When you receive income for the rental of a dwelling, you may be able to deduct some expenses you incurred when you file your taxes. Some of the expenses that can be deducted include mortgage interest, property tax, operating expenses, depreciation, and repairs.
What are ordinary and necessary expenses?
The IRS allows you to deduct ordinary and necessary expenses for the cost of managing, maintaining, and conserving your property. An ordinary expense is that which is common and would be accepted in the business. A necessary expense would be an expense that is deemed appropriate for the property such as taxes, maintenance, utilities, interest, insurance, and advertising.
Can I deduct the cost of upkeep of my property?
Costs that you incur due to the upkeep of your property such as repairs, maintenance, supplies, and certain materials can be deducted
Can I deduct a rental expense?
Expenses paid by the tenant may be deducted if they are deductible rental expenses. When included in the fair market value of the property or services in your rental income, this same amount can be deducted as a rental expense.
Can I deduct the cost of improvement of the property?
The cost of improvements are not deductible. Rental properties are considered improved only if the paid amounts are for betterment or restoration or adaptation of usage to a new or different use. You may visit the IRS site by clicking Tangible Property Regulations - Frequently Asked Questions for more information about improvements. You may recover the cost of improvements through depreciation.
Use Form 4562 to report depreciation to recover some or all of the costs of improvements made. You can report the depreciation starting the year the rental property is first placed in service and beginning in any year you make an improvement or add furnishings. You may deduct only a percentage of the expenses in the year they are incurred.
For more information regarding rental property expenses, please see the IRS article on this subject.