9 Rental Property Tax Deductions You Can Claim in 2023

If you own and manage a rental property, you’re well familiar with all the expenses of maintaining a property. Regular maintenance and unexpected repairs add up quickly; it can be challenging to know how to claim these expenses when tax season comes around. Use this blog as a helpful guide for learning more about the tax benefits of rental property management and possible deductions you can claim.

What is a rental property tax deduction, and how can I claim one?

A rental property tax deduction is a qualified expense related to the operation, repairs, and management of a rental property. Like other tax deductions, a rental property tax deduction reduces the amount of income subject to taxation at the state and federal levels. Simply put, rental property tax deductions are good for your overall tax bill and allow you to pay less in taxes. 

This is by no means a complete rental property deductions checklist. However, this list will give you a good starting point of what expenses you should review. 

1. Maintenance and Repairs

Rental property owners can claim tax deductions for any expenses paid for regular repair and maintenance. As long as it’s clearly necessary maintenance, you can deduct the cost of those repairs from your taxable income. 

It’s a landlord’s responsibility to maintain their property and keep everything in good order, so you shouldn’t hesitate to claim those costs on your tax return. But while repair costs are deductible, improvements to your facility are not. 

You must keep careful records of these expenses. The IRS heavily scrutinizes unusually large repair expenses or seemingly unnecessary costs. 

2. Rental Property Depreciation

You may not be able to deduct the cost of improvements you make to your properties; however, you can still recollect some costs of those investments over time by reporting depreciation. 

It’s not ideal, but at times your investment property will go down in value. If your rental property decreases in value, remember to report this loss on your tax return. 

Depreciation allows you to deduct the costs over the property’s life, provided you meet the following requirements:

• You own the rental property. 
• The property is part of an income-producing activity. 
• You expect the property to last more than a year.
• The property was not utilized, then disposed of in the same year. 
• The property has a determinable useful life. 

3. Mortgage Interest

You can deduct mortgage interest as a business expense for your rental property. You’ll need to fill out Schedule E (Form 1040) on your tax return with the information on Form 1098. Your lender will send you Form 1098 each year to show how much you paid in mortgage interest for the year. You can deduct the money you spend paying off the interest on your mortgage from your income. This does not apply to money used to pay back the principal of the mortgage itself. 

4. Property Taxes

As a rental property owner, paying property taxes on those properties counts as part of your everyday business costs. Paying that rental property tax is a business expense. Therefore, you can deduct it from your total taxable rental income. 

5. Travel and Transport

If you have a rental property office, you, unfortunately, cannot deduct driving to and from the office on your taxes. However, you may be able to deduct all other transportation and travel costs incurred for business purposes. 

Deductible expenses include travel costs for visiting properties and making repairs. You can also deduct transport and lodging expenses for overnight travel away from home when you have an apparent business reason for travel. 

You must keep comprehensive records of these costs to claim them correctly on your tax return. Business use of your personal vehicle can be claimed and deducted according to a standard mileage rate set by the IRS. 

6. Professional or Legal Fees

All of your necessary professional and legal expenses are deductible as well. This includes membership fees in a professional association and subscriptions to any professional renter publications. 

Deductible legal fees include notary costs and attorney consultations. If you hire an attorney for a business-related purpose, then those fees also count as business expenses. 

Utilizing the service of an accountant or CPA to assist with your rental property taxes also qualifies as a deductible expense. 

7. Utilities

If you pay for utilities on a property yourself instead of passing them on to a renter, those payments qualify as deductible business expenses. You can deduct utility costs for rental properties and your office.  

8. Operating Expenses  

Pretty much any of the everyday costs of doing business may also be eligible tax deductions you can claim on your federal income tax return. Here are just a few of the business costs that may fall into this category: 

• Employee costs: wages and employment taxes
• Insurance premiums
• Office supplies
• Technology expenses: internet and business software
• Office space rent and utilities 

You can deduct certain materials, repairs, and maintenance as long as they keep your property working effectively. Expenses for improvement purposes are not deductible. This may be a tricky category, so it’s best to consult with a tax professional to make sure your deductions are acceptable.

9. Necessary Expenses 

This is an umbrella term that includes insurance, marketing, advertising, and other everyday costs associated with owning and maintaining a rental property. The IRS states that these expenses are to be considered appropriate for the rental property industry.

What is not deductible on rental properties? 

As stated above, not all rental property expenses are tax-deductible. The cost of improving your rental property is non-deductible. 

It’s important to distinguish between projects that are completed for regular maintenance and others that are meant to improve your property’s function or aesthetics. 

How can I claim a rental property tax deduction?

Now that you understand some examples of what is tax-deductible on a rental property, you’re probably wondering how to claim them on your next tax return. According to the IRS, both rental income and expenses are to be reported on Form 1040 or 1040-SR, Schedule E, Part I. Multiple Schedules E may be required if you have more than one rental property. 

What does the IRS consider rental income?

Earning income from rental property has its own set of regulations that differ from other job types. Property owners and landlords have different types of income flowing in and a wide range of expenses that are needed to maintain operations. 

First, you’ll need to know what types of payments are considered income. This may extend beyond the month-to-month rent you collect from your tenants. 

Then, you’ll need to understand how rental income is taxed. Let’s review the payment types that are categorized as rental income:

• Normal rent: This is the standard rent amount you receive from your tenants, usually on a month-to-month basis or whatever is stated in the lease.
• Advance rent: This is any amount of rent that’s paid prior to the covered period of the lease. You must include this advance rent in your income for the year you receive it. A security deposit that was considered the final payment of rent would fall into this category of advance rent.
• Canceled lease rent: Any income you receive for the cancellation of a lease is also considered rental income.
• Tenant-paid expenses: If your tenant pays any of your expenses, such as utility bills, you’ll need to include those on your tax return. 
• Services or property for rent: Some property owners may accept a service or a piece of property instead of a regular monetary payment. You will still need to include the rent the tenant would have paid.
• Lease-to-buy: If the tenant is paying for the right to buy the property, these amounts should also be considered income. 

Accounting Types: Cash vs. Accrual

How you calculate your taxable rental income depends on your preferred accounting method. The cash method of accounting records your income and expenses as they happen in real-time. The accrual method instead looks at the reporting of these payments when they’re earned or scheduled and isn’t as immediate.

Consider a situation where you had to make a large repair at the end of 2022. However, you don’t actually pay for this repair until the following month, January 2023. This expense would be tied to two years, so it’s important to have a consistent accounting method that tells you which year to record. 

The accrual method would include this expense for 2022, while the cash method would claim the expense in 2023 when the payment actually occurred. Cash accounting is most common among small businesses. However, what matters most is that you remain consistent in your accounting method for your rental property management. 

Which rental documents should you keep?

The tax benefits of rental property management are much easier to determine if you maintain good records. Not only will this save you time and effort when filing your taxes, but it can also help ease the burden if you receive an audit. 

The IRS recommends that rental property owners keep documents that provide details on the following categories:

• Rental income: This includes the payment types listed in the previous section, such as advance rent and tenant-paid expenses.
• Rental expenses: Any type of expenses for your rental property should be recorded to help with claiming deductions.
• Documentary evidence: Bills, receipts, and canceled checks will be able to support your expense claims.
• Travel expenses: Refer to Publication 463 regarding any travel expenses you obtain while visiting different properties to make repairs. 

Work with an Expert CPA to Maximize Your Rental Property Tax Savings

There are many details to consider when filing taxes for your rental property. Various expenses and payment types need to be reviewed to ensure that you claim all of your eligible deductions. 

Don’t risk missing a valuable rental property tax deduction on your taxes this year! Enlist the help of 1-800Accountant to maximize your tax savings and deductions for your rental property business.