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Rental Accounting

9 Common Tax Deductible Rental Property Expenses

Every year landlords all over the US overpay their taxes. The reason for this is that they leave valuable tax deductions left unclaimed. This could be because they aren’t tracking their income and expenses properly using software like Landlord Studio, or it could be that they didn’t realize they could deduct certain things.

Whatever the reason, failing to take advantage of all the tax deductions is unnecessary. Often these tax benefits can mean the difference between losing money and earning money on a property.

Here are the top tax deductions for owners of residential rental property.

The Top 9 Tax Deductions for Landlords:

  1. Interest
  2. Depreciation
  3. Repairs
  4. Personal Property
  5. Pass-through Tax Deduction
  6. Travel
  7. Employee and Independent Contractors
  8. Insurance
  9. Legal and Professional Services

1. Interest

Interest is a major deductible for many landlords. The key reason it’s such an important deduction is that, while you can’t deduct your mortgage payments themselves, you can deduct the interest payments for mortgage loans used to acquire or improve a rental. Another common example of an interest payment is the interest paid on credit cards used for goods or services related to rental property activity

2. Depreciation

Another major deductible for landlords in the US is property depreciation. Property depreciation allows you to deduct the value of the house against your taxable income.

There are a couple of conditions for this, however. The first is that you must spread the deductible cost over 27.5 years.

The second consideration is that the value of the land can’t be depreciated only the property itself. For example, you purchase a property for $275,000. The land the property is built on is worth $50,000. Meaning the adjusted cost basis that you can depreciate over the allowed time is $225,000. This allows you to deduct $8,181 per year against your taxable income.

Additionally, you can depreciate improvements to the house using an adjusted cost basis of the house value.

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tax deductible expenses

3. Repairs

Work done on the property which is deemed as an improvement is not deductible for landlords. However, the cost of maintenance and repairs to the property are fully deductible in the year in which they occur.

You have to be careful not to deduct what the IRS determines as improvements as maintenance. As a quick guideline, you can work on the principle that a replacement is almost always an improvement —not a repair, at least for tax deduction purposes.

To obtain the best tax deduction results then you should patch, mend, or fix things instead of replacing them. This can often be a little counter-productive as a replacement might work out cheaper, however, you might not be able to deduct it so it will cost you more.

For example, if a tenant damages a portion of a carpet, instead of replacing the entire carpet get it professionally cleaned or repaired.

A few examples of deductible maintenance and repair costs include:

  • Repainting
  • Fixing guttering
  • Fixing floors
  • Plastering
  • Replacing a broken window.

4. Personal Property

Personal property, such as furniture or whiteware that is used in rental activity can be deducted in a single year. This deduction comes under the de minimis safe harbor deduction and is allowable for property costing up to $2,000.

Examples of personal property include:

  • Furniture used in a furnished apartment.
  • Appliances (eg. fridge, oven, washing machine).
  • Any supplied gardening equipment.

5. Pass-Through Tax Deduction

Pass-through tax deduction is a special income tax deduction rather than a rental property-specific deduction and was established as part of the 2018 Tax Cuts and Jobs Act.

Depending on your income landlord’s may be able to deduct either (1) up to 20% of their net rental income, or (2) 2.5% of the initial cost of their rental property plus 25% of the amount they pay their employees.

6. Travel

Landlords are entitled to a tax deduction for travel related to their rental activity. In the main, this means deducting mileage for any driving done to manage your rental property. For example, driving to the property for a routine property inspection.

It’s worth pointing out though that you cannot deduct any travel expenses to a property that is done to improve the property. These costs, just like improvement costs need to be added to a property’s tax basis and depreciated over many years.

To deduct your driving expense you can do one of two things. Either:

You must use the standard mileage rate in the first year you use a car for your rental activity to be qualified to use this rate going forward.

To take advantage of this deduction, you need to carefully and precisely track and monitor your traveling as the IRS closely scrutinizes travel deductions especially any deductions made for overnight travel. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel expenses.

You can easily do this using Landlord Studio’s built-in mileage tracker.

landlord mileage expense

7. Employees and Independent Contractors

You can deduct the wages of anyone employed to perform services for your rental activity. Independent contractors include examples such as electricians or plumbers; whilst an employee is someone like a resident manager.

8. Insurance

All the Insurance premiums you pay for your rental property, including, fire, theft, and flood insurance as well as any landlord liability insurance can be deducted. On top of this, if you have employees involved in the management of your property you can deduct the cost of their health and workers’ compensation insurance.

9. Legal and Professional Services

The final item on our list is the cost of legal and professional services. This can include fees paid to attorneys or accountants, as well as costs associated with the creation of legal documents and property management. Landlord Studio property management software falls under this category.

Final Thoughts

To make the most out of your deductions and take full advantage of the annual deductible allowance of $25,000 you need to carefully track your income and expenses. The most efficient way to manage this is to use a designated software such as Landlord Studio.

Landlord Studio allows you to track your income and expenses at an organization, property, and unit level. On top of this, connect your bank accounts and use our smart scan feature to quickly enter receipt details using your camera.

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Please note that all of the above is for the purposes of general information and does not constitute advice. If you need help or legal advice please contact a licensed professional.

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Ben Luxon

Ben is an author and real estate enthusiast. His interest in all things entrepreneurial has led him to work with real estate professionals all over the world, distilling their knowledge into articles and Ebooks.


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