This rental property tax deductions checklist outlines 21 of the most common expenses that landlords need to track using Landlord Studio.
As a landlord, it's important to keep track of the various expenses incurred in managing a rental property. These expenses, which can range from marketing the property to covering legal fees and maintenance costs, can add up quickly and amount to thousands of dollars.
Thankfully, however, many of these expenses are tax-deductible and can substantially reduce your end-of-year tax liability. On top of this, by tracking these expenses you can identify areas of overspending, and opportunities for increasing cash flow. For these reasons, it's crucial for landlords to maintain accurate and up-to-date records of their expenses.
Our rental property tax deductions checklist highlights 21 common expenses that landlords should track in order to claim these deductions on their Schedule E form 1040 at the end of the year. Plus, we explore how using software like Landlord Studio for digital record keeping can help you streamline your rental management saving you time and increasing your ROI.
Rental Property owners have a federal tax responsibility to report all of their income and expenses to the IRS at a tax turn tax time.
Not doing so could result in you missing expenses and overpaying your taxes, or filing an inaccurate tax return and triggering an IRS audit.
A few of the main deductions, rent a property a rental property owner can take include:
Landlords and real estate investors will need to calculate and declare all of the income collected from their rental properties over the course of the year in their tax return. This obviously includes all of the rents received, but also any other income received from tenants. For example, if as the landlord you are responsible for paying utilities and you are reimbursed by your tenants, you would declare that utility payment as income but then treat the utility payment you made as a deductible expense.
Landlords are responsible for tracking and declaring all of their deductible expenses such as operating expenses, any owner expenses, including things like mileage and as mentioned above, depreciation. To calculate your depreciation, you need to first work out the cost basis of the property minus the land and you can depreciate it over a period of 27.5 years.
To calculate the total amount of taxable income in a given year you need to subtract the sum of all of the expenses detailed in this rental property deductions checklist from the sum of the income received. From this calculation, you’ll get the total amount of income that you need to report on your schedule E.
Rental income is taxed as ordinary income. Meaning if you’re in the 22% marginal tax bracket, you get taxed 22% on that rental income.
Tax law in the US is incredibly friendly to rental property owners. Most expenses related to the operation and management of your rental property are deductible as an expense against your income. If you qualify as a real estate professional you can also deduct these expenses against other sources of income.
Find out more about how to qualify as a real estate professional here.
On top of this, depreciation makes up a large deductible expense and could result in a cash flow positive property running at a taxable loss.
A quick word on depreciation: When you sell your property you will have to pay depreciation recapture on depreciation allowed (even if you didn’t claim it).
You can learn more about depreciation recapture on the sale of your rental property here.
The rental property deduction checklist below outlines 21 essential rental property tax deductions you can claim to improve your investment ROI.
The costs associated with advertising your rental to fill your vacancies. These could include costs for rental listing sites such as Zillow, for rent signs, as well as professional photography and video, etc.
If you choose to outsource the finding of new tenants the leasing commission that you pay to an agent to fill your vacant property is also deductible. Generally, these expenses equal about one month’s rent.
Interest, mortgage points, and real estate taxes can be deducted the year they are incurred. Other real estate closing costs such as recording fees, transfer taxes, and title insurance must be added to the cost basis of the residential property and depreciated over 27.5 years.
Money spent on educational materials such as books, webinars, real estate seminars or tuition is tax-deductible.
The cost of the building (not the land) can be depreciated over what the IRS deems its useful life. The useful lifetime for residential property is 27.5 years, and for commercial property is 30 years.
Real estate investors must claim the allowable depreciation amount because they will be required to pay depreciation recapture tax upon the sale of the property even if they don’t claim the depreciation.
New items bought for the property such as new appliances, office furniture, fences, etc cannot be deducted in full in the year in which they are bought. Instead, they will need to be depreciated over what the IRS deems their useful lifetime. For example, appliances and carpeting have a useful life of 5 years according to the IRS.
Paid subscriptions to real estate publications and reports and dues to a real estate club are tax-deductible.
You may be able to take advantage of a home office deduction if you have a home office in which you do work relating to your real estate business. The IRS offers a simplified home office deduction that is easy to calculate and expense from rental property income.
Landlords should have a quality landlord insurance policy to protect their assets in case of disaster and against potential liability issues. Thankfully, these insurance premiums are fully tax-deductible.
While the mortgage principal is not deductible, the interest on the loan is. Additionally, interest on business credit cards used t purchase services or materials for your rental property business is deductible too. At the end of each year, the lender will send a statement itemizing annual interest expense to make booking the deduction easier.
Any expenses incurred for recurring expenses related to the external property upkeep such as lawn mowing, hedge trimming, etc are fully deductible, as well as one-off seasonal costs like gutter cleaning and snow removal.
Sales and tax licenses, local business licenses, and annual fees related to running your business as an LLC (limited liability company) are counted as operating expenses and are deductible.
Any routine maintenance such as changing the air-conditioning filters as well as regular repairs such as air-conditioning repair, repainting, or plumbing repairs, etc are fully deductible in the year in which they are incurred. It’s important to note that any more extensive work that adds value to the property may not be immediately deductible, but instead count as capital improvement and will need to be depreciated.
Find out more about capital improvements vs repairs.
Legal forms such as lease documents, pens, paper, or other office supplies are tax-deductible.
Professional fees include things like fees for your CPA or tax advisor or fees to an attorney and are deductible.
Many costs associated with the management of your rental are normally deductible. For example, if you hire a property management company – or if you use a landlord software like Landlord Studio to help with tasks such as tenant communication and rent collection.
Property taxes can vary broadly depending on the location and size of the property ranging from a few hundred dollars to several thousand. Fortunately, these property taxes can be fully deducted from income generated by a rental property.
The pass-through tax deduction allows qualifying rental property owners to deduct 20% of the rental business income from the overall taxable business income. This can be complicated and it’s advised to seek guidance from a professional tax advisor or CPA.
In some locations and municipalities, there will be a sales or use tax on the rental income that is collected.
The use of your phone for your rental business is deductible.
Many rental property owners purchase a cell phone specifically for business use and pay for the monthly service using business credit or debit cards.
Most landlords get the tenant to pay for the tenant screening report, but not all. Additionally, fees associated with screening an applicant outside of the screening report can also be deducted at the end of the year.
All auto costs associated with traveling to or from your rental or travel undertaken for business purposes such as meeting with a contractor or picking up supplies can be deducted using the standard mileage deduction rate.
For longer distance travel where you are visiting another city or state, the associated travel costs can often also be deducted. However, in order to claim these travel deductions, you will want to keep a careful record of all travel, including distance traveled (if you’re driving) as well as the date and the purpose of the travel. Expenses must also be reasonable.
You can use Landlord Studio’s inbuilt mileage tracker to keep a detailed travel log.
Landlords that pay for the utilities for their property can include the cost in the tenant’s monthly rent and then deduct the expense of the utilities as an operating expense.
Taking advantage of deductible expenses requires landlords to keep up to date and accurate records of all of their expenses throughout the tax year. You not doing so could cost you $1,000’s in overpaid taxes or IRS audits.
One of the main jobs of a real estate investor then is record keeping and bookkeeping. For one or two properties you may be able to use a spreadsheet to keep track of your income and expenses. However, as your portfolio grows the more complex your accounting needs become. Plus, all of the receipts, documents, and records required need to be organized and stored securely for future reference.
Ideally, then investors should look for technology that allows you to streamline your income and expense tracking as well as general property management. Landlord Studio, for example, is a tool designed by landlords tool landlords specifically to help them keep up-to-date and accurate records of their income and expenses. This financial tracking tool has an intuitive financial dashboard, and advanced accountant approved reporting.
Additionally, you can connect your bank account to import, view, and reconcile transactions with a few simple taps, take pictures and digitize receipts and securely store all your important documentation organized within the system in our cloud server so that it is easily accessible at any time. Other Automation features include automated income tracking when you use our online rent collection tool.
Using a tool like Landlord Studio allows you to scale your business without increasing the time requirements to do so and without becoming overwhelmed by the volume and complexity of your accounting system.
Finally, with this real-time data, you can get nuanced insights into your portfolio financials and develop unique strategies that work for you, allowing you to optimize cash flow profitability and scale your business.