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:
- Depreciation – Allowances for exhaustion, wear and tear (including obsolescence) of property. You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings. Each asset should be depreciated and listed separately.
- Repair Costs – Expenses to keep your property in good working condition but that do not add to the value of the property. Improvements to the property increase the value and are not considered expenses. Instead, they are considered assets that need to be depreciated separately. One example would be a roof.
- Operating Expenses – Other expenses necessary for the operation of the rental property, such as the salaries of employees or fees charged by independent contractors (groundkeepers, bookkeepers, accountants, attorneys, etc.) for services provided.
Schedule E Program Entry
- Income (select my forms)
- Profit or Loss from Rentals and Royalties (Schedule E)
- Choose either General Expenses or Depreciation