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ContinueReduce your rental property income tax by maximizing deductible expenses. Learn about IRS guidelines and how Landlord Studio simplifies tracking and filing.
Head of Content, Landlord Studio
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Are you looking for how to pay no taxes on rental income? One of the most effective strategies for reducing your income tax obligations is to take advantage of rental income tax deductions.
The IRS permits landlords to deduct operating expenses from rental income reported on Schedule E. However, it’s important to understand the IRS guidelines regarding what qualifies as an operating expense under the tax code.
To be deductible, an expense must be ordinary and necessary for the operation of the rental property. Additionally, it should be a current operating expense directly related to the rental business, and the amount must be reasonable.
In this guide, we explore everything you need to know about tax deductions for rental income. We’ll also provide tips on how to maximize these deductions for your rental property. Furthermore, we will guide you on seamlessly reporting your rental property expenses using a property management solution.
According to the provisions included in 26 U.S.C. § 162, landlords are allowed to subtract specific “tax-deductible” expenses during the taxable year from their rental income as a form of tax relief.
The IRS defined these deductible expenses as costs that have been incurred wholly and exclusively to run your rental business.
However, it's important to note that capital improvements are not eligible for rental income tax deductions under deductible expenses. This improvement cost refers to the amounts paid for a betterment, restoration, or adaptation to a new or different use.
Some key deductible expenses you can take advantage of when filing for tax returns include mortgage interest, property taxes, operating expenses, depreciation, and repairs.
To use these deductible expenses, landlords must accurately report their rental property expenses, incomes, and depersonalization in Schedule E (Form 1040). Landlords who own multiple real estate properties are expected to complete and attach as many Schedule E as needed to list the properties.
Many landlords miss out on some tax deductions for rental property because they don't understand the distinctions between tax-deductible expenses and capital improvements, including how they are reported and deducted.
Below is an overview of the IRS’s specifications and guidelines concerning these two categories which affects how landlords should handle them to maximize their real estate tax deduction.
The IRS classifies capital improvements as expenditures that enhance the value of a property or extend its useful life. Examples of capital improvements under IRS regulations include:
The key aspect to note about capital improvements is that these expenses increase the property's cost basis, which can reduce taxable gains when the property is sold. Consequently, the IRS specifies that these costs must be capitalized and depreciated over time.
For example, if a landlord renovates the entire kitchen, this cost would add value to the property and as such be deemed a capital improvement. As such, the cost of the improvement would need to be added to the ‘cost basis’ of the property, and depreciated over what the IRS determines is its ‘useful life’ rather than being deducted immediately in that year.
Unlike capital improvements, tax-deductible expenses can be deducted in full during the year they are incurred. This is because these costs do not significantly enhance the property's value or extend its life.
According to the IRS definition of tax-deductible expenses, routine maintenance tasks such as cleaning gutters and replacing light bulbs fall under this category. Also, minor repairs like fixing leaky faucets, repairing broken windows, or painting walls would qualify as deductible expenses.
The IRS allows these expenses to be deducted as they are necessary for keeping the property in good working order without improving it beyond its original state.
Here's a comprehensive overview of tax-deductible expenses associated with rental properties. Understanding these deductions can help you maximize your rental income and navigate the tax implications effectively.
If you need to travel long distances to inspect your property, you can deduct various travel expenses. These travel expenses may be deductible costs and include:
If you financed your rental property with a mortgage, you can deduct the interest paid on that mortgage as a rental expense. It's important to note that this deduction is significant for landlords, often representing one of the largest deductions available.
Landlords may be required to pay personal property taxes on equipment and furniture used for rental purposes, based on their value. While many landlords know they can depreciate their personal property, it’s worth noting that items used in your rental business can often be depreciated at an accelerated rate.
The Modified Accelerated Cost Recovery System allows you to fully depreciate certain assets, like appliances and furniture, over shorter periods—typically five years. For items such as fences and driveways, the depreciation period is 15 years.
You can check the IRS website for specific asset classifications.
The IRS categorizes property work into two types: capital improvements (which increase value) and repairs (which restore original condition). As we've explained earlier while improvements must be capitalized and depreciated over time, repair costs can be deducted in the year they are incurred.
To determine if an expense is a repair or an improvement, consider the BAR acronym:
If you answer "yes" to any of these questions, it may be considered an improvement requiring depreciation.
Landlords often need to check on their properties and tenants regularly. If you use your personal vehicle for these trips, you may deduct travel costs using one of two methods:
It's important to note that if you choose the standard mileage method, it must be used in the first year of vehicle use for rental activities. The actual expense method allows for deductions of all vehicle-related costs, including gas, repairs, and tolls.
However, we recommend you calculate both methods to determine which offers the greater benefit.
Eviction proceedings can be stressful and costly for landlords. Fortunately, court fees and attorney costs related to evictions are generally deductible. However, given that total eviction-related expenses can average around $3,500, it’s crucial to minimize such situations by thoroughly screening tenants before they move in.
If you use a dedicated space in your home for managing your rental business, you may qualify for a home office deduction—even if it’s not an entire room.
Here are some of the criteria to qualify for this deduction:
You can calculate your home office deduction by dividing the square footage of your office by the total square footage of your home or using a prescribed rate of $5 per square foot (up to 300 square feet) for 2024.
If you hire staff such as property managers or maintenance workers, their wages are deductible as business expenses. This also applies to independent contractors like electricians or carpenters. Remember that if you pay contractors more than $600 in a year, you'll need to file IRS Form 1099-NEC.
Additionally, meals and entertainment expenses related to employee events are fully deductible, while client-related expenses are deductible at 50%.
In cases where your property suffers damage from unexpected events like natural disasters or fires, you can claim total or partial losses on your tax return—provided these losses aren’t covered by insurance.
Depreciation allows you to deduct the cost of qualifying assets over what the IRS deems its ‘useful life’. For residential rental buildings, this is 27.5 years and for commercial buildings this 39 years.
While claiming depreciation is technically optional, most property owners benefit significantly from doing so; it can save money while also preventing potential tax liabilities upon selling the property.
Landlord insurance involve paying various premiums paid for things such as fire, theft, flood insurance, and landlord liability insurance. These premiums are tax deductible. If you have employees, their health and workers’ compensation insurance costs are also deductible.
To maximize this tax deduction for rental property, it's important to understand the difference between current expenses (day-to-day operational costs) and capital expenses (long-term investments).
Capital expenses include purchases expected to last more than one year—like equipment or vehicles—and must be capitalized over several years. On the other hand, current expenses can be deducted fully in the year they occur—this includes costs like advertising and utilities.
In addition to the legal fees mentioned earlier, other professional services related to your rental business are deductible as well. Hiring a CPA, accountant, or other tax professionals is advisable; their fees can help ensure you don’t overlook available deductions.
Many purchases made throughout the year for managing your rental property qualify as operating expenses and can be deducted in the same year they are incurred. The IRS defines these as necessary expenses for managing and maintaining your rental property.
Property maintenance involves regular upkeep rather than repairs necessitated by damage. You can deduct ongoing maintenance costs such as landscaping or pool cleaning services without needing major issues present. Additionally, tools required for maintenance—like lawnmowers—may also be deductible; however, some tools might need depreciation treatment.
It's also important to note that homeowners' association fees may also qualify as deductible rental expenses in most cases.
Tax deductibles are meant to provide tax relief for landlords that's why it's crucial you take advantage of these provisions.
The best way to maximize tax deductions for your rental property is through accurate expense tracking. By maintaining precise records throughout the year, landlords can avoid missing out on valuable deductions that could significantly reduce their taxable income.
Keeping track of all your expenses doesn't have to be a hassle. Property management and accounting software like Landlord Studio can help you manage your expenses and taxes effectively.
Here are some of the features Landlord Studio has to offer that help you maximize rental income tax deductions.
With Landlord Studio’s expense tracking capabilities, you can stay organized, prevent missed deductions, and make your tax filing process much smoother.
Create a free account with Landlord Studio today to get started.
