Rental Property Tax Deductions: Maximize Your Tax Savings as a Landlord

Navigating rental property tax deductions could save you heaps of cash come April 15.

But, figuring out those deductions won’t happen without first addressing a few of the questions bouncing around your head:

• Can I deduct repairs and maintenance? 

• What about capital improvements?

• What is property depreciation, and how do I calculate it?

• Can I deduct financial losses due to vacancies?

• What if my rental expenses are more than my rental income?

While pondering these questions may be overwhelming, our rental accounting team will answer every one of them for you in this top-to-bottom guide. To do so, we’ll break down all you need to know about rental income taxes, deductions, write-off limits, how to avoid dreaded IRS audits, and more.

Tax season doesn’t have to be stressful. In fact, this article could help you face Uncle Sam confidently, generate significant tax savings, and grow your portfolio faster than ever imagined.

Note: TurboTenant does not provide tax advice, and the information we provide within this article is for educational purposes only. We recommend consulting with a CPA for tax guidance regarding rental property tax deductions.

Do landlords pay taxes on rental income?

Yes, landlords must pay taxes on rental income directly to the IRS and their state (if applicable). They must also report all rental income to the government, including rent payments, fees, tenant-covered expenses, and more.

To balance out the income generated by their rental properties, landlords can (and definitely should) deduct all eligible expenses associated with these properties to help lower their overall tax burden. They must report all rental expenses on the IRS Schedule E (Form 1040).

Deductible rental expenses include mortgage interest, property taxes, repairs and maintenance, property management fees, advertising costs, depreciation, and more. 

For landlords who want to lower their overall tax burden, learning how to maximize deductible expenses should be the top priority.

How is rental income taxed?

The government considers rental income “ordinary income” and requires landlords to report it on IRS Schedule E (Form 1040). Landlords can calculate their total taxable rental income by subtracting all deductible expenses from it.

Next, your federal tax rate is determined by the tax bracket you fall into, and your state tax rate depends on your state’s income tax laws. These tax rates determine how much of the rental income, minus deductions, you’ll pay to state and federal taxes. 

Furthermore, you might be required to file quarterly taxes depending on how much income your properties generate.

What counts as rental income?

The IRS considers all payments from tenants to landlords taxable income. Therefore, landlords must report all earnings (including certain non-cash payments) on their tax returns. 

Here are a landlord’s typical forms of rental income:

• Monthly rent payments: Collecting rent payments is a landlord’s primary source of rental income
• Security deposits applied to rent: Taxable if used to cover unpaid rent
• Fees and penalties: Includes late fees, pet fees, and lease termination charges
• Tenant-covered expenses: Utilities or repairs paid by tenants for lower rent
• Bartered goods or services: Non-cash payments, such as maintenance work

Rental income can add up quickly for landlords, so they should meticulously track and account for all expenses. Property management accounting and bookkeeping software helps ensure compliance with tax laws and could make your life much easier come tax season.

Rental Property Tax Deductions: What Landlords Can Write Off

Operating a rental property involves endless expenses, many of which are tax deductible. Knowing what you can legally deduct will help lower your tax burden and keep the IRS at bay come tax season.

Here are some typical expenses that landlords can write off: 

• Mortgage interest: Interest paid on loans used to buy or improve the property
• Property taxes: State and local taxes charged on the rental property
• Repairs and maintenance: Costs associated with fixing property issues
• Insurance premiums: Payments for landlord insurance, liability coverage, and other policies
• Property management fees: Charges for property management software or hiring property managers and leasing agents
• Depreciation: Deductions that estimate the rental property’s loss of value over time
• Utilities and services: Costs for water, gas, electricity, trash removal, and other landlord-paid services
• Legal and professional fees: Fees for legal services, accountants, and tax professionals

Landlords who want to minimize their tax liabilities must understand and track every deductible expense. Use property management accounting software or hire a tax professional to keep your books balanced and your numbers airtight.

Rental Property Tax Deductions: What Landlords Can’t Write Off

Understanding what expenses you can’t write off is just as important as knowing what expenses you’re allowed to deduct. The IRS has strict rules about ineligible expenses, and it’s in your best interest to follow them.

Here are common landlord expenses that you can’t legally deduct:

• Major property improvements: Renovations that increase the property’s value (rather than maintain it). You will need to depreciate these improvements over time. 
• Personal expenses: Costs unrelated to the rental property, including travel and meals
• Vacancy losses: Lost rental income during unoccupied periods
• Uncollected rent: Missed rent payments from tenants
• Fines and penalties: Government-imposed fines, including code violations and late tax payments
• Down payments: Lump sum payments to secure a mortgage
• Home office deductions: Only allowed under strict IRS guidelines for separate, dedicated workspaces
• Commuting costs: Travel expenses between home and the rental property

Landlords who attempt to deduct ineligible expenses make themselves vulnerable to a potentially stressful and time-consuming audit from the IRS. If you want to be tax-compliant, avoid deducting any ineligible expenses.

Rental Property Write-Off Limits: What You Need to Know

While landlords can deduct as many eligible expenses as they incur, the IRS typically forbids them from deducting more than their declared income. Though these limitations shouldn’t be an issue for most landlords, understanding them is a must nonetheless.

One important tax regulation to consider is the passive activity loss rule, which prohibits landlords from deducting rental expenses from income generated outside their rental properties. While landlords can only deduct rental expenses from rental income, they can pass their losses on to future tax years.

Rental property depreciation is another critical factor for landlords to consider. The IRS has strict rules that prevent landlords from declaring depreciation on their property all at once and mandates that they must spread it out over time, typically 27.5 years.

To learn more about rental property depreciation, read our comprehensive guide and check out our easy-to-use calculator.

Step-by-Step Guide: How to Report Taxes on Rental Income

Correctly reporting rental income helps landlords like you maximize tax deductions, stay compliant, and avoid stressful IRS audits. The following step-by-step guide will help you track rental income, deduct eligible expenses, and navigate your taxes like a seasoned vet.

Step 1: Gather Rental Income Records

Before filing your taxes, collect all your essential income-related records or receipts, including rent payments, security deposits, and any other eligible fees collected from tenants. 

We recommend using property management accounting software to track all of your income records and receipts digitally. Doing so will allow you to automatically organize all of your payments (whether cash, check, or direct transfer) within a secure online portal.

Step 2: Track All Deductible Expenses

To maximize rental property tax deductions, diligently track each eligible expense related to your income-earning property. These include property taxes, utilities and services, legal and professional fees, depreciation, mortgage interest, property management fees, repairs and maintenance, insurance premiums, and more.

Track your deductible expenses as meticulously as you would your rental income by keeping them organized with rental accounting software (or a spreadsheet, if you’re old-fashioned). Hold onto receipts and invoices, as they will prove to the IRS that the expenses are directly related to your rental property.

Step 3: Complete IRS Schedule E (Form 1040)

When reporting your rental income to the IRS, use Schedule E (Form 1040). This document helps landlords organize income, eligible expenses, and depreciation to determine their rental properties’ net income.

To do so, reference your rental accounting records and transfer over your rental income, eligible expenses, and allowable depreciation to your Schedule E. Accuracy during this step is essential, so exercise due diligence and ensure your numbers are irrefutable before filing. 

Step 4: Account for Depreciation

Depreciation allows landlords to deduct the cost of their rental property over its useful life, typically 27.5 years, significantly reducing their overall tax burden.

Investors with rental properties placed in service after 1986 must use the Modified Accelerated Cost Recovery System (MACRS) to figure depreciation. Use the correct depreciation method when calculating your deduction for the best chance at accuracy and compliance. 

Step 5: Report Capital Improvements Separately

The IRS treats capital improvements (renovations or upgrades that raise the value of a rental property) differently than regular repairs and maintenance expenses. Because these improvements add value to the property, they’re depreciable over time (instead of being deducted in full promptly after they were performed). 

Because understanding the difference between capital improvements and repairs and maintenance can get a bit tricky, we recommend asking yourself a simple question when deciding how to classify an expense:

Did the expense in question raise my property value or return it to its original state?

Generally, if an expense raises your property value, you can classify it as a depreciable capital improvement. If an expense returns your property to its original state, you can classify it as a one-time repair and maintenance expense. 

Step 6: Include Any Passive Activity Losses

As we mentioned earlier, passive activity losses occur when your rental property expenses exceed the overall income generated by that property, resulting in a loss. Typically, these losses can only offset income generated from other passive activities. Importantly, landlords can carry passive activity losses on to future tax years.

Any passive activity losses you incur should be reported in Part II of Schedule E (Form 1040). Because tracking passive activity losses can be tedious, we recommend using professional property management accounting software to keep your numbers in order.

Step 7: Pay Estimated Quarterly Taxes (If Required)

If you expect to owe more than $1,000 in taxes on income generated by your rental properties, the IRS may require you to pay estimated quarterly taxes. This rule exists to help you meet your tax obligations for the entire year and avoid paying underpayment penalties.

To calculate your estimated quarterly taxes, download IRS Form 1040-ES. Within it, you can input your rental income, expenses, and depreciation and glean a reasonable idea of how much money you’ll owe for a given tax quarter.

Step 8: Keep Records for IRS Compliance

Undergoing an IRS tax audit is among the most stressful things a landlord can endure, but landlords who stay on top of their numbers should be able to face any scrutiny with confidence. Accurate accounting and bookkeeping records are mandatory for landlords who want to ensure IRS compliance.

To maintain proper records, keep detailed documentation of all rental income, deductible expenses, and capital improvements, along with receipts, invoices, and bank statements to back them up. The IRS will want to cross-check reported income and expenses with these documents during an audit.

Tax professionals generally recommend that landlords keep these records for at least 3 years after filing. However, the IRS has audited up to 6 years into the past for extreme cases of underreported income (more than 25% of a landlord’s gross reported income). 

Essential Tax Records for Landlords

Now that you understand how important it is to keep tax records, let’s dive into the types of records you should retain to stay compliant. 

Essential tax records for rental properties include:

• Rental income and receipts.
• Property purchase and sale documents.
• Mortgage interest and loan statements.
• Repair and maintenance receipts.
• Insurance premiums.
• Property tax assessments.
• Depreciation schedules.
• Legal and professional fees.
• Utilities and service payments.

By keeping track of all necessary tax records, landlords like you can stand strong in the face of a potential IRS audit. Here is a list of the best real estate accounting software solutions to help you track all of your essential rental property tax records.

Final Thoughts: Reduce Your Tax Burden with Rental Property Deductions

Navigating rental property tax deductions doesn’t have to be an anxiety-inducting endeavor. By putting this guide’s advice into action, you’ll be able to confidently report rental income, maximize deductions, and anticipate your tax obligations from here on out.

To streamline this process, sign up for a free TurboTenant account today. You’ll get access to our valuable accounting and bookkeeping software, plus a suite of other useful tools to help you:

• Market your rentals,
• Create rental applications,
• Screen applicants thoroughly,
• Generate state-specific lease agreements,
• Collect rent digitally,
• And more.

FAQs: Rental Property Tax Deductions