Common Tax Deductions for Rental Properties

The last few years created new real estate investors and "Accidental Landlords".  Owning rental properties certainly has its negatives, but among its pros are the tax deductions rental homeowners enjoy.

We have helped many real estate investors buy rental properties in Oswego, Plainfield, Naperville and the surrounding suburbs.

Renting out a home can be a lot of work and it could make sense to hire a property manager if you aren't up to the task. If you manage the property yourself or have someone do it for you, either way, you will appreciate collecting the rent checks and taking advantage of the tax deductions for rental properties.

You can use rental property expenses to offset your rental income. IRS Publication 527 has all the details.

Writing off Rental Property Expenses

Many rental properties expenses are tax deductible. Save all your receipts, document expenses in MS Excel, Google Sheets or just on a piece of paper!  Consult with your CPA and make sure to include the expenses on Schedule E.

In general, you can claim the deductions for the year in which you pay for these common rental property expenses:

- Accountant/Professional Services fees
- Advertising
- Cleaning and maintenance
- Commissions paid to Realtors
- HOA/Condo dues
- Insurance premiums
- Legal fees
- Mortgage interest
- Repairs
- Taxes
- Utilities (if paid by owner)

Travel Expense Limits

You can deduct expenses related to traveling locally to a rental home for activities such as showing the home, collecting rent, or performing repairs and maintenance. If you use your own car, you can claim the IRS standard mileage rate, plus tolls and parking, if applicable.

Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the rental property. If you mix business with pleasure during a trip, you can only deduct the portion of expenses that directly relates to rental activities.  For example, we have had clients purchase a rental property in their child's college town and then write off trips if the trip included "management, conservation, or maintenance" while on that visit.  Once the kiddo's graduate, you can keep on renting it out!

Repairs vs. Improvements

Repairs are any fixes that keep your property in working condition such as a broken faucet, clogged toilet or malfunctioning ice maker. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years.

Performing a furnace tune-up counts as a repair, but replacing the furnace in your rental property counts as an improvement and needs to be depreciated. Patching a roof leak is a repair;  replacing an entire roof of shingles is an improvement.

Depreciation Expense

Depreciation refers to the value of property that’s lost over time due to wear, tear, and obsolescence. In the case of improvements to a residential rental property, you can deduct a portion of that lost value every year 27.5 years. Carpeting and appliances in a rental property, for example, are usually depreciated over five years.

You can begin depreciating the value of the entire rental property as soon as the rental property is ready for tenants and you hold it out for rent. In general, you depreciate the value of the property itself (but not the portion of the cost attributable to land) over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.

Depreciation is a "non-cash" tax break.  You get the deduction, but aren't outlaying "cash" to do so. Personally, I leave depreciation calculations to my CPA, but if you want to read the nitty-gritty, check out IRS Publication 946, “How to Depreciate Property,” for additional information, and use Form 4562 come tax time.

Profits and Losses on Rental Homes

The rent you collect from your tenant every month counts as income. You offset that income, and lower your tax bill, by deducting your rental property all your expenses.

You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.

If your modified adjusted gross income (same as adjusted gross income for most persons) is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.  If you are a "Real Estate Professional" (ie Realtor), you have unlimited rental losses.

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