10 Tax Benefits of Owning a Rental Property

Real estate investing is a lucrative endeavor. It offers a steady stream of passive income, as well as many other benefits. One of the greater benefits is attractive tax deductions. If you’re wondering how to start a rental property business, understanding all of the benefits and hindrances should be an essential component in your decision-making process.  

The IRS has many laws in place to encourage real estate investing and entrepreneurship. Despite this, many real estate investors pay higher taxes than they need to. By taking full advantage of the tax benefits of owning a rental property, you can maximize your profits and enjoy more success. 

So what are these rental property tax deductions? Here’s a list of 10 write-offs to take advantage of this tax season.

What Qualifies For Rental Property Tax Deduction?

Generally speaking, the IRS allows rental property owners to write off any expense that is “ordinary and necessary” to the management and maintenance of their property. 

The following rental expenses fall under that umbrella:

  • Mortgage interest
  • Property taxes
  • Insurance
  • Depreciation
  • Home improvements
  • Maintenance and repairs
  • Utilities
  • Professional fees
  • Travel and transportation
  • Office expenses

As you can see, there’s a ton of expenses you can write off! Let’s take a look at each of these tax deductibles in greater detail.

10 Rental Property Tax Deductions

To enjoy the full tax benefits of owning rental real estate, make sure to deduct these expenses with your accountant before April rolls around:

#1 Mortgage Interest

Many rental property investors take out a mortgage, incurring substantial interest costs along the way. Fortunately, if the property is being used as a rental, this interest is considered a business expense. Therefore, you can write it off. For most landlords, mortgage interest will be their largest deductible expense. 

To determine the deductible amount, simply refer to your mortgage’s monthly statement. It will clearly state your monthly interest payments. By adding these up for the entire tax year, you’ll arrive at your mortgage interest deduction amount. 

Along the same lines, you can also deduct:

  • Mortgage and refinancing origination fees and points
  • Interest on unsecured loans used for rental property improvements
  • Credit card interest of rental property-related purchases

#2 Property Taxes

When you own property, you have to pay taxes on it. These taxes are used to support the local area’s infrastructure and resources. Your tax amount depends on your investment property’s location and value:

  • Location – Property tax rates vary greatly depending on the state. For instance, New Jersey has the highest average property taxes, whereas Louisanna has the lowest. To find out your area’s tax rate, simply look it up online.
  • Value – Furthermore, the more valuable your property is, the more its property taxes will be. That’s because you have to multiply the location’s tax rate by your property’s assessed value. If you aren’t sure what your rental property is valued at, check out our guide on how to value a rental property.

Based on these factors, your property taxes can be a few hundred dollars or reach the hundred thousand range! Fortunately, you get to deduct these taxes when you run a rental property. 

#3 Insurance Premiums

Insurance is another crucial business expense for any rental property. You can (and should) purchase insurance to safeguard your rental property investment against:

  • Fires
  • Floods
  • Theft
  • Landlord liability

As an investment property owner, you also probably provide your rental property’s employees with health insurance and worker’s compensation insurance. 

All of these insurance premiums can be written off since they are ordinary, necessary business expenses. Furthermore, if you experience any loss due to a natural disaster, flood, or theft, you can deduct these losses. 

#4 Depreciation

While real estate values typically appreciate over time, the physical structures are still prone to depreciation. Each year, rental homes experience wear and tear. 

Lucky for landlords, they can deduct depreciation from their taxes as soon as their property is available for rent. The IRS assumes a property’s “useful lifespan” is around 27.5 years, so you must use this time span for your depreciation calculations. Keep in mind that only the structures depreciate —not the land

Determining the annual depreciation deduction amount requires some math and is usually best left to a trusted accountant or tax professional. 

#5 Home Improvements

In all likelihood, you won’t let your rental property depreciate to the point of being unlivable. Instead, you’ll probably make enhancements to the building to increase its value. 

These home improvements are also deductible. Home improvements must fall into one or more of the following categories:

  • They add value to the property, like new granite kitchen countertops
  • They adapt the property’s use, like the addition of a casita
  • They extend the property’s life, like a brand new roof

Most home improvements will depreciate over time too. In turn, they qualify for the depreciation tax deductions, as long as they’re expected to last for a year or more, add value to your rental property, and lose value over time. 

#6 Maintenance and Repairs 

The next deductible expense is maintenance and repairs. Many landlords confuse these expenses with home improvements. Here’s the difference:

  • Maintenance and repairs – Repairs are efforts to maintain your property’s condition, so it’s livable for tenants. However, repairs do not add significant value to the property. (Examples: Replacing a broken window, fixing a leak, repairing damaged flooring, etc.)
  • Improvements – In contrast, home improvements are meant to add value to the home and go above and beyond basic repair. (Examples: Outfitting the entire property with top-of-the-line windows, renovating the bathroom, reflooring the entire property with brand new hardwood, etc.)

When it comes to tax deductions, repairs can be written off in full during the tax year, whereas home improvements must depreciate over time. 

Any labor costs associated with the maintenance and repairs, like a property management fee or Homeowners Association fee, are also deductible. 

#7 Utilities

When you own a rental property, you can either pay for tenants’ utilities or let tenants pay for them on their own. Some common utilities include:

  • Gas
  • Electricity
  • Water
  • AC
  • Internet
  • Cable

If you cover these expenses, you can deduct them from your rental income tax. 

If your tenants reimburse you for any of these utilities, you can still write them off. Just make sure to report the reimbursement as income later on. 

#8 Professional Fees

As a rental property owner, you probably hire various professionals, such as:

  • Real estate investment advisors
  • Real estate agents 
  • Lawyers
  • Accountants
  • Property management firms
  • Advertising agencies

Any fees relating to these professional services can be written off. Likewise, if you use software to prepare your tax returns on your own, the cost of this software is also deductible. 

The only legal fees that aren’t deductible are ones that relate to:

  • Defending your property’s title
  • Recovering or improving your property

#9 Travel and Transportation

As a landlord, you’re entitled to write off your business-related travel expenses. These include any travel expenses that are incurred as you:

  • Show the property
  • Collect rent from tenants
  • Organize maintenance for the rental property

For example, if you drive to your property to supervise maintenance or stop by the hardware store to buy repair equipment, you can write off your gas and car upkeep expenses related to the associated mileage.

The only exceptions are if your travel relates specifically to rental property improvements, rather than necessary and ordinary maintenance, or if you travel to the property as a part of a “regular commute.” 

Overnight Travel

If your property is located far away, you may need to fly to it and spend the night in a hotel. In this scenario, your airfare, restaurant bills, and hotel expenses are also tax-deductible. 

Just take note that IRS auditors carefully scrutinize overnight travel expenses, so make sure to document your transactions properly. Also, be sure to exclude any activities that could be interpreted as “pleasure” rather than “business.”

How to Calculate Travel Deductions

To deduct travel expenses, you have two options: 

  • Deduct the actual travel expenses, based on your recorded transactions
  • Deduct them using a standard mileage rate of 57.5 cents per mile

Your accountant can help you decide which method is better for you. Using actual travel expenses may offer you a larger deduction, but it requires much more extensive record-keeping and calculations. 

#10 Home Office

Lastly, if your rental property business has a dedicated office space, you can deduct its expenses, including:

  • Computers and business software
  • Office equipment, like copiers, phone lines, and printers
  • Office appliances, like refrigerators and microwaves
  • Office supplies, like printer ink and paper
  • Office furniture
  • Rent or mortgage

Make sure to document these purchases for your records. The IRS often looks deeper into these deductions, since they’re easy to abuse. 

Furthermore, if this office is located in your home, it must be used exclusively for rental property business purposes. If it meets this qualification, you are eligible to deduct the associated portion of your home’s mortgage or rent. 

Maximize the Benefits of Rental Property With Great Jones

Rental properties offer a host of attractive tax deductions. As a rental property owner, you don’t want to let any of these slip through the cracks during your tax preparation.

When done right, some landlords end up paying zero taxes when their deductions are all said and done!

If you want help maximizing your rental property’s tax benefits, reach out to the property management specialists at Great Jones. We have teams for property management in Austin, TX to experts in property management in Charlotte, NC, and more places! Wherever you need us, we’re here to assist you with all of your rental property needs, saving you and time and money along the way. 

Are you looking for more information to help you with your investment property? Continue reading to find out how to advertise a rental property

Sources:

IRS. Tips on Rental Real Estate Income, Deductions and Recordkeeping. https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping

The Balance. The Best and Worst Property Taxes by State. https://www.thebalance.com/best-and-worst-states-for-property-taxes-3193328

IRS. Publication 527: Residential Rental Property.https://www.irs.gov/pub/irs-pdf/p527.pdf

IRS. Publication 946 (2019), How To Depreciate Property. https://www.irs.gov/publications/p946

IRS. About Publication 527, Residential Rental Property (Including Rental of Vacation Homes). https://www.irs.gov/forms-pubs/about-publication-527

Nolo. Deducting Landlord Car Expenses.https://www.nolo.com/legal-encyclopedia/deducting-landlord-car-expenses.html

IRS. Standard Mileage Rates.https://www.irs.gov/tax-professionals/standard-mileage-rates

Noah Jeong

Noah works on the Growth Team at Great Jones. He's just as frustrated as you are with the status quo in the property management industry and is passionate about making contributions towards raising the bar for property management.

Suggested: Hiring a Property Manager Property Maintenance Rental Income