? I read that writing off depreciating assets/losses(#2) phases out at a joint income of $150k. If your
    Joint Income is higher than this can you still deduct mortgage interest, taxes, management fees, etc.? Or do all these great deductions have income limits that one should be aware of?

    Thanks!

  • amy lewis

    Hi. We have a mother in law that we rent where we share the electricity. Our home is 5000ft with a large family vs the 600 ft MIL with two adults, one on the lease. How do I deduct for the tenants electricity? Thank you!
    Amy

  • Gwen

    My mother died 2015. I inherited the property 2016. It remained vacant all of 2016. I plan on renting it out starting beginning 2017, using a property management company , as I’m not in the area. The property is in disrepair. I need to replace all appliances , paint, all new flooring, some plumbing work and some fixtures. This will be well over $5000. The rental management company said as long as I declare it a rental I can deduct repairs , improvements , etc. Do you suggest doing some improvements this year and some beginning in January 2017? And delaying rental until February ? I have already ordered appliances , should I cancel delivery till 2017, or reorder after 2017? Or just rent jan?

  • Priya

    I have a rental property. I managed it on my own. Am I allowed to expense a salary for myself. What is the IRS limit for that expense?

    • Lucas Hall

      Hi
      If you are formed a business entity, the. The business would certainly be allowed to have employees. However, even if you pay yourself and write it off as an expense, you would will still have to declare that as personal income and it will be taxed as such. Please talk to a certified tax professional to learn more (which I am not)

  • Alice Anderson

    I just moved in with my son for medical reasons.. I rented my previous apartment from Dietz and Francis Investments in Hickory, NC.. WHEN i LEFT OUT OF THE APARTMENT EVERYTHING WAS VERY, VERY CLEAN, CARPET WAS SHAMPOOED, OVEN WAS CLEANED, ALL SHELVES WERE WIPED DOWN. I did have a really nice office desk that I could not use at my son’s house where I moved so I left it in case the landlord could use it. There was a building on the site we spent 5 hrs. cleaning out because he said that was why I was not getting one of my deposit back. And now he says because I left the desk in the apartment I am not getting any of my deposit back..WHEN i LIVED THERE I HAD TO PUT UP STORM DOORS TO KEEP OUT WATER. $538.00, CLEAN UP SOOT DAMAGE $995.00

  • Paul Leipzig

    is the de minimus safe harbor and/or the small taxpayer safe harbor, treatment of capital items available to individual taxpayers for their rental property? And does the $2,500 limit apply to each capital item where more than one item can be included in a single tax year?

  • Troy

    I have rental properties and one of them needs painted, my daughter is home from collage and is wanting to do the painting. Can I pay her for doing the painting and claim it as an expense on my taxes ?

  • David Laughlin

    Due to a change in jobs we moved from our home. We are upside down on it so we decided to rent it. How long do I have to rent it before I can sell it (for a loss) and take the tax deduction.

  • Greg Matejcik

    I own an apartment that I rent out. The rent includes all utilities (because they are included in my HOA fees and there’s no good way to separate them out). Can the entirety of my HOA fees be deducted? Let’s say my rent is $1200 a month and the HOA is around $600. Can I deduct all of the HOA fee?

    • Zafar

      Yes you can but you have to split the HOA fee into operating and improvement costs and then depreciate the improvement cost over a 5 or 7 year (or longer) period.

  • Don

    Hi,
    I had a rental property that hasn’t rented the entire 2016 year as I have been trying to sell the property unsuccessfully I’m afraid. Are there any deductions I can claim even though i didn’t try to rent in 2016? I may have to reconsider renting again this year if it doesn’t sell but hope it sells.

    Thanks

  • Angela

    I have rental property. I also rent a storage building to put all my tools in.. And maintance stuff. It cost me 500.00 a month. Is that tax deductible?
    Thank You

  • Tim

    I purchased my home in 2006 and have been renting the apartment (31%) of the total square footage for the last 5 years. I have never depreciated the cost of the home or improvements that were made that benefit the entire property. I live in the property. Should (can) I depreciate to catch up for the missed years?

  • M

    This article should be updated with safe harbor for small taxpayer (SHST) information. Not all capital expenses/improvements have to be depreciated over time if SHST requirements are met. When these requirements are met, repairs, maintenance, improvements, and other rental costs can be deducted in the year they occur.

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