5 Tax Deductions For Rental Property

If you’re a landlord, your rental property not only brings you extra income but can allow you to write off tax deductions to lower your tax liability. From repairs and maintenance to mortgage interest and more, rental properties come with many expenses. In many cases, you can write off these costs on your tax return.

Here are five tax deductions you can claim for your rental property.

1. Rental expenses

One of the key aspects of owning rental real estate is that you can deduct certain expenses on your income tax return.

“Typically any expense that you incur to run the property and generate income is considered deductible,” says Atiya Brown, a certified public accountant and owner of the Savvy Accountant in Mansfield, Texas.

The IRS allows you to deduct ordinary and necessary expenses for your rental property. Those can include furnace repairs, lawn-mowing services, cleaning expenses between tenants and more. You can also deduct ongoing expenses like homeowners insurance and property taxes. See the IRS’ tips for rental property deductions.

However, don’t confuse maintenance and upkeep with property improvements, which are handled a different way. You can’t deduct the full cost of improvements right away, but you can recover the cost over time by using Form 4562 to report depreciation (more on this in the “property depreciation” section below). “Only a percentage of these expenses are deductible in the year they are incurred,” the IRS says. See the IRS instructions for Form 4562.

2. Qualified business income deduction

Sole proprietors and owners of S corporations, partnerships and some trusts or estates might qualify to claim the qualified business income (QBI) deduction, also known as Section 199A. (See this IRS page for more information.)

Passive activities, such as some rental activities, are usually not eligible for the QBI deduction. However, the IRS allows for a safe harbor under which a real estate enterprise is treated as a trade or business for the purpose of the QBI deduction. You can read more about how to qualify in this IRS document.

Depending on how you run your rental property as a business, you might qualify for this deduction. Eligible taxpayers might be able to deduct up to 20 percent of their qualified business income, as well as 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.

Keep in mind that the QBI deduction was introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA). The QBI deduction and other provisions of the TCJA are due to expire on Dec. 31 unless Congress takes steps to extend them. The House of Representatives in May passed a proposed tax bill that would maintain the QBI and raise its value to 23 percent, from the current 20 percent.

3. Property depreciation

Depreciation allows owners to write off part of the loss in value of the property’s structures due to wear and tear over time. In accounting, the process is typically referred to as capitalization.

“You can claim a percentage each year until the asset is sold or fully depreciated,” Brown says. Generally, you can start depreciating your rental property when it’s available for rent, which means the property is suitable for occupancy, even if vacant.

Typically, the improvements you make to your property can be treated as separate property for the purposes of depreciation. For example, a deck or bedroom addition can be depreciated separately from the rental property itself.

The depreciation amount depends on a few different variables, including what type of item it is. For example, residential property is typically deducted over 27 ½ years, whereas appliances such as a stove or refrigerator are depreciated over five years.

An important aspect of depreciation to keep in mind is something known as “depreciation recapture.” If you sell your property for a gain, some of the gain may be taxed as income if you took depreciation deductions.

4. Other expenses associated with running a business

You may also be able to find tax deductions related to running a business. For instance, if you have a home office, you might be able to deduct a certain amount related to using your home for business purposes. However, the home office must be regularly and exclusively used for business and be your principal place of business, according to the IRS.

Another area where you might find deductible expenses is if you have employees or contractors. If you employ a property manager or you contract people to fix up the property, for instance, wages paid may be deductible. (Check out this IRS page.)

You may also be able to deduct any legal or other professional fees you incur. For instance, if you have to pay a legal fee as part of setting up an organizational partnership, that could qualify as a business expense. You might also be able to deduct fees paid to accountants, bookkeepers and tax preparers as part of the direct and necessary operation of the business.

5. Rental property losses

Rental property tax deductions allow you to claim the cost of repairs, maintenance, taxes, insurance, depreciation and any other expenses associated with the property. But generally, if these deductible expenses exceed your rental income, you can only deduct up to $25,000 in losses in a given year, and only if you’re below the income threshold.

Here’s the income limit on claiming these losses: If your modified adjusted gross income is $100,000 or less, you may be able to claim rental losses of up to $25,000. If your MAGI exceeds $150,000, you’re not eligible to deduct rental losses.

If a taxpayer incurs a loss over $25,000, the amount that exceeds the threshold is “suspended until the property is sold or passive income is generated,” says Alton Bell, an enrolled agent and founder of Bell Tax Services in Chicago. In other words, you can carry the loss forward to deduct in future years.

Bell recommends consulting a tax planner throughout the year to figure out income reduction strategies if you are subject to loss limitations.

In addition, Bell recommends checking to see if you meet the IRS requirements for real estate professionals. If you do qualify as a real estate professional, you don’t face the $25,000 limit on rental losses.

To qualify, you must do more than half of your work in real estate-related activities, such as property management. As a second requirement, you need to work 750 hours or more in those activities every year and materially participate in them.

Bell also says timing plays a vital role in lowering your tax bill. “If you have a potential gain from a sale of another rental property, you can sell within the same year so that your losses can offset the gains,” he says.

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