Rental Property Expenses: What's Deductible and Non-deductible?

Rental Property Expenses: What's Deductible and Non-deductible?

In the U.S., 77% of people prefer to rent instead of purchasing a home, and about 74.4% of rental property is owned by individual investors, not corporations. Profits are substantial; rent prices increased by almost 50% between 2007 to 2017.

A stringent rental property accounting process is the key to good investment income. Rental property management involves making tough decisions regarding your expenses. Maintaining a rental property deductions checklist is imperative for offsetting profit and loss.

We are sharing the dos and don'ts of IRS rental property deductions. Keep this list handy for future reference!

IRS Publication 527

This IRS publication discusses all rental income and deductible expense allowances, including rental property depreciation and which IRS form to use.

The lengthy publication provides information on the personal use of units and vacation homes. It explains rental income and expense reporting, depreciation, and how to report losses.

Rental Property Deductions Checklist 

This list provides an overview of allowable rental deductions. If you have questions regarding deductions, refer to Publication 527 or contact your tax advisor.

  • Mortgage Interest on rental property
  • Property taxes
  • Depreciation for loss of value due to normal wear and tear
  • Repairs, maintenance, and cleaning
  • Insurance premiums
  • Professional services-accountants, attorneys, tax preparation, property management, real estate agents
  • Advertising to find renters
  • Supplies-cleaning and other DIY maintenance
  • Utilities
  • Office space and related costs
  • Travel from home to the rental property (if you have a home office)
  • Additional operating expenses-employee wages, business travel, etc.

Repairs, maintenance, and cleaning like patching a roof or installing a new roof, painting, replacing a furnace, shampooing carpets, or replacing floors.

The average rule of thumb for repairs is about 1% of the property value. This means a $200,000 rental will cost around $2,000 yearly for repairs and maintenance.

Meals when meeting with business associates or potential clients are partly deductible. You may deduct up to 100% of the costs for events you throw for work staff, like a company picnic or Christmas party.

Independent Contractors

You can also deduct the services of independent contractors you hire to perform maintenance or upgrades to the property, including the following:

  • Architects
  • Carpenters
  • Carpet-layers
  • Electricians
  • Gardeners
  • Landscapers
  • Painters
  • Plumbers
  • Roofers

When hiring a contractor, request that they fill out IRS Form W-9 before performing any work. You then submit the amount you pay the contractor on IRS Form 1099-MISC.

Expenses You Can't Deduct

Some costs do not qualify for tax write-offs. These include rent loss during vacancies and unpaid rent. The exception to unpaid rent is if you use accrual accounting rather than cash accounting.

You must have a home office to deduct travel expenses.

Mortgage points or origination fees need to be deducted over the life of the loan, not in the year paid.

Deductions for improvements to the property may not be deductible. You may need to handle them using depreciation allowances. Check with your tax professional on writing off things like adding a room or insulating an attic.

Tax Forms for Deductions

Use IRS Schedule E for income or loss from rental real estate. Several other forms may be necessary. Form 4562 allows you to claim asset depreciation, and Form 4684 is for reporting theft or casualty loss on the property.

If you pay wages to employees, interest, or enter into real estate transactions, you may need other tax forms.

Records Substantiating Deductions

Rental property accounting personnel must diligently maintain the following records to support deductions:

  • Annual or monthly mortgage interest statements
  • Bank and credit card statements
  • Detailed invoices for property improvements
  • Detailed repair and maintenance receipts, including tenant requests
  • Invoices for professional services
  • Insurance bills
  • Property tax assessments and bills
  • Tenant leases

Good record-keeping allows you to reduce your tax obligation when reporting rental income.

Managing Rental Property

Handling everything in our rental property deductions checklist is time-consuming. We have 20 years of experience at PMI Premier as a full-service real estate asset management company. We handle services for residential, realty, commercial, and association properties.

Schedule a rental analysis today to learn how much you can profit from rental property investments.