Want to maximize your income? Make sure you're claiming every available tax deduction for your rental property.
Owning and operating a rental property is a great way to boost your income, but it comes with a fair bit of expenses. Fortunately, the Internal Revenue Service (IRS) provides quite a few tax deductions to help offset those costs and help you turn a better profit.
The IRS states: "You can deduct the ordinary and necessary expenses for managing, conserving, and maintaining your rental property." Ordinary expenses are common and generally accepted costs of doing business, and necessary expenses are considered helpful and appropriate costs.
Below, you'll find all the must-claim tax deductions for your rental property. Start claiming these on your annual tax return to maximize your income. Remember to consult with a professional tax advisor. We’re home experts and not qualified to provide personal tax advice.
10 Tax Deductions for Your Rental Property
1. Mortgage Interest
You likely used a mortgage to finance your rental property investment. If so, you can deduct your loan interest. You can also deduct:
Origination fees and points that you used to buy or refinance your rental properties
Interest on unsecured home improvements loans
Credit card interest for rental-related purchases
Basically, you can deduct most interest payments related to your rental property. However, this doesn't include the portion of your payments that go toward the principal loan amounts.
Mortgage interest will end up being one of your biggest rental property deductions, so don't forget it. Consider working with a financial advisor if you're finding it challenging to get it all sorted out.
2. Property Taxes
State and local governments often collect property taxes. These taxes can vary from hundreds of dollars to thousands of dollars. If your state has rental licensing requirements, you can also deduct any accompanying landlord license fees (like in Boulder, CO).
If you own a home or other real estate and you paid property taxes to state and local governments, you may be able to deduct those property taxes from your federal taxes. However, it is subject to certain limitations and rules set by the IRS. You can only deduct property taxes if you itemize your deductions on your federal income tax return instead of taking the standard deduction.
You should note that the IRS limits the deduction of state and local income, as well as sales and property taxes, to a combined deduction of $10,000 ($5,000 for married taxpayers filing separate returns). This means you cannot deduct state or local taxes paid above the limit.
Work with a financial advisor to see what property taxes you can deduct from your rental property.
3. Depreciation
Your home will lose value over time (whether you like it or not), but the IRS lets you claim depreciation as a tax deduction. You can claim this deduction even if you don't have tenants yet.
The amount you can claim will depend on the year your property was built, its original cost, and the number of years you plan to use it for rental purposes. Oh, and your structures can depreciate but not the value of your land.
You can also deduct the value of equipment that aids you in running your rental property, such as your computer or car. This also includes value-improving additions to your house, such as a new roof, furniture, or updated appliances.
4. Maintenance and Repairs
Big-ticket home improvements are deducted through deprecation, but minor maintenance and repairs are separate. You can deduct these costs as they occur rather than depreciating the value of the improvement.
Examples of repairs might be fixing a leaky faucet, re-painting a room, patching a hole, or weather-sealing a door. IRS Publication 527 says the following should be capitalized (not deducted as a repair):
Bedroom and bathroom additions
Landscaping and sprinkler systems
New roofs
Security systems
Adding heating and A/C systems
Water heaters
New flooring
Insulation
Storm windows
You can also include labor costs on your deductions if you hire out the work. Doing it yourself? Deduct the fees you spend on rental tools and equipment. Keep track of any invoices and receipts related to your rental property. These deductions can add up fast at tax time, so it's important to ensure you're taking advantage of every opportunity.
5. Advertising
You can deduct any advertising or promotion expenses necessary to market your property. This might include listing fees on websites like Airbnb or HomeAway, classified ads, or even marketing materials like business cards and flyers.
Keep track of all your software subscriptions and marketing spend. If you're running email marketing and social media campaigns, there's a good chance you can deduct the associated expenses.
6. Transportation
If you have to drive between your rental property and other business locations (such as other rental properties), the cost of travel is deductible. This includes gas and tolls.
Think about all the times you drive for your rental business:
Showings
Rent collection
Emergency calls
Maintenance
Cleanings
You can deduct your travel expenses by using your actual costs or the standard mileage rate. For example, the standard mileage rate for business use in 2021 was 56 cents per mile. In 2022, it's 58.5 cents per mile.
7. Rental Insurance
Your insurance policy for your rental property is considered an ordinary and necessary expense, so it's deductible. You can deduct the premiums you pay for insurance that covers liability, property damage, or other types of loss.
However, you can only deduct one year's worth of insurance premiums in the year you pay for them. That means you can't prepay future year's premiums to boost your deductions.
8. Utilities
You can deduct any fees and costs associated with providing utilities or services to your rental property. For example, you can deduct fees for:
Water
Gas
Electricity
Trash collection
Internet
Cable TV
9. Legal and Professional Fees
You can deduct any legal or professional fees you incur to manage your rental property. Legal costs could be for contract negotiations, reviewing leases, and evicting tenants.
Professional fees could include accounting, bookkeeping, real estate agent commissions, and property management fees. For example, when you use Nomad to rent your property, you can deduct all your fees—this helps further maximize your income.
10. Association Fees
If your rental property is part of a homeowners association (HOA), you can deduct most of your dues:
HOA dues
Condo fees
Association fees
Cluster fees
Etc.
This can be pretty lucrative as often in condo complexes, things like water, sewage, grounds maintenance, and snow removal are included in condo fees.
Work With a Professional
Always work with a trusted financial advisor to help you maximize your deductions and ensure you file your taxes appropriately. Get it done right the first time, and you'll avoid a scary visit from your friends at the IRS.
We're not tax pros (always speak to a tax advisor before investing), but we are real estate experts. Need help buying, renting, or selling a home? We've got your back.
Nomad helps maximize your rental income, lower your vacancy risk, and win back your time. We'll guarantee your rent and take care of all the heavy lifting—you can sit back, relax, and watch the cash roll in month after month.
Ready to get started? Enter your rental address, and we'll send you a free, no-obligation, personalized estimate. Try it now and see for yourself.
Appendix: Property Tax Reductions
Source: Nerd Wallet
Property tax is a tax on real estate (and sometimes other property you own). The amount of tax is largely based on where the property is and how much the property is worth.
You can usually deduct the property taxes on a rental property — you just have to remember to do it, Castelli says. Rental owners frequently overlook the deduction, he notes. Although there’s a new limit on the property tax deduction ($10,000, or $5,000 if married filing separately, for property taxes and either state and local income taxes or sales taxes combined) — that limit doesn’t apply to business activities.
