According to TurboTax, a tax deductible business expense is a qualifying charge you can post to reduce your taxable income on your Schedule E tax form.
Schedule E breaks out expenses into set categories to include business costs such as advertising, cleaning, auto and travel, repairs, management fees, and eviction fees. For a full breakdown of what qualifies for each category, read here. If you’re tracking your expenses through TurboTenant, all you need to do is export your expense list so you can input the correct numbers into the form.
Before we dive into what you can deduct from your taxable income as an independent landlord, let’s break down standard deductions vs. business expense deductions.
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Standard Deduction vs. Business Expense Deduction for Landlords
The standard deduction is a single deduction at a fixed amount, says Investopedia. This fixed figure is determined by your filing status (single, married filing jointly, head of household, etc.), age, and whether the taxpayer is blind. Taxpayers who are blind or at least 65 years old can claim an additional standard deduction; those who are both over 65 and blind will receive double the additional amount.
As a small business owner, you can claim the standard deduction for your personal 1040 while writing off business expenses. To learn more about your standard deduction, check out the Internal Revenue Service’s free calculator.
Otherwise, Investopedia offers the following breakdown by filing status:
Standard Deduction for the 2022 and 2023 Tax Years | ||
Filing Status | | 2022 Standard Deduction | | 2023 Standard Deduction |
Single | $12,950 | $13,850 |
Married Filing Separately | $12,950 | $13,850 |
Heads of Household | $19,400 | $20,800 |
Married Filing Jointly | $25,900 | $27,700 |
Surviving Spouses | $25,900 | $27,700 |
The Top 10 Business Expense Deduction for Landlords
That said, Nolo lists the following expenses as being the top 10 tax deductions for landlords:
- Interest: Mortgage interest payments on loans used to buy rental property and interest on credit cards for goods or services used in a rental activity are common examples of deductible interest.
- Depreciation for rental real estate: The actual cost of rental property isn’t fully deductible the year in which you pay for it. Instead, you’ll get back the cost of real estate through depreciation, which we’ll discuss in the section below.
- Repairs/maintenance: If the repairs are ordinary, necessary, and reasonable, their cost is fully deductible in the year in which they’re incurred. If you’re embarking on an improvement project, the associated costs cannot be deducted from your taxable income.
- Personal property: If you furnish your rental with your own furniture, appliances, or other equipment, the cost of these items can typically be deducted in one year using “the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain in effect for 2018 through 2022.
- Pass-through tax deduction: This deduction isn’t a rental deduction; it’s a special income tax deduction. Depending on your income, you may be able to deduct up to 20% of your net rental income or 2.5% of the initial cost of your rental property plus 25% of the amount you pay your employees. This deduction will expire after 2025.
- Travel: Track the driving and other travel you undertake to manage your rental. For example, if you drive around prospecting nearby neighborhoods or go to a hardware store to sort out a repair, you have two options to deduct the associated expense. You can either deduct your actual expenses (the cost of gasoline, vehicle upkeep, repairs, etc.) or use the standard mileage rate defined by the IRS. However, you must use the standard mileage rate in the first year you use a car for your rental activity to qualify for it.
- Home office expenses: If you use a dedicated room to run your business and it serves as your primary place of business, you can write off up to $1,500 through the IRSs’ simplified option.
- Employees and independent contractors: If you hire someone to support your rental business, such as a repair person or an administrative assistant, you can deduct their wages from your taxable income. You can also deduct the cost of their health and workers’ compensation insurance, Nolo notes.
- Insurance, including your landlord policy: The premiums you pay for virtually any insurance you carry related to your rental activity can be written off.
- Legal and professional services, including your Premium all-in-one software subscription: Whether you’ve decided to keep more money by managing your own property or have a real estate lawyer on retainer, these fees can be deducted as operating expenses if they are related to your rental activity.
As a bonus, Nolo points out that “landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using cost segregation.”
What Can’t Be Reported as a Tax Deduction
While recouping money from Uncle Sam is a massive perk of itemizing your deductions, not everything that you pay for as a landlord will qualify for this perk. Specifically, you can’t deduct the cost of improvements to your rental property.
The IRS notes that “a rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use.” However, “you can recover some or all of your improvements by using Form 4562 to report depreciation beginning in the year your rental property is first placed in service, and beginning in any year you make an improvement or add furnishings. Only a percentage of these expenses are deductible in the year they are incurred.”
Also, as Nolo highlights, “people who rent property to their family or friends can lose virtually all of their tax deductions,” so it’s important to speak with a tax and accounting professional if you’re a landlord who has personal relationships with your tenant(s).
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How to Make the Most of Your Rental Property Tax Deductions
Beyond being familiar with your local landlord-tenant laws and guidelines from the IRS, proper documentation is vital to maximizing your tax deductions. That’s why TurboTenant offers document storage for our landlords – for free.
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