What kind of items can a landlord deduct?
Generally, if you are a landlord, you can deduct most of your actual expenses related to your rental property. Deductible expenses include things like normal operating expenses, business expenses for advertising or marketing your property to prospective tenants, utility costs you are responsible for paying under the terms of the Lease Agreement, as well as certain materials, supplies, repair expenses, and maintenance costs for the property. Tax preparation costs and professional service fees, such as legal and accounting expenses, are also deductible. If you have a Property Manager Agreement in place to handle day-to-day business responsibilities, or pay someone or a service to handle landscaping, lawn care, or snow removal, you can deduct those costs, too.
Additional common rental property tax deductions include real estate taxes, homeowners insurance premiums, and property management fees, as well as HOA costs or commissions paid to leasing companies. If you have a mortgage on the rental property, you can take a tax deduction for the mortgage interest. It is worth noting that if you work on your rental business from an office in your home, you may also be able to take a home office deduction.
If you travel to and from your rental property to meet prospective tenants, handle repairs, or collect payments from renters, you can also take a tax deduction for certain transportation expenses. For the 2024 tax year, the standard mileage rate for travel expenses is 67 cents per mile.
Finally, you can also claim a deduction based on the depreciation of your rental real estate and certain items of personal property used in your rental business, as discussed in more detail below.
What deductions have to be depreciated?
Calculating and reporting depreciation on income tax filings can be a challenge for any taxpayer. The basic idea behind depreciation is that it spreads out the cost of purchasing rental real estate (and other large-ticket purchases) over multiple tax years (the useful life of the property, as defined by the IRS). While you generally cannot take tax deductions for expenses related to improving your rental real estate, you can depreciate those expenses. Capital improvements are improvements that increase the rental home’s property value, enhance its usefulness, adapt it to a new use, or restore it to new or like-new condition. Depreciable capital improvements include things like:
- The cost of installing new carpeting.
- Upgrading the HVAC system.
- Replacing the roof.
- Completing renovations to make the property accessible to persons with disabilities.
In order for an improvement to be depreciable, it must have a useful life of more than one year. Also, keep in mind that you must be the owner of the property and use it to produce income. If you purchase a rental property and begin leasing it to tenants immediately, depreciation starts that same year. Otherwise, depreciation begins as soon as the property is in service or available as a rental.
Because of the complexities involved in depreciating rental real estate and improvements to rental real estate, it may be best to talk to your tax professional or a Rocket Legal Pro to confirm that your reported depreciation deduction is accurate.
How does a landlord calculate depreciation?
Rental property depreciation is based on the useful life of the property. For real estate placed in service as rental property after 1986, the IRS generally applies the Modified Accelerated Cost Recovery System (MACRS). MACRS uses a 27.5-year period for depreciation (or 3.636% of the property’s tax basis annually). Essentially, this means that if you purchased rental real estate in 2000 and have continued to use it as such since that time, you would take your final depreciation deduction for that property in the 2028 tax year. This is true even if there were tax years when you failed to claim depreciation for the property. Depreciation is based on your tax basis. The tax basis for the property includes the amount you initially paid to purchase the property, as well as certain fees, transfer taxes, and title insurance.
It is important to note that while the property is subject to depreciation for tax purposes, the land upon which the property sits is not. That’s because land does not have a useful life or wear out. In other words, values for depreciation purposes do not factor in with improvements to the land, such as grading or planting. Depreciation is based solely on the basis of the structure itself, including improvements. You may need to adjust your tax basis if you made capital improvements to the property.
Most rental property owners use the General Depreciation System (GDS) to determine their depreciation rate. Some property owners are required to use the Alternative Depreciation System (ADS), which provides a longer depreciation period for real estate.
Calculate your depreciation amount by using the applicable percentage from the MACRS percentage tables in IRS Publication 527, or by using the depreciation method and convention applicable for the property’s recovery period.
How does the depreciation rate affect tax liability?
Once you have calculated your depreciation amount, enter that figure as an expense on IRS Schedule E for your federal tax return. Your net real estate income or loss will then be reported on Schedule 1 (Form 1040), which is attached to your Form 1040 tax return. Ultimately, depreciation (and other expenses listed on Schedule E) reduces your taxable income and, consequently, your tax liability for that tax year.
You can determine the approximate total percentage of your tax savings applicable to rental property depreciation by multiplying your tax bracket percentage by the total amount depreciated.
How can I maximize deductions for my rental business?
Owning rental real estate can come with many expenses, whether you are actively involved or own the rental as an investment property. Good recordkeeping for your rental activity is the key to managing your business real estate income and expenses effectively. Good recordkeeping can also be pivotal during tax season. You can maximize your rental property tax deductions by keeping detailed, organized records of your gross rental income as well as all expenses related to the business. Consider using a Small Business Tax Worksheet to capture this information.
Remember that in the eyes of the tax authorities, your real estate rental business is a small business. So, in addition to the expense deductions and depreciation deductions described above, which are specific to residential rental property, you may be eligible to take additional small business and self-employed tax deductions and tax breaks, such as business credit card interest and office supplies.
You may also be eligible for a variety of tax credits, including credits related to energy-efficient improvements. These deductions and tax credits for business owners and independent contractors, when taken together, can have a meaningful impact on your ultimate tax liability. Please note that rental real estate property may not be eligible for all of the same credits as personal real estate property. Working with a tax professional can ensure that you are receiving the appropriate energy-efficient home improvement credit for your type of property and improvements.
Taxes for landlords and other small business owners can be daunting. Confused about what you can and can’t deduct for your particular business and situation? Get matched with a tax pro via Rocket Tax™ to save time and money filing your tax returns.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
