What is tax-deductible on a rental property?

Do you rent property to others? Rental real estate provides more tax benefits than almost any other investment. Besides, the potential for an ongoing income and capital appreciation, such investments offer deductions that can reduce the income tax on your profits. 

Here are some tax deductions for owners of rental property:

Interest. Interest is often a landlord’s biggest deductible expense. Common examples of interest that landlords can deduct are mortgage-interest payments on loans used to acquire or improve rental property and interest on credit cards for goods and services used in a rental activity.

Depreciation. The actual cost of rental property is not fully deductible in the year in which you pay for it. Instead, landlords can deduct a portion of the cost of the property over several years (i.e., 27.5 years). Use IRS Form 4562 to calculate depreciation.

Repairs. The cost of repairs for rental property is fully deductible in the year they are incurred. Some examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks and replacing broken glass.

Local travel. Rental landlords are entitled to a tax deduction whenever they drive anywhere for their rental property. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.

Long-distance travel. If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses.

Casualty and theft losses. If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

Insurance. You can deduct the premiums for insurance for your rental activity. This includes fire, theft, and flood insurance, as well as landlord’s liability insurance.

Legal and professional fees. You can deduct fees you pay for attorneys, accountants, and property management companies.

You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

Rental income and expenses are generally reported on Form 1040, Schedule E, Supplemental Income and Losses. You can write off a loss on a rental property as long as you meet income requirements and actively participate in rental activities. Active participation in a rental is as simple as placing ads, setting rents or screening prospective tenants. If you are married filing jointly and your modified adjusted gross income (MAGI) is $100,000 or less, you can deduct up to $25,000 rental losses. For example:

Let’s say that for the year rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss. If your MAGI is below $100,000, you can deduct the full $3,000 loss. If you’re in the 25-percent bracket, a $3,000 loss reduces your tax bill by $750, plus any applicable state income taxes.

There are a lot of good reasons to own rental property. Many people invest so that their money will grow, so it will provide income, or to take advantage of the tax-break opportunities.

For more information on rental income and expenses, see IRS Publication 527, "Residential Rental Property.”

Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.

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