As a landlord, you’re no stranger to the twinge of pain each time you part with your hard-earned rental income to pay for costly repairs, business expenses, or—worst of all—taxes. But what if we told you there may be a way to reclaim a portion of those outgoings?

There’s a silver lining around these obligatory costs: tax deductions for rental properties. The Internal Revenue Service (IRS) allows rental property owners to deduct qualified rental activity expenses from their rental revenue, reducing the amount of taxable income.

Being aware of these rental property tax deductions gives you the potential to recoup some of your operating costs, whether from mortgage interest, repairs, insurance, and more. This article unveils these hidden opportunities, allowing you to keep more of your income in your pocket, where it belongs.

Note that this guide is intended to inform and to raise awareness, but it is not meant to substitute for advice from a licensed tax professional. Be sure to consult a certified tax advisor for tax advice, including to learn what tax deductions you may be eligible for, and for help filing your tax return.

How Much Can Landlords Save With Tax Deductions?

The maximum percentage of tax reduction a landlord can have in the U.S. isn’t defined by a set percentage rate. It depends on the total amount of allowable expenses deducted from their rental income. Your participation level in managing the property may also impact how certain income and losses are treated.

There are three types of participation for rental property investors:

• Active Participation: A landlord is actively involved in making management decisions like approving new tenants, deciding on rental terms, or authorizing repairs on the property. This level of involvement allows landlords to take advantage of a special tax benefit. In general, you may be able to deduct up to $25,000 of passive losses, provided your modified adjusted gross income is below a certain limit.

• Material Participation: Material participation, which requires a more significant time and effort commitment. Material participation could include working on the property for a certain number of hours per year or being involved in day-to-day operations. Note that this is more commonly applicable to real estate professionals. If you materially participate as a real estate professional, then your rental property involvement receives non-passive tax treatment. This means that you can use any of your losses to offset other types of income, and you may not be subject to the net investment tax.

• Passive Participation: Landlords with minimal involvement (like those who use a property management company for all operations) are considered as having passive participation. While they can still deduct expenses like mortgage interest, property taxes, and maintenance costs, their ability to deduct passive losses may be limited. 

Given the complexity of tax laws and the variability of individual circumstances, it’s always advisable to consult with a tax professional to understand your specific situation and maximize your tax benefits.

10 Tax Deductions for Landlords

Here are ten expense categories where rental property investors can claim tax deductions:

1. Mortgage Interest

Mortgage interest is a major expense for many rental property owners. This deduction can lessen its impact, making your investment more viable. For this deduction, the interest paid on their rental property’s mortgage is subtracted from the taxable income. Proper documentation, like mortgage statements, is necessary to claim this write-off.

Eligibility Criteria:

• The property must be used as a rental. This means it should be rented out for a part of the year and used for generating income.

• You must have an ownership interest in the property. This means you are legally responsible for the mortgage.

• The deduction specifically applies to mortgage interest only.

• You need to report your rental income and expenses to the IRS. The mortgage interest is deducted against the rental income received.

2. Loan Fees and Points

Loan fees (also known as origination fees) and points are the upfront costs paid to the lender when you take out a mortgage. One point is typically equal to 1% of the loan amount and is prepaid interest. For rental properties, these costs must be deducted over the life of the loan, not all at once in the year they are paid. This means you spread out the deduction of these fees over the mortgage term rather than deducting them in full in the year you incur them.

3. Property Taxes

The property tax deduction allows landlords to subtract local and state taxes paid on their rental properties from their taxable income. For rental property owners, this can count towards a business expense. However, the deductible amount depends on your level of participation in the property.

Eligibility Criteria:

• You must own the property and be legally responsible for the taxes and mortgage.

• The property must be used for rental purposes, not personal use.

• You must have paid the property taxes and mortgage interest during the tax year.

4. Operating Costs

Operating expense deductions are a boon for landlords and rental property owners, offering a broad scope for reducing taxable income. These expenses encompass the day-to-day costs of managing and maintaining a rental property. Expenses that are ordinary, necessary, and directly linked to rental activity will likely qualify. Here are some examples of operating expenses eligible for deductions:

Advertising: Costs incurred while advertising your property for rent are deductible. This can include online listings, print ads, and signage.

Utilities: If you pay for utilities for your rental property, these costs are deductible. This includes gas, electricity, and water.

Yard Maintenance and Cleaning: Expenses for maintaining the property’s appearance, like landscaping or cleaning services, are deductible.

Legal and Professional Fees: Fees you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals can count as operating expenses.

Losses Due to Theft or Casualties: If your rental property suffers from theft or casualty losses like fires or storms, you may be able to deduct some of these losses.

Education and Professional Development: Costs associated with improving your knowledge or skill set in property management, like courses or seminars, may be deductible as well.

Other eligibility criteria:

• Expenses must be incurred only over the course of renting out the property.

• The costs should be common and accepted in the business of renting properties.

• You must have obtained and already paid for these expenses.

• Expenses must be solely for the rental property, not mixed with personal costs.

Podcasts are a great (and free!) way to enhance your property management know-how. Check out our round-up of the Top 16 Real Estate Podcasts for Landlords and Real Estate Investors.

5. Employee Expenses

Do you employ staff or work with independent contractors to help you manage your rental properties? Employee expense tax deductions can offer more financial relief. These deductions include salaries, wages, and other benefits paid to employees, such as property managers, maintenance staff, or administrative personnel. Employee health insurance, retirement plans, and any employment taxes paid are also deductible.

6. Repairs

Deductions for this category cover expenses for fixing and maintaining the property in its current condition. These are considered necessary for property maintenance and tenant safety. Examples include repairing leaks, painting, fixing broken windows, or repairing appliances

The IRS distinguishes between repairs and improvements. Repairs are immediately deductible, while improvements must be depreciated over time. This distinction is important, as repairs offer immediate tax relief, reducing taxable income in the year they are incurred.

Eligibility Criteria:

• The repair should be commonplace and essential for property upkeep.

• The deduction should be for repairs only, not improvements or renovations.

• Expenses must be acquired and paid within the relevant tax year.

7. Depreciation

This deduction is a bit more complex but it’s important nonetheless. Depreciation allows you to deduct the cost of buying and improving a rental property over its useful life, typically 27.5 years for residential property. Landlords can deduct a part of the property’s cost from their annual taxable income, representing the property’s wear and tear over time.

However, it’s important to remember that depreciation recapture can occur when the property is sold. Any depreciation claimed during the property’s rental period may be subject to tax upon sale.

Eligibility Criteria:

• Only the value of the building can be depreciated. You can’t depreciate the land.

• The property must be available for rent in the tax year for which depreciation is claimed.

Learn more about depreciation here: How to Handle Depreciation on Your Rental Property.

8. Travel Expenses

Travel expenses can add up, especially if you’re a long-distance landlord with properties far from your primary residence or you have investments in multiple locations. To qualify as deductible expenses, travel trips must be primarily for managing, maintaining, or inspecting rental properties. Typically, the travel should be outside your usual living and working area. Be sure to read IRS Publication 463 on Travel, Gift, and Car Expenses to ensure compliance.

Qualified expenses include:

• Mileage when driving to rental properties, hardware stores, or meetings related to the rental business

• Costs for flights to visit or manage rental properties

• Hotel stays that are necessary for business-related property management

• A percentage of meal expenses during business-related trips

• Parking, tolls, and public transportation fees associated with rental business travel

9. Home Office

If you manage your rental properties from a home office, you may be able to deduct expenses for the business use of your home. This includes some of your internet, electricity, and even mortgage interest or rent. The space must be used exclusively for conducting rental business activities and must be used regularly for business, not just occasionally. The home office should also be the primary location where you manage your rental properties.

Qualified expenses include:

• Proportionate Home Expenses: A percentage of mortgage interest, property taxes, insurance, utilities, and repairs based on the home office’s size relative to the entire house.

• Direct Office Expenses: Full deduction for expenses solely related to the office, like office furniture or equipment.

• Energy Efficiency Credit: For business use of less than 20% of your home, you can get full credit for eligible clean energy expenses. For more than 20% of business use, the credit is based on the portion of expenses assigned to personal use.

10. Insurance

Any insurance for your rental activity is a deductible expense. The insurance must specifically cover a property that generates rental income. If insurance covers both rental and personal aspects, only the rental portion is deductible. 

U.S. tax laws are generous to landlords, but there are rules to follow when claiming deductions. It’s important to keep meticulous records of all income and expenses related to your rental properties. This includes saving receipts, invoices, bank statements, and documentation for all your expenses. Finally, be sure to consider working with a tax professional to ensure that everything is completed properly.

Aside from boosting your rental’s profit potential, staying compliant with tax laws helps prevent legal troubles or hefty financial penalties. Tax laws and regulations can change frequently, so stay informed about any update that could affect rental property tax deductions.

Interested in more tax information for your rental investment? We have a FREE downloadable Tax Guide for Landlords: Everything You Need to Know About Taxes. For more investor tips, head on to the Renters Warehouse Education Center.