October 5, 2023
Last Updated
Every landlord and real estate investor who owns rental property carries responsibility for paying their taxes each year. This is an overwhelming process for many, and it’s easy to miss out on substantial money-saving deductions.
However, missing out on essential rental property tax deductions knocks down your business profits. Deductions consider your business’s expenses when determining how much is owed in taxes—skipping out on these means you’re paying more taxes than you should.
Today, look at the top tax write-offs for rental property that you should always check for when preparing and filing your tax returns.
A Table Of Contents On Rental Property Tax Deductions
Rental property deductions are essential to calculating your taxes each year. Ensure you receive all possible write-offs by reviewing these top deductions for landlords and investors.
- Tax Breaks For Rental Property: Why It Matters
- Top Tax Deductions For Rental Property
- 2023: Stay On Top Of Key Rental Property Taxes
- FAQs On Rental Property Write-Offs
- Investment Property Tax Deductions: Plan For Your Future
Tax Breaks For Rental Property: Why It Matters
Everyone from new to experienced landlords carries some confusion around their taxes, and there’s good reason for that. Tax laws and regulations often change yearly, so it’s a lot to keep track of, especially when managing taxes on rental properties is already complex to begin with.
Still, investors need to utilize all possible tax breaks for rental property. Deductions offset the money spent on maintaining, repairing, and managing rental properties. Without accounting for these standard expenses, taxes on rental income would be impossible to balance into your business’s bottom line.
Even if you get help from an accountant to prepare your taxes, it’s still essential for you to understand what deductions are likely to apply. Preparing the correct information for your accountant is crucial.
Top Tax Deductions For Rental Property
What exactly are the most important investment property tax deductions that you need to keep tabs on? Let’s cover the primary categories that will apply to your return.
Standard Repairs
The first and perhaps most obvious deduction category for rental property is the cost of standard repairs. Adding all of these expenses maximizes how much you can deduct. You will naturally incur these costs throughout the year, so make sure you use them accurately to offset your income.
While determining what repairs you have completed this year, differentiating between repairs and improvements is essential. Improvements to a rental property are considered capital expenses and cannot be deducted in full directly within the current tax year. Instead, the value of those improvements will need to be depreciated over time.
Repairs, on the other hand, are considered to be changes made to the property that are ordinary in nature, necessary to the property’s habitability, and reasonable regarding both cost and frequency. For example, replacing a broken sink faucet would be a repair, while replacing the entire sink unit when only the faucet is broken could be an improvement.
Examples of deductible repairs include:
- Repairing roof leaks
- Replacing broken locks and windows
- Repainting rooms
Making repairs as they arise ensures that you can deduct the cost immediately. Waiting and then needing to instead make more extensive improvements will only increase your current-year tax liability and reduce current-year deductions.
Maintenance
Make sure to deduct the cost of regular maintenance for your property. For example, purchasing ice melt to keep sidewalks of communal areas safe would be a maintenance cost. All expenses incurred as part of maintenance should be included to maximize your tax benefits.
Professional Fees
Another tax write-off for rental property for investors is the cost of professional services. These services may include:
- Legal fees
- Accounting fees
- Property management fees
- Investment advisor fees
- Other professional fees
When filing your Schedule E, deduct these fees as they are part of your standard operating expenses.
Taxes
You may be able to deduct the entire amount paid in local property taxes each year. The exact limit on how much can be deducted will depend on your involvement in the business and how your business is structured.
Landlords managing short-term rentals should also deduct the cost of occupancy taxes if applicable in your area. Tax on business expenses, such as wage taxes paid to employees, can also be deducted.
Cost Of Insurance
The premiums that you pay for insurance of all types are deductible as well. Landlord liability insurance, fire insurance, flood insurance, and more are all deductible. These are necessary expenses for your business and are thus deductible.
Depreciation
Many expenses cannot be deducted immediately. Instead, these large amounts must be deducted over time through a process known as depreciation. Depreciation is the process of deducting a specified portion of an expense (such as the cost of a property) over the span of a few years.
Depreciation deductions are recurring deductions that need to be accurately filed and tracked from year to year. For most landlords, depreciation is one of their largest deduction categories.
There are many different ways to handle depreciation. Cost segregation is one method that property investors use to increase yearly deductions or to depreciate improvements at a faster rate.
To learn more about depreciation and all that goes into it, check out the complete depreciation guide by the IRS.
Employee And Contractor Wages
Employee wages are also rental property write-offs. Payments to your employees or hired contractors are required to operate your business and thus fall into the deductible category. These are both fully deductible through Schedule E.
Loan Interest
Interest is another huge deductible for landlords. Interest paid alongside mortgage principal payments and any loan interest is fully deductible. Your entire portfolio may require these payments, which is why this deduction amount gets so large.
Continuing Education
Have you taken any classes to learn about real estate, renew your licensing, or otherwise support your rental business? If so, you can deduct the cost of courses taken to improve your skills.
Home Office Expenses
If your home office meets the IRS requirements, some associated expenses will be tax deductible. This can be complicated to determine, but most landlords working from home can take some sort of deduction for their home office. The space needs to be used as the principal place of business in order for the tax deduction to apply.
Mileage And Travel Expenses
Ordinary travel expenses are deductible for landlords. Mileage costs for driving to and from rental properties for repairs and maintenance are deductible. The IRS sets a standard mileage deduction rate. For 2023, the rate is 65.5 cents per mile.
Landlords traveling overnight due to their business needs may also be able to deduct their hotel costs and related expenses. Be sure you carefully document these costs in case they are scrutinized once you file your taxes.
2023: Stay On Top Of Key Rental Property Taxes
The best thing you can do to maximize your yearly tax deductions is to plan ahead. Plan for the accounting that will need to be done, and keep track of all mileage as you travel. By planning ahead, you will not need to scramble to get things together when it comes time to file your taxes.
Dates To Remember
Keep in mind these significant dates as you move forward to file your taxes:
- Tax return deadline for partnerships (1065): March 15, 2023
- Tax return deadline for individuals (1040): April 18, 2023
Quarterly deadlines are also important for landlords and sole proprietors making these periodic payments:
- Quarter 1: April 18, 2023
- Quarter 2: June 15, 2023
- Quarter 3: September 15, 2023
- Quarter 4: January 15, 2023
Planning For Better Tax Filing
Another step to ensure you’re claiming all applicable rental property tax deductions is to learn more about the overall process of filing your taxes. Even if you work with an accountant, knowing more about your taxes, how they work, and what applies to your business will benefit you greatly.
Outlining For Your Future
We know how important it is to stay organized when working with rental property. Without carefully tracking your properties, expenses, and more throughout the year, filing your taxes only gets more complicated. The same principle applies to many parts of your work as a landlord.
The best way to find financial success in this field is to stay organized. Keep the files and forms that you need on hand. If you aren’t sure what files those are, don’t worry—we’re here to help.
RentPrep’s complete Landlord Form Bundle sets you up with the forms you need to stay organized and thrive as a landlord. Download these forms today.
FAQs On Rental Property Write-Offs
What expenses are tax deductible on rental property?
As a landlord, you’re responsible for paying taxes on your rental income when filing your return. However, the amount of tax you owe will be offset by tax-deductible expenses invested into your business and properties throughout the year.
Generally speaking, there are a few main categories of deductions that can be taken:
- Repair expenses
- Maintenance costs
- Wages for employees, contractors, etc.
- Fees and interest
- Local taxes
- Depreciation of improvements
- Other operating expenses
The list of deductions possible in the rental space is incredibly long, but most will fall into the categories covered today. Keeping tabs on everything throughout the year will simplify what it takes to generate your tax return, so set yourself up for tax success by getting organized now.
What are the tax benefits of investment property?
Diversifying one’s investment portfolio to include properties is an excellent tax balancing act for many investors. Money invested into long-term, profit-generating assets enable landlords to take a variety of deductions and reduce the amount of taxes owed on their assets overall.
Can you write off renovations on a rental property?
Renovations are considered capital improvements, meaning they cannot be deducted as expenses in the current year. Instead, the value of these improvements needs to be depreciated over time based on the standard depreciation values. Depending on the type of renovations, the amount of time for depreciation can vary greatly.
Landlords and property investors should become well-versed in how depreciation works, to file their taxes in the most efficient way possible. Stay up-to-date with the specifics of deducting from residential real estate property by reading information from the IRS directly.
Can you write off furniture for rental property?
Furniture may be a tax-deductible expense. It is also possible to get a tax break to account for costs incurred while repairing existing furniture.
If you’re a landlord providing rentals for traveling nurses, for example, you may have fully furnished units available. Repairing broken tables or faulty TVs would be considered standard maintenance or repairs and fall into your tax deductions.
What is the difference between a repair and a capital expense?
Repairs are fixes made to a property that need to be done to keep the property in working and livable condition. For example, fixing a roof leak at a rental property would be considered a repair.
Any property improvements that go beyond the scope of a repair are considered capital expenses. Capital expenses include large-scale improvements like painting the exterior of a house, replacing a roof, or upgrading the plumping system.
Unlike repairs, capital expenses are changes to the property that are larger and beyond the scope of standard maintenance. It’s essential to know the difference between these two categories because they are taxed differently, and your deductions will vary because of them.
Analyze your projects on a case-by-case basis to determine which category they fall into. Searching the IRS website can provide clarity on items you’re unsure of, and your accountant may also be able to advise on the best classification.
Investment Property Tax Deductions: Plan For Your Future
Preparing your tax return properly is important for both the legality and profitability of your business. Preparing taxes may sometimes feel like you’re giving away your profit. Utilizing as many deductible expenses for rental property management as possible ensures that your profits are maximized.
Don’t forget about the most overlooked rental property tax deductions when preparing your tax return this year and going forward, including:
- Insurance costs
- Loan interest
- Fees and income paid to employees and hired professionals
- Maintenance and repair expenses
Knowing what deductions are in play helps you plan for the future as you grow your rental business. Keep track of these essential tax breaks for the biggest profits, the easiest tax returns, and the most successful future.