Owning rental property can be an excellent way to supplement (or even replace) your regular income.
After all, if you can find good tenants who pay on time every month, you can make substantial money while at your day job, playing with your kids, or even lying on the beach.
According to Business Insider, one of the ways that people get and stay wealthy is to have passive income sources, such as rental income.
However, real estate investors know that making money while sleeping isn’t the only benefit of owning rental property.
Being a rental property owner also qualifies you for several tax deductions to help ease your tax obligation or increase your yearly refund.
- Top 15 Tax deductions for landlords
- Mortgage Interest
- Commissions
- Depreciation of Assets
- Repairs, Maintenance, and Improvements
- Utilities and Energy
- Travel Expenses
- Home office & Operating Expenses
- Marketing Costs
- Legal and other Professional fees
- Start-up Expenses
- Employees and Independent Contractors
- Vehicles
- Insurance
- Theft and casualty losses
- Passive Activity Losses
- Further reading
Top 15 Tax deductions for landlords
1. Mortgage Interest
If you borrowed money to purchase your rental property, the interest you pay to the lender could be tax-deductible.
If you are yet to pay off your mortgage, you will most likely be paying real estate taxes through your mortgage broker or bank. The bank will outline this in form 1098, Mortgage Interest Statement form.
You will need to report your share of the interest when submitting your tax using Form 1040 Schedule E.
2. Commissions
You can deduct any commissions you offer property managers, salespeople, and tenants.
This includes any monetary incentives given to tenants that find new tenants if they are moving out.
3. Depreciation of Assets
Depreciation is a capital expense, providing a means to recover the costs of an income-producing property over the life of that property.
You can use form 4562 to claim your deduction and amortization for your property.
4. Repairs, Maintenance, and Improvements
The money you spend on maintaining your properties can also be deductible.
This includes paying to have the lawn mowed, carpet cleaned, or gutters and drainage system cleaned each fall.
Repairs vs. Improvements
When claiming expenses, there is a difference between ‘repairs’ and ‘improvements.’
A repair is something you have done to maintain the property or, according to the IRS, something that “does not add significant value to the property or extend its life.”
In contrast, an improvement results in the betterment of your property. It can either restore or adapt the property to a new or different use.
A betterment may include expenses spent:
- fixing a pre-existing defect
- increasing the capacity, strength, or quality of your property
- enlarging or expanding the property
A restoration includes expenses used for:
- replacing a structural part of the property
- repairing damage (learn about normal wear and tear)
- rebuilding your property to a like-new condition
Landlords could claim expenses used for adaptation if they altered the property beyond the intended use when they began renting to tenants.
Examples of home Improvements given by the IRS:
Full List of Deductions
Additions
- Bedroom
- Bathroom
- Deck
- Garage
- Porch
- Patio
Lawns and Grounds
- Landscaping
- Driveway
- Walkway
- Fence
- Retaining wall
- Sprinkler system
- Swimming pool
Miscellaneous
- Storm windows, doors
- New roof
- Central vacuum
- Wiring upgrades
- Satellite dish
- Security system
Heating & Air Conditioning
- Heating system
- Central air conditioning
- Furnace
- Ductwork
- Central humidifier
- Filtration system
Plumbing
- Septic system
- Water heater
- Soft water system
- Filtration system
Interior Improvements
- Built-in appliances
- Kitchen modernization
- Flooring
- Wall-to-wall carpeting
Insulation
- Attic
- Walls, floor
- Pipes, duct work
5. Utilities and Energy
If you pay for any of the utilities at your rental property as stipulated in the lease agreement, you may be able to claim them as an expense.
These utilities include electricity, gas, heating oil, water, and sewer costs, and trash and recycling not paid for by the tenant.
You may be able to claim a federal tax credit if you make any improvements or install appliances at your property that make it more energy efficient.
So get green and reduce your impact by making your property energy efficient now!
Residential energy property expenditures
The goal of residential energy-efficiency tax credits is to encourage individuals to increase residential energy-efficiency investments.
Landlords can claim two kinds of credits on property:
- The first credit, the nonbusiness energy property tax credit (IRC §25C), regards energy-efficiency improvements made to the building envelope (insulation, windows, and doors) and for purchasing high-efficiency heating, cooling, and water-heating appliances purchase.
- The second credit, the residential energy efficient property tax credit (IRC §25D), allows taxpayers to claim a credit for renewable energy (e.g., solar panels, geothermal heat pumps, small wind energy, fuel cells) systems installed on the residence.
For more information on how to make your home or rental property energy-efficient (and possibly claim it as an expense depending on state law), visit the US Department of Energy’s Energy Saver website.
6. Travel Expenses
Local travel for your rental business
Any local driving you do to manage your rental properties may also be claimed as an expense if you drive to collect rental income or manage, conserve, or maintain your rental property.
However, you can only claim this credit if your home is the place of business where you manage your property (see below).
You cannot deduct the expense if the primary purpose of the trip to the property is to improve the property (recover the cost of improvements by taking depreciation).
You can use the standard IRS mileage deduction if you drive your vehicle or deduct the cost of a bus ticket if you use public transportation.
Parking and tolls are also deductible. Use form Form 4562, Part V, to deduct these expenses.
For more information on how to deduct travel expenses, read chapter 4 of Publication 463 or page 4 of Publication 527.
Long distance travel
Most landlords won’t have overnight travel expenses associated with their rental business.
However, suppose you market your properties to people looking to move into your area.
In that case, you could potentially use hotel, flight, and meal expenses as a tax deduction if you live a considerable distance from the property, such as interstate or overseas.
7. Home office & Operating Expenses
If you use a portion of your home as the office where you manage your property as a business, you can deduct a portion of your home expenses, including:
- stationary such as ink, paper, pens, staples, etc.
- rental software
- phone and internet bills
You can also deduct a percentage of those expenses equal to the portion of square footage your home office occupies compared to your entire home structure.
For more information on expenses claimed for your home office, read publication 527 on business use of your home.
8. Marketing Costs
Another deduction you can claim is the costs associated with finding and keeping tenants.
This includes advertising, the cost of application forms, flyers, and even the cost of your website (if you use it to attract renters.)
9. Legal and other Professional fees
If you require the services of a lawyer, attorney, accountant, or tax professional, you may be able to claim the costs as an expense.
This can include tax preparation fees and costs you paid resolving tax issues on your rental property (including preparing part I of Schedule E form 1040, Supplemental Income and Loss).
If you feel like you might be too busy to manage your property, you might need to hire a property manager.
10. Start-up Expenses
Your property may qualify as a start-up business, and, as such, you might be able to claim costs incurred for creating or investigating the acquisition of your active trade or business.
Landlords can only claim these expenses if the cost is:
- incurred operating an existing active trade or business or
- incurred before the day your active trade begins.
Some of the costs you may be able to claim include:
- analysis of the market, including examining potential properties and researching local property markets
- advertisements for gaining potential tenants
- salaries and wages for any employees hired during this process
- travel to and from the property or to real estate agencies etc.
- fees for professional services rendered, including property managers, etc.
11. Employees and Independent Contractors
You might be able to deduct wages if you have hired staff to work on the property, either full-time or part-time.
This can include management fees, as previously mentioned, but can also refer to contractors hired to maintain or fix the property or if you have hired a superintendent or groundskeeper.
12. Vehicles
If you use your vehicle for your business, e.g., the maintenance of your property, you can choose from the following two methods for deducting the expense:
- standard mileage rate
- actual car expenses.
The standard mileage rate refers to using a car you own within the first year of the business operation, and you must use the vehicle throughout the entire lease period.
You can then claim the standard mileage rate or the expenses after the first year. For example, the standard mileage rate for 2015 was 57.5 cents per mile.
Actual car expenses include depreciation, licenses, gas, oil, tolls, insurance, parking fees, repairs, registration, tires, garage rent, and insurance.
Note: if you use the standard mileage rate that year, you cannot deduct your actual car expenses, and you need to include form 4562 part V in your tax return.
For more information regarding vehicle expenses, read IRS publication 463.
13. Insurance
The insurance premium you use to protect your property is generally deductible.
The types of insurance you may claim as an expense include:
- insurance that covers fire, storm, theft, accident, or similar losses
- credit insurance that covers losses from bad business debt
- group hospitalization and medical insurance for employees, including long-term care insurance
- liability insurance
- malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients
- workers’ compensation insurance set by state law that covers any claims for bodily injuries or job related diseases suffered by employees in your business, regardless of fault.
14. Theft and casualty losses
Theft is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it.
Causality refers to the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Such events include a storm, fire, or earthquake.
If your building is vandalized or harmed by a natural disaster or fire, the amount of loss not covered by your insurance can be considered a tax deduction.
If your insurance company has paid you for losses incurred due to theft and casualty, you may also be able to claim it as a gain instead of a loss.
For more information regarding publication 527, read the Residential Rental Property by the Department of Treasury.
This document provides details regarding tax deductions on your rental property.
15. Passive Activity Losses
Most rental real estate activities are ‘passive’ activities, meaning you receive income mainly for the use of tangible property rather than services.
Renting your property to a tenant is generally considered a passive activity, even if you materially participated in the activity.
Deductions or losses from these activities are limited. Usually, you cannot offset income or losses from passive income activities.
According to the IRS, there are two types of passive activities:
- Trade or business activities in which you do not materially participate during the year.
- Rental activities, even if you do materially participate in them unless you are a real estate professional.
However, there is an exception: a special $25,000 allowance.
Suppose you or your spouse actively participated in a passive rental real estate activity. In that case, the amount of disallowed passive activity loss decreases and you can therefore deduct up to $25,000 of loss from the activity from your non-passive income.
This allowance is an exception to the general rule, so ask your tax accountant if you qualify for it.
Further reading
For more information on any of the above topics, read the following publications:
Publication 463: Travel, entertainment, gift, and car expenses.
Publication 527, Residential Rental Property by the Department of Treasury
Publication 529, Claiming Home Office expenses, Legal & Professional Fees
Publication 535, Business Expenses, Chapter 6: Insurance & Chapter 8: Business Start-Ups.
Forms you will need:
Form 1040 Schedule E: Claiming mortgage interest and legal fees
Form 4562: Claim your deduction and amortization expenses, including vehicles.
Don’t let tax get you down. Use it to your advantage!
Remember to save all documentation supporting your deduction claims, including receipts for parts and supplies you bought for the rental property, invoices from contractors or individuals that worked on the house, and credit card receipts for website domain registration.
Preparing your tax return can get a little complicated, but keeping yourself informed can be invaluable in calculating the deductions you deserve on your investment property.
If you’re having trouble with your tenants, terminating your lease agreement, or considering giving tenants a notice of eviction, understanding how to deal with tenant issues is crucial to a successful transition.
