Key Takeaways
- In addition to regular rent payments, landlords renting residential real estate must include advance rent payments, expenses paid by your tenant on your behalf, property or services provided by the tenant, lease payments with an option to buy, lease cancellation payments, and certain security deposits as taxable rental income.
- Rental property tax deductions are available for a wide range of expenses related to the renting of residential property, including the cost of advertising, cleaning, insuring, managing, and repairing the property.
- No rental property deductions are available for personal expenses, even if they’re related to the renting of property you own. You can only claim your share of deductions if you only own part of the rented property.
- Passive activity loss rules can limit the impact of rental property deductions. However, exceptions apply for certain real estate professionals, and for people who actively participate in rental activities (that is, make management decisions about the rental property and own at least 10% of it).
Importance of tax deductions for rental property
Renting a house or other residential property can provide a steady source of income. But being a landlord also comes with its own set of financial responsibilities – including paying taxes on your rental income.
The good news is that there are several federal tax deductions available for people who own and rent residential properties. These tax breaks can help reduce your tax burden and increase your cash flow.
Whether you’re a long-time landlord or just starting out, claiming these deductions can make a significant difference in your bottom line. That’s why it’s important to be aware of and understand the tax deductions that apply to you.
Types of rental property income and how they’re taxed
Before diving into the tax deductions for rental real estate, let’s take a look at some of the common types of income you might receive when you rent residential property and how they’re taxed.
TurboTax Tip:
If you rent out your home for fewer than 15 days during the year, you don’t have to include the rent payments in your taxable income for the year. However, you can’t deduct related expenses, either.
If you only own part of the property, you only have to report a proportional amount of the taxable rental income from the property.
Regular rent payments
Of course, you’ll receive periodic rent payments from your tenants. Rent is often paid monthly, but rent can be collected at other intervals. Regardless of how frequently it’s paid, periodic rent payments are considered taxable income.
Advance rent payments
Rent can be paid in advance, too. If you receive an advance payment, it’s included in your taxable income for the tax year you receive it. For example, if you sign a five-year lease and you immediately receive rent for the next tax year, you need to include the advance payment in your taxable income for the current tax year.
Security deposits
Tenants often must pay a security deposit when signing a lease. As the landlord, don’t include that payment as taxable income for that tax year if you might have to return the deposit to the tenant when the lease expires. However, if you end up keeping all or part of the deposit at any point because the tenant breaks the lease, include the amount you keep in your taxable income for that year.
If you keep all or part of the security deposit because the tenant damaged the rental property, include the amount you keep in your taxable income for that year if you deduct the cost of repairing the damage as an expense (see below). On the other hand, if you use the deposit to cover any repair costs, but don’t deduct the cost of repairs, don't include the amount you keep in your taxable income.
Also, if a payment is called a “security deposit,” but if it's really going to be used as a final rent payment, it’s really just an advance rent payment and is included in your taxable income for the tax year you receive it.
Expenses paid by the tenant
If your tenant pays any of your expenses – such as a utility or repair bill—and deducts the amount from the regular rent payment, the amount paid is treated as taxable income to you.
However, you can deduct an equal amount if the underlying expenses qualify as deductible rental expenses (see below).
Property or services provided by the tenant
What if your tenant pays you with property or services, instead of money? For example, the tenant is a carpenter who builds a deck on your rental property instead of paying rent for two months.
In that case, include the fair market value of the property or services provided in your taxable income. If you and the tenant agree upon a price for the property or services, use that price as the fair market value unless there’s evidence to the contrary.
Lease payments with an option to buy
If a rental agreement gives the tenant the right to buy your rental property, rent payments made under the agreement are generally taxable income for the tax year you receive them. However, if the tenant exercises his or her right to buy the property, payments received after the sale are treated as part of the selling price, not as rental income.
Lease cancellation payments
Sometimes tenants need to break a lease early. If a lease cancellation payment is required, you must include it in taxable income for the year you receive it.
Rental property tax deductions
Now that you have a better sense of what counts as taxable rental income, let’s review some of the more common tax deductions available for residential rental property expenses.
Generally speaking, you can deduct all ordinary and necessary expenses related to your rental property. You might also be able to write off up to 20% of your business income if you qualify for a special deduction available to small business owners.
Advertising costs
When your rental property is vacant, you need to get the word out about its availability. For example, you might place an ad online or in a local newspaper. Money you spend on advertising your rental property is deductible.
Auto expenses
If you use a car, truck, or van for activities related to your rental property, you can generally deduct your auto expenses. This includes expenses related to a vehicle you rent, not just for vehicles you own.
You can use either the standard mileage rate or your actual expenses to calculate this deduction.
For the 2024 tax year, the standard mileage rate is 67¢ per mile driven for rental property-related or other business purposes (65.5¢ per mile for 2023).
Actual expenses include gas, oil, repairs, insurance, and other ordinary costs associated with owning and operating a motor vehicle. However, you can only deduct the expenses for the miles that you drive for rental property activities as a rental property expense. If you also use your vehicle for personal driving, you can only deduct expenses for the miles you drive for rental property as a rental property expense.
Cleaning costs
Your rental property likely needs a good cleaning between tenants. Whether you hire a cleaning service or do it yourself, cleaning costs can add up quickly. However, you can deduct the ordinary and necessary costs of keeping your rental property clean.
Depreciation
Rental property depreciation deductions let you recover the cost of purchasing your rental property over time. For example, if you buy a house that you rent out to tenants, you can generally deduct a portion of the purchase price allocated to the building (but not the land) each year until your combined deductions equal the cost of the property.
If you build an addition, replace the roof, or make other improvements to the property, you can also claim depreciation deductions to recover those costs, too.
How much you can deduct each year for depreciation depends on your cost basis in the property, the property’s recovery period, and when the property is placed in service.
Disaster and theft losses
You may be able to deduct the damage, destruction, or loss of your rental property from a storm, fire, earthquake, or similar disaster. You might also be able to deduct losses from the theft of items you own that are in the rental property, such as a television or furniture that you provide for your tenants.
Insurance
You’ll likely need to insure your rental property to protect yourself from damage, liability claims, and other potential risks. Premium payments for insurance coverage are generally deductible.
However, you can only deduct premiums that apply to that tax year. So, if you pay an insurance premium for a future year in advance, you can’t deduct that payment in the year you pay it.
Interest payments
Suppose you take out a loan to cover the cost of new appliances, furniture, or other necessary expenses for your residential rental property. As you pay back the loan, part of your payments will be for interest. The portion of your payments allocated to interest – as opposed to principal – are generally deductible.
However, you can’t deduct prepaid interest in the tax year you pay it. Instead, if you pay interest that’s allocated to next year or sometime after that, you have to wait to deduct the payment until the tax year to which the interest applies.
You may have also heard that business interest deductions are sometimes limited. Fortunately, you probably don’t have to worry about the limits. For the 2024 tax year, they only apply to businesses with average annual gross receipts over $30 million for the previous three years (average of over $29 million for 2023).
Legal and other professional fees
You might need to hire a lawyer, accountant, or other professional to handle issues related to your rental property. If so, their fees are generally deductible.
This includes fees for tax advice and preparation of tax forms related to your rental property. You can also deduct the cost to resolve a tax underpayment related to your rental activities.
However, you can’t deduct legal fees paid to protect title rights or to recover, develop, or improve rental property. Instead, these fees should be added to the property's basis and depreciated (see above).
Management fees
You might hire someone to manage your rental property. Property managers can handle tenant applications, rent collection, maintenance requests, and more. If you go that route, you can generally deduct the property management fees.
Mortgage interest payments
If you have a mortgage on your residential rental property, you can generally deduct interest paid on the loan. However, payments for principal are not deductible.
Points paid to take out a mortgage – sometimes called loan origination fees, maximum loan charges, or premium charges – are also deductible. But you have to deduct them gradually over the life of the mortgage.
Certain other costs of obtaining a mortgage on your rental property aren’t deductible, such as mortgage commissions, abstract fees, and recording fees. Instead, they’re added to the property's basis and depreciated (see above).
If you rent a second home or part of your primary residence, there are two different ways that mortgage interest for the property can be deducted – but you first have to divide the interest payments into rental use expenses and personal use expenses. Once the expenses are separated, you can write off the interest attributed to rental use as a rental property deduction. Then, the amount attributed to personal use might be deductible as an itemized deduction.
Qualified Business Income Deduction
While not a deduction of particular expenses, you might be able to claim the Qualified Business Income (QBI) Deduction if you meet the deduction’s many requirements.
Landlords can claim this deduction if their property rental activities are treated as a trade or business, or if they satisfy the requirements for a “safe harbor” exception under the QBI deduction rules.
If you qualify, you can deduct up to 20% of the net amount of qualified items of income, gain, deduction, and loss from your business.
Repairs and maintenance
The costs of repairing and maintaining residential rental property are generally deductible for the tax year you pay for it. This includes expenses required to keep the property in good condition, such as fixing a leaking faucet or painting a room.
Improvements, which add to the value of the property, aren’t immediately deductible. Instead, their costs are subject to depreciation and deducted gradually over a period of years (see above).
Taxes
You’ll likely have to pay property taxes on your rental property. If so, those tax payments are deductible.
Other tax payments related to your rental property might be deductible, too. For instance, you might owe local occupancy taxes, which are deductible. If you have employees, Social Security and Medicare taxes withheld from their wages and paid to the IRS are also deductible.
Travel expenses
Landlords can generally deduct the cost of traveling away from home if the main reason for taking the trip is to collect rental income or manage, conserve, or maintain rental property. You can generally deduct 50% of meal expenses while traveling away from home, too.
Travel costs aren’t deductible if the main purpose for the trip is to improve rental property (as opposed to repairing or maintaining it). Instead, those costs can only be recovered through depreciation deductions (see above).
Utilities
Electric, gas, water, and other utility bills you pay for your rental property are generally deductible. If your tenant pays for utilities, you can’t deduct them on your tax return.
You can also deduct the cost of telephone calls related to your rental activities, such as calls to your tenant or property manager.
What’s not a deductible rental property expense?
While the rules for deducting ordinary and necessary expenses are relatively broad and allow for a wide variety of write-offs for landlords, not every expense (or 100% of every expense) related to residential rental property is deductible.
Here are a few situations where you can’t deduct certain expenses.
Personal expenses
Any personal expenses you pay generally aren’t deductible, even if they’re somehow related to your rental property. So, for example, if you take a trip away from home to collect rent, but end up staying an extra day or two for personal reasons, you can’t deduct any expenses related to the additional two days.
This type of situation also arises with utilities, insurance, maintenance costs, and the like if you rent part of your primary home, use your rental home for more than 14 days, or sometimes rent a second home. In that case, you need to divide your expenses between rental use and personal use, and only deduct those expenses related to renting the property (although the portion of your mortgage interest deemed a personal expense might also be deductible, as noted above).
Partial ownership of rental property
If you only own part of a rented property, you can only deduct expenses you paid multiplied by your percentage of ownership. You can’t deduct the remaining portion, but you can seek reimbursement of it from the other owners.
For example, if you own 50% of a rental property and pay $1,000 for repairs during the year, you can only deduct $500 for the repairs on your tax return ($1,000 x .50 = $500).
Local benefit taxes
You generally can’t deduct taxes for local benefits that increase the value of your rental property, such as taxes and fees for putting in streets, sidewalks, or water and sewer lines. Instead, these taxes are added to the property’s basis and depreciated (see above).
Commuting costs
Auto expenses for traveling between your home and a rental property are generally nondeductible commuting costs unless you use your home as the place from which you manage your rental property.
Rental property that’s for sale
If you're selling a rental property, you can generally deduct the cost of managing, maintaining, or preserving the property until it's sold. But if the property isn't held out and available for rent while it's listed for sale, the expenses aren’t deductible as rental expenses.
How to claim rental property deductions
Rental income and expenses are generally reported on Schedule E (Form 1040). The total income (or loss) is copied to Schedule 1 (Form 1040), where it’s combined with other forms of income and then reported on the main 1040 form.
Use Schedule C instead of Schedule E to report rental activities if you provided significant services to the tenant, such as regular cleaning, changing linens, or housekeeping services. Furnishing utilities, cleaning public areas, collecting trash, and similar services don’t count.
Also use Schedule C instead of Schedule E to report income and expenses from rental property you held for sale to customers as a real estate dealer.
You have to file Form 4562 if you’re depreciating property placed in service during the tax year.
If you’re claiming a disaster or theft loss for your rental property, use Form 4684 to calculate your loss.
Use either Form 8995 or Form 8995-A to calculate the QBI deduction.
Effect of passive activities losses
The impact your rental property deductions have on your overall tax bill could be limited by the passive activity loss rules. That’s because the IRS generally treats rental property activities as passive activities.
However, there are a couple of exceptions to the passive activity loss rules that are designed for landlords. First, if you “actively participate” in a rental property activity, you might be able to deduct up to $25,000 of passive activity loss from nonpassive income, such as wages. However, the $25,000 amount is gradually phased out if your modified adjusted gross income is more than $100,000 ($50,000 if you’re married and filing a separate tax return).
You can be treated as actively participating in rental property activities if you make management decisions, such as approving new tenants, deciding on rental terms, and approving expenditures. You must also own at least a 10% interest in the rental property to qualify for this exception.
Second, renting property isn’t treated as a passive activity if you materially participate in the activity as a real estate professional (material participation is a higher level of activity than active participation). Basically, to qualify for this exception, more than half your work time must be spent in real property-related trades or businesses, and these activities must total more than 750 hours per year.
File Form 8582 if you have passive activity losses that are subject to loss limitation rules.
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