Top 10 Tax Write-Offs For Rental Property

Ines Zemelman, EA
Ines Zemelman, EA
• 17.01.21 • 5 min read
Top 10 Tax Write-Offs For Rental Property

When you run your rental property business there are many deductions you can claim to reduce your taxable income. In this article, you will learn about the Top 10  tax write offs for rental property. You will also find out the conditions you need to fulfill to get a tax break on some of these business expenses. 

You and your tax preparer can easily figure out which business expense qualifies for a deduction if you keep track of them.

Rental property write-offs

The IRS allows landlords like you to deduct all the ordinary and necessary business expenses you incur during a tax year. Here is a list of the top 10 tax write offs for rental property that you can claim on your tax return.

1. Interest

You will get a significant tax break on the interest expenses while filing your income tax return as a landlord. Generally, these interests can be of three kinds.

Mortgage interest: 

Imagine you took out a mortgage to buy rental property and are now repaying it through monthly installments. These monthly payments consist of two parts; principal and interest. 

You are only allowed to claim the interest portion on that loan as a rental property tax deduction. 

At the start of the year, you will receive a Form 1098 from your lender if your annual mortgage interest payment is equal to or exceeds $600 in the preceding tax year. 

You will use this form to report your annual mortgage interest expense. 

Interest on the loan taken for improving your rental property: 

Consider this, you are planning on making some additional improvements to your rental property. You estimated the cost and applied for the loan. 

Your loan got approved and you received a payment schedule detailing the amount of principal and interest payment separately. The interest you will pay on this loan is deductible.

Interest on credit cards: 

You swiped your credit card to purchase goods and services for your rental property. The interest charged on the amount you spent for these specific supplies is deductible.

In 2018, the tax cuts and jobs acts capped the interest deduction. If your rental income is more than $25million your deduction will be limited. However, if you want to claim the full deduction then you can only do so if you agree to depreciate your rental property over 30 years instead of the usual 27.5 years. 

2. Property & sales tax

The question is can you write off property taxes on rental property?  How much you can write off for property taxes will depend on the location of your property. 

It might be a few hundred dollars or hundreds of thousands of dollars. You are allowed to deduct it to reduce your taxable income.  

You can also get a tax break on the sales tax you pay on business-related items.  

It is noteworthy that the IRS has capped the amount of deduction for sales and property tax to the combined total of $1000. If you are married and file your returns separately this limit is reduced to $5000. 

3. Wages & social security taxes

If you hired an employee to manage your rental business activity you can deduct their wage. You are also allowed to write off the employer-equivalent portion of social security and medicare taxes

4. Insurance premiums

Usually, before you take out a mortgage for your rental property the lenders can demand that you get a homeowners insurance policy. 

As all forms of relevant insurance are considered essential while operating rental property business, therefore, it is deductible. 

If as a landlord you suffer losses caused by natural disasters such as earthquakes or hurricanes or man-made disasters such as theft, then you are allowed to deduct them. 

5. Depreciation

Depreciation for rental and personal property is a deductible expense. 

Rental Property:

The purchase price of a rental property is a capital expenditure and you cannot deduct it from your income statement like you deduct all the other revenue expenditures. 

This means the cost is recognized in your balance sheet as an asset. Over the years the asset’s value decreases due to wear and tear. This is called depreciation. 

You get a  tax break on this depreciation that you calculate over the useful life of an asset. So Instead of a one-off deduction, you get to deduct a portion of the cost of the property over its useful life.

The IRS stipulates that the rental properties can depreciate over 27.5 years. You can claim depreciation as a deduction as soon as you make your home available for rent regardless of whether or not you have tenants.

It is noteworthy that land cannot be depreciated. What you built on that land such as your rental property is a depreciable asset. Use form 4562 to claim the depreciation as a deduction. 

Personal Property:

The IRS allows you to deduct depreciation on your personal property such as furniture and equipment like computers if they are facilitating in running your rental property business. 

These personal properties must be depreciable and are expected to last more than a year. 

6. Repairs and maintenance

Your rental property needs regular maintenance. For instance, your gutter might need fixing or your walls are begging to be repainted. These necessary expenses are deductible in full in the year it incurred. 

However, repairs and maintenance should not be confused with improvements. According to the IRS, rental property is only considered improved if it results in either one of the following:

  • Restoration
  • Betterment
  • Adaptation to a new or different use.

An example would be adding a brand new roof. The IRS allows you to recover some or all of your cost of improvements.

7. Qualified business income (QBI) 

To prevent the double taxation of income the individual operating as a sole proprietor or partnership chooses to create an LLC. These pass-through entities might be eligible to claim Qualified Business Income (QBI) deduction. 

The QBI was introduced by the 2017 tax cuts and jobs act. It allows non-corporate taxpayers to deduct up to 20% of their qualified business income (QBI). 

You might be eligible to deduct 20% of your rental income. Note that the income earned by a C corporation is not eligible for the deduction.

8. Utilities

Depending on how you choose to deal with utilities will determine to what extent you can claim the deduction. Utilities include things like electricity, water, gas, internet, cable heating, AC. You may cover all or some of these. 

You will be able to claim whatever you paid for even if your tenant reimburses it to you later. You can claim the reimbursement as your income. 

9. Legal and professional fees

You might need the services of property managers, CPAs, lawyers, and other professionals while carrying out your rental business activity. You are allowed to deduct the professional fees you pay for these professional services. 

10. Travel and transportation

It might happen that your tenant has a complaint and you drive to your rental property to sort it out with him. Travel costs like this that are related to your business are often deductible. You can either use your actual expense or standard mileage rate to compute your deduction. 

You will only be eligible to use the standard mileage rate if you use a car in the first year for your rental business.  

There might be more tax write offs for rental property that you can claim as a deduction like home office space. 

You can always consult a tax professional to figure out which deductions you are eligible for while conducting your rental property business.