One of the smartest ways to increase profits and keep cash flow healthy is to take tax deductions. Think of tax deductions as a financial lifeline. Taxes can be a maze but this guide will be your map. This isn’t just about filing smarter—it’s about being able to manage your rental property like a pro.
Ready to get more of your money back where it belongs? Let’s get started.
How Rental Income Is Taxed
When you’re a rental property owner any income you receive from tenants is considered taxable rental income. Additional income like fees for parking spaces, late rent penalties or even reimbursements for utility bills can also be taxable.
The IRS taxes your rental income as part of your income. This means it’s added to any other income you have like wages or investment returns and taxed at your rate. But rental property income also opens up special tax benefits making it one of the best things about owning real estate.
Tax Deductions
This is where owning rental property becomes a financial win. Tax deductions allow you to offset your rental income with expenses related to managing and maintaining the property. Every dollar you deduct reduces the amount of income the IRS can tax and means more money in your pocket.
Examples of allowable expenses:
- Repairs and Maintenance: Fixing a broken HVAC system or patching a leaky roof.
- Mortgage Interest: A big one if you’re financing the property.
- Depreciation: Even though it’s not an out of pocket cost you can deduct the wear and tear on the property over time.
- Utilities: If you pay for water, electricity or trash services those bills are deductible.
Common Tax Deductions for Rental Properties
Understanding and utilizing tax deductions can make a big difference in your rental property’s profit.
A. Mortgage Interest
Mortgage interest is often the biggest deduction for rental property owners. Any interest paid on loans used to purchase, improve or refinance your rental property can be deducted.
You purchased a rental property for $300,000 with a mortgage. For the year you paid $15,000 in total payments of which $10,000 was interest. The $10,000 is fully deductible as a rental expense.
Deducting mortgage interest reduces the taxable rental income and lowers your overall tax bill.
Tip: Save your mortgage interest statements (Form 1098) for tax time.
B. Property Taxes
State and local property taxes on your rental property are deductible. These vary by location.
- If your property tax bill is $5,000 a year you can deduct the full amount as a rental expense.
- If your property is in a jurisdiction with special assessments (e.g. for local infrastructure) consult your tax advisor to see if it’s deductible.
Tip: Review your property tax bill to separate deductible taxes from non-deductible charges like trash collection fees.
C. Depreciation
Depreciation allows you to deduct the cost of your rental property over its “useful life” which the IRS defines as 27.5 years for residential properties. This deduction is for wear and tear even though it’s not an out of pocket cost.
You purchase a rental property for $350,000. The land value is $100,000 so the building’s depreciable value is $250,000. Divide that by 27.5 and you get an annual depreciation deduction of $9,090.
Depreciation is a big tax benefit without cash outlay. Tip: Use IRS Form 4562 to calculate depreciation and exclude the land value.
D. Repairs and Maintenance
Expenses for ordinary and necessary repairs to keep your property in good condition are fully deductible in the year they occur. Improvements that add value or extend the life of the property must be depreciated.
Fixing a broken water heater for $300 is deductible immediately. Replacing all the plumbing in the house for $10,000 is an improvement and must be depreciated over 27.5 years.
Tip: Label invoices as “repairs” or “improvements” so you don’t get confused at tax time.
E. Insurance Premiums
Insurance premiums for your rental property are fully deductible. This includes fire, theft, flood, liability and landlord insurance.
You pay $1,500 a year for landlord insurance and $300 for an additional flood insurance policy. Both are fully deductible.
Tip: If you have an umbrella liability policy that covers multiple properties, allocate the premium across your properties.
F. Utilities
If you pay for utilities like water, electricity, gas or trash collection on behalf of your tenants, these are deductible.
You pay $200 a month for water and $100 for trash collection at your rental. Over the year you can deduct $3,600 ($2,400 for water and $1,200 for trash).
Tip: Keep utility bills organized by property and document payments made on behalf of tenants.
G. Professional and Legal Fees
Fees paid to professionals for services related to your rental property are deductible. This includes accountants, property managers, attorneys and even tax preparers.
You hire an accountant for $1,000 to prepare your taxes and a property manager for $5,000 a year. Both are deductible.
Tip: Make sure the services are related to your rental property and not personal.
H. Travel Expenses
If you travel to manage your property, show it to potential tenants or meet with contractors, those travel expenses are deductible.
You drive 30 miles to inspect your property and the IRS mileage rate is $0.655/mile. You can deduct $19.65 for that trip.
You fly to another state to manage your property and spend $300 on airfare, $100 on lodging and $50 on meals. All are deductible. Tip: Keep a log of mileage and save receipts for transportation, meals and lodging.
I. Advertising Costs
Advertising expenses to attract tenants are deductible whether you’re placing online ads, printing flyers or hiring a photographer for professional property photos.
You spend $150 on a Facebook ad campaign and $100 for professional photos of your property. Both are deductible.
Tip: Track all marketing expenses including costs for signage, brochures and online listing fees.
Advanced Strategies
When you’re ready to take your rental property tax game to the next level advanced strategies can help you maximize savings and keep more of your money.
Capital Improvements and Depreciation
Capital improvements—kitchens, new HVAC systems, energy efficient windows—can increase the value of your property and depreciation deductions. Unlike repairs these improvements are depreciated over time not deducted immediately.
When you make a $20,000 capital improvement, such as a new roof, that $20,000 gets added to your property’s basis. If the property is residential the $20,000 is depreciated over 27.5 years, so you get an annual deduction of $727.
Bigger improvements mean bigger long-term deductions which reduce your taxable rental income over time.
Passive Activity Loss Rules
The IRS considers rental income as “passive activity” meaning you can only deduct rental losses against passive income not against wages or other active income. However there are exceptions for landlords who qualify as “real estate professionals” or have modified adjusted gross income (MAGI) below certain thresholds.
How It Works:
- If your MAGI is below $100,000 you can deduct up to $25,000 in rental losses annually.
- If your MAGI is between $100,000 and $150,000 the deduction phases out.
- If you’re a real estate professional the passive activity loss rules may not apply and you can deduct unlimited losses.
You report a $10,000 net loss on your rental property due to repairs and depreciation. If your MAGI is $85,000 you can deduct the full $10,000.
Section 199A Qualified Business Income Deduction
Under the Tax Cuts and Jobs Act some rental property owners qualify for the Section 199A deduction which allows a 20% deduction on qualified business income (QBI). Eligibility depends on whether the rental activity is considered a trade or business by the IRS.
If your rental activity qualifies and your taxable income is below the threshold ($182,100 for single filers, $364,200 for married filers in 2023) you can deduct 20% of your rental income.
If your net rental income is $50,000 you can claim a $10,000 deduction under Section 199A.
1031 Like-Kind Exchanges
A 1031 exchange allows you to defer paying capital gains taxes when you sell one investment property and reinvest the proceeds into another similar property. This allows you to grow your portfolio without immediate tax hit. How It Works:
- Sell a property and reinvest the full sale proceeds into a new property within 180 days.
- Capital gains taxes are deferred until the new property is sold.
You sell a rental property for $300,000 with a $100,000 gain. Instead of paying capital gains taxes you reinvest the $300,000 into another property and defer taxes and preserve capital.
Record-Keeping Tips
Here’s how to keep good records for your rental property:
Detailed Records
Detailed records are the foundation of good property management. Receipts, invoices and supporting documents are the proof you need to back up your tax deductions and track expenses. What to Keep:
- Receipts for repairs, maintenance and capital improvements
- Invoices from contractors, property managers or service providers
- Property tax bills, insurance premium statements and mortgage interest statements
- Lease agreements and correspondence with tenants
Accounting Software
Spreadsheets and shoe boxes are a thing of the past. Accounting software for rental properties makes tracking expenses, generating reports and preparing for taxes easier than ever. How It Helps:
- Tracks income and expenses in real time
- Categorizes expenses for reporting purposes
- Creates profit-and-loss statements and cash flow reports
With accounting software you can generate a report that summarizes all deductible expenses (e.g. $1,200 for utilities, $500 for insurance) in minutes for your tax return.
Personal and Business Expenses
Mixing personal and rental property expenses is a recipe for confusion – and possibly IRS trouble. Having separate accounts makes it clear, simplifies record keeping and makes audits less painful. What to Do:
- Open a dedicated bank account for your rental business.
- Use a business credit card for property related expenses.
Are You Ready to Save More?
Have you thought about how detailed record-keeping, smart deductions and advanced tax strategies can boost your rental property’s profits? From tracking every expense to using depreciation and 1031 exchanges the strategies are at your fingertips.
What’s holding you back from getting started today? By following these best practices you’ll be tax efficient, protect your assets and increase your bottom line. Now’s the time to review what you’re doing now, make changes and be proactive about your financial success.
Need more? Talk to a tax pro or check out some resources. What’s next?