What Can I Deduct as a Landlord? A Practical Guide for Small Landlords

If you own a rental property in the United States, the IRS lets you subtract the ordinary and necessary costs of running it from the rent you collect, and you pay tax only on what is left. That sounds simple, and the principle is. The difficulty is that "ordinary and necessary" covers a long list of costs, some of which are deducted all at once, some spread over decades, and a few of which people assume they can deduct but cannot. This guide walks through the categories most small landlords deal with, explains where the common mistakes happen, and ends with what to do before the year closes.

A note on method before we start. Most small landlords use the cash method of accounting, which means an expense counts in the year you actually pay it, and rent counts in the year you actually receive it. That single fact drives a lot of year-end planning, which we come back to below.

The expenses nearly every landlord can deduct

• Mortgage interest. The interest portion of your mortgage payment is deductible against rental income. The principal portion is not, because paying down principal builds your equity rather than costing you anything. Your lender's Form 1098 shows the interest paid for the year. If you refinanced and paid points, those are generally spread over the life of the new loan instead of deducted at once.

• Property taxes. Real estate taxes on the rental are deductible as a rental expense. Unlike the personal deduction for taxes on your own home, this one is not affected by the cap on state and local tax deductions, because it is a business expense of the rental rather than an itemized deduction.

• Insurance. Landlord or dwelling-fire policies, liability coverage, umbrella premiums attributable to the rental, and flood insurance on the property are all deductible. If a premium covers more than one property or more than one purpose, split it sensibly and keep the allocation.

• Repairs and maintenance. Fixing a leaking faucet, patching drywall, servicing the furnace, repainting between tenants, and clearing a drain are all repairs, and you deduct them in the year you pay. The distinction between a repair and an improvement matters enough that it gets its own section below.

• Utilities. Water, sewer, gas, electricity, trash, and internet that you pay on behalf of the property are deductible. If the tenant pays them directly, there is nothing for you to deduct. If you pay a utility and bill it back to the tenant, the reimbursement is income and the payment is an expense.

• Professional fees. What you pay a CPA to prepare the rental portion of your return, an attorney to draft a lease or handle an eviction, or a bookkeeper to keep the records is deductible. So is the fee for a tenant screening report.

• Property management fees. If you hire a manager, their percentage or flat fee is deductible, as are leasing commissions paid to find a tenant.

• Advertising. Listing fees, yard signs, and online ad spend to fill a vacancy are deductible.

• Supplies and small purchases. Light bulbs, smoke detectors, cleaning supplies, locks, and small tools used for the rental are deductible. Under the IRS de minimis safe harbor, you can generally deduct an individual item or invoice costing $2,500 or less rather than depreciating it, provided you make the election on your return and apply it consistently. A stove at $900 for a rental is a good example of something that safe harbor covers.

• Travel and car expenses. Driving to the property to collect rent, make repairs, meet a contractor, or inspect the unit is deductible, either by the standard mileage rate or by actual costs, but you need a log. The rate changes most years, so check the current figure on the IRS website. Trips to a property purely to enjoy it do not qualify, and overnight travel to a rental that is far away is deductible only when the trip is primarily for the rental business.

Repairs versus improvements

This is where most landlords either leave money on the table or take a deduction they cannot defend. A repair keeps the property in its ordinary working condition. An improvement makes the property better than it was, adds to its value, or extends its useful life, and an improvement must be capitalized and depreciated rather than deducted immediately.

Replacing a few broken shingles is a repair. Replacing the whole roof is an improvement. Fixing a section of damaged fence is a repair; building a new fence where none existed is an improvement. Repainting a room is a repair; a full kitchen remodel is an improvement. When the work restores the property after a problem, or replaces a major component, or adapts the property to a new use, it usually falls on the improvement side.

The IRS offers a safe harbor for small taxpayers that can help here. If your total annual spending on repairs, maintenance, and improvements to a building is no more than the lesser of $10,000 or 2 percent of the building's original cost, and the building's unadjusted basis is $1 million or less, you may be able to deduct the whole amount. It is an election with conditions, so it is worth asking your tax preparer whether it applies to you.

Depreciation, the deduction you do not write a check for

Depreciation is the deduction landlords most often misunderstand. The IRS treats a residential rental building as wearing out over 27.5 years, so you deduct a portion of its cost each year even though you spent the money when you bought it. Land does not wear out and is not depreciable, so you must split your purchase price between land and building, usually by using the ratio on the property tax assessment or an appraisal.

Improvements get their own depreciation schedule, and appliances, carpet, and similar items are generally depreciated over a shorter period when they are not covered by the safe harbor above. Depreciation begins when the property is ready and available for rent, not when you sign a lease, and it is not optional: the IRS reduces your cost basis by the depreciation you were entitled to take, whether or not you actually took it. When you eventually sell, that reduction is recaptured and taxed, so skipping depreciation does not avoid the tax and only costs you the benefit in the years in between.

What you cannot deduct

Mortgage principal is not deductible, as noted above. Neither is the purchase price of the property itself, since that is recovered through depreciation and at sale. Your own labor is not deductible, which surprises many landlords: you cannot pay yourself a wage for fixing your own rental, and the time you spend is simply unpaid. Fines and penalties are not deductible. Personal expenses cannot be run through the rental, and when a cost serves both you and the property, only the rental share counts.

Security deposits deserve a mention because they confuse people in the opposite direction. A security deposit you intend to return is not income when you receive it, so you do not report it. If you keep some or all of it, for unpaid rent or damage, the retained amount becomes income in that year.

Records are what make deductions hold up

A deduction you cannot document is a deduction you may lose in an audit. For each expense, keep the receipt or invoice, note which property it belongs to if you own more than one, and note what it was for, a short phrase is enough. Keep a mileage log with dates, destinations, and purposes. Keep closing documents, improvement invoices, and depreciation schedules for as long as you own the property and for several years after you sell.

The practical problem is that this work happens in small moments throughout the year and it is easy to postpone until a pile of receipts is waiting for you in March. Whatever tool you use, whether a spreadsheet, a shoebox with a monthly sorting habit, or software built for landlords, the winning approach is to record each expense once, close to when it happens, and tag it to a property and a category as you go. If you do, tax season turns into a short export instead of a weekend of reconstruction.

Before December 31

Because most small landlords deduct expenses when they pay them, the last weeks of the year are a planning window. If you were already planning a repair, a new appliance, or the annual insurance renewal, paying it before December 31 moves the deduction into this tax year. A charge on a credit card generally counts in the year you make the charge, not the year you pay the card bill. The reverse applies to income: rent you receive in advance, even for next year, is generally income when it arrives.

Do not let tax timing override a business decision. A repair that is not needed is not worth doing for the deduction, since you spend a dollar to save a fraction of a dollar. But if the work is coming anyway, the timing is free.

When to bring in a professional

Rental taxation has several areas where a short conversation with a CPA pays for itself: the passive activity loss rules that can limit how much rental loss you can use against other income, the qualified business income deduction that some rental activity can qualify for, how to treat a property you converted from personal use, and what happens when you sell. This guide covers the common ground, but your situation may have details that change the answer.

This article is general information, not tax or legal advice. Tax rules change and depend on your circumstances, so confirm the details with the IRS publications or a qualified tax professional.

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