Becoming a landlord can be a great way to grow your savings, but it also comes with its fair share of challenges. In addition to managing your personal living expenses, you’ll need to handle tasks like finding tenants, securing insurance, and covering a mortgage and property taxes. Owning a rental property can also add complexity to your tax situation. Fortunately, the IRS allows landlords to deduct certain expenses related to the operation of rental properties. To qualify, these expenses must be ordinary and necessary for managing and maintaining the property, as defined by the IRS.
When you report your rental income on Schedule E, you can deduct the ordinary and necessary expenses. Examples of expenses that you may deduct from your total rental income include:
- Mortgage Interest - If you’ve financed your rental property with a mortgage, the interest portion of your payments is typically the largest deductible expense. Note that you can only deduct interest—not the principal. Monthly statements generally separate these amounts, making it easier to calculate the total interest paid for the year.
In addition to mortgage interest, landlords can deduct origination fees, points paid to secure or refinance the mortgage, and interest on loans used for property improvements. Keep in mind that these deductions apply only to expenses already incurred, so careful record-keeping is essential.
- Property Tax -Property taxes are another common deduction for rental property owners. Rates vary significantly depending on location and can be found on your property tax bill or escrow summary. Some states also require rental licenses, and the associated fees are typically deductible.
It’s important to note that the IRS caps deductions for state and local income, sales, and property taxes at $10,000 annually ($5,000 if married filing separately). Additionally, if your rental is a short-term property, occupancy taxes or similar fees charged by local governments are deductible.
- Travel and Transportation Expenses -
If you travel to manage your rental property—whether to show it to prospective tenants, collect rent, or handle maintenance—transportation expenses may qualify as deductions. However, daily commutes do not qualify.
You can calculate travel deductions using actual expenses or the IRS’s standard mileage rate
- Utilities - Landlords who pay for utilities like electricity, gas, or water can deduct these expenses. Internet and cable services provided to tenants may also qualify. Even if tenants reimburse you for utility costs, you can still deduct the expense while reporting the reimbursement as income.
- Depreciation – Rental properties and their contents gradually lose value due to wear and tear, a process known as depreciation. The IRS allows landlords to deduct this loss over the property's useful life, which is 27.5 years for residential rental properties. Depreciation begins as soon as the property is placed in service, regardless of whether it is occupied.
Landlords can recover some or all of the property's original acquisition cost and the cost of improvements by reporting depreciation using Form 4562, Depreciation and Amortization. This applies both when the property is first placed in service and when improvements or furnishings are added. Each asset should be listed and depreciated separately.
Qualifying items for depreciation include furniture, appliances, and upgrades that enhance the property’s value, such as installing a new roof or updating a kitchen.
- Cleaning, Maintenance and Repair Costs – Expenses for maintaining your property in good working condition, such as routine repairs, can often be deducted in the year they occur. These costs do not increase the property’s value and are not considered assets. Examples include fixing a leaky faucet or repainting walls.
- Legal and Professional Fees - Expenses related to legal or professional services for your rental property are deductible. This includes fees for tax preparation, legal documents, tenant screening, and advertising. If you hire a lawyer for eviction proceedings, those costs are deductible as well. However, legal fees for defending property ownership or improving the property are not eligible.
- Insurance Premiums - Insurance premiums for rental properties, including basic homeowners, liability, and special peril policies, are deductible. If you have employees, you can also deduct health and workers’ compensation insurance costs.
- Office Space - If you use a dedicated space for managing your rental property, you can deduct related expenses. This could include a home office or a commercial office. Be sure to document all costs and allocate expenses accurately between business and personal use.
- Commissions - If you used a real estate agent to find your tenants you may deduct the commissions.
- Advertising - Expenses related to advertising and marketing your rental property are tax-deductible. This includes costs for placing ads in local newspapers or paying for online advertisements, such as Google ads.
- Management fees - Property management fees are eligible for tax deductions, regardless of whether a landlord personally manages the property or employs a professional management company. However, landlords who choose a self-managed approach must also take on the responsibility of accurately tracking and documenting all related expenses.
How do I report the 1099 forms I issued?
If you reported any of these expenses on a 1099 form for the vendor/contractor, you will report the expense in the correct category listed above. Using our program, you cannot issue the 1099 form to the vendor/contractor.
Schedule E Program Entry
- Federal
- Income - Select My Forms
- Profit or Loss from Rentals and Royalties (Schedule E)
- Choose either General Expenses or Depreciation