31 tax deductions real estate investors need to know about
Owning rental property has its share of challenges, but there are some serious rental property tax deductions that can make it worthwhile. Surprisingly, some rental property owners fail to take full advantage of these tax benefits when filing their returns.
Most real estate investors write off costs like mortgage interest, insurance, property taxes, and ordinary operating expenses, like maintenance and repairs — understandably, as these are widely known. But there are many other tax deductions that rental property owners should take advantage of when filing their tax return.
1. Expenses related to starting a business
Those who are just starting their rental business might be able to deduct a portion of their startup costs. Common startup costs include:
- Accounting fees
- The study of potential markets
- Training for new employees and salaries
- Office equipment and furniture
Although most startup costs are considered capital expenditures, property owners may be able to deduct up to $5,000 of those costs if they exceed $50,000. The remaining costs must be amortized over a period of time.
2. Expenses related to looking for new property
The costs of hotel, airfare, rental car, meals, and other travel expenses incurred while looking for a new residential rental property are a deductible expense if they are ordinary and necessary.
To qualify, at least half of the time spent away on travel must be spent on doing business, and the primary reason for travel must be business. This means investors deduct travel expenses for a long weekend in Florida as long as they spend the majority of time engaging in business-related activities.
3. Ordinary and necessary advertising expenses
Property owners can write off any costs incurred while advertising their business and/or a rental unit. Typical expenses include classified ads, signs, and postage for mailers. They can even deduct the costs of building a new website.
4. Internet and cell phone plans
Property owners who use their internet and cell phone for business purposes can deduct the percentage they spend on their business. It may be challenging to separate personal and business usage, but the key is to be reasonable and consistent and keep records.
One option for owners is to subtract the estimated number of hours worked per month from the total number of hours there are in a month and then use that difference to calculate the percentage of their bills they spent on their business.
So, if Joe's internet is $100 a month and he works 40 hours a week in September, that's 160 hours a month (40 hours x 4 weeks) out of 720 total possible hours (24 hours x 30 days). So, he spent 22 percent (160 ÷ 720) of $100 on his business, which means Joe can deduct $22.
5. Suspended passive losses
Real estate professionals can write off rental loss and business losses against any income they earn. That includes income lost to unpaid rent. Until 2025, there's a cap of $250,000 if they are single and $500,000 if they are married filing jointly. That cap goes away after 2025.
Rental property losses that aren't deducted right away are called suspended passive losses. These losses are carried forward indefinitely until one of two things happens:
- The owner has passive income (from a rental home or otherwise) to deduct again
- The owner sells or transfers the property
Investors can deduct the suspended losses when they sell their property, but only if the property is treated as a single activity for tax purposes. Many investors treat one or more of their properties as a single activity, which would mean that selling just one property would not allow them to deduct those suspended losses.
Finally, the sale must be made to an unrelated property and treated as a taxable event, meaning 1031 exchanges do not count. Foreclosures are eligible.
6. Utilities paid by the owner
A real estate investor will often pay for common area lighting and security systems. But they can also write off expenses like heating, water, sewer, gas, trash collection, cable, and internet.
The costs of utilities used by renters are fully deductible, even if the renter reimburses the owner later, though those reimbursements must be claimed as income.
7. Paying family to help with property maintenance
This is one of the oldest tricks in the book. If an investor is facing a large tax liability, they can put their children to work, hiring them to help with property maintenance by mowing lawns, shoveling snow, and cleaning vacant units.
Owners should keep a written receipt detailing how much they paid them, for what activities, and when. Not only will this reduce tax liability, but it will introduce the children to the world of real estate and property management.
8. Property maintenance fees
Property maintenance costs, whether they arise frequently or infrequently, are deductible, including:
- Pest control
- HVAC servicing
- Flushing sewage/water lines
- Cleaning gutters
- Deep cleaning during rental turnover
9. Property management fees
No children to put to work? No problem. Property owners can still reduce their tax liability by deducting property management fees, which are considered administrative expenses and can be written off in full.
Property owners who manage their own rentals can write off costs like yearly fall maintenance, screening prospective tenants, and advertising.
10. HOA dues
Investors who belong to a Homeowners Association have to pay dues. Since they're a necessary expense, that makes them deductible against rental income.
11. Legal fees for an eviction
Legal fees are usually incurred as part of the costs of an eviction. Court fees and legal fees are deductible.
12. Expenses paid by tenant
Any fee that a property owner would pay if he lived in the property that is covered by a tenant's rent payment is known as an expense paid by tenant. Investors can easily stipulate which fees they may be by using a free rental agreement template.
For example, a tenant might cover their own HOA dues, which would be deducted from their monthly rent. It's key to remember that:
- Expenses paid by the tenant count as rental income since the owner would be making those payments otherwise, and
- The expenses have to be themselves deductible, like water or sewage
13. Energy efficiency
Real estate investors who upgrade their property to be more energy-efficient might qualify for a partial deduction. For example, replacing a 10-year-old HVAC or a 15-year-old water heater may qualify.
All employees and independent contractors hired to run the business can be a deduction. That includes:
- Social Security contributions
- Health insurance costs
- Other benefits
Real estate investors can deduct rental property insurance premiums, which are 15 to 25 percent more than homeowners' insurance for owner-occupied properties. Those who work out of a home office can also deduct a part of the insurance on the primary residence.
16. Casualty losses
Owners can claim a total or partial property loss in case of fire, natural disaster, or other unexpected event. They can only claim a loss if they have insurance.
The casualty loss claim has to be reduced by the amount the owner receives from the insurer. If the loss is 100 percent covered by insurance, the investor gets no deduction.
17. Rent for equipment and tools
Money spent on renting equipment and tools is tax-deductible. Examples include:
- Tools used for maintenance
- Reserving a helium tank for a work event
- Transportation and vehicle expenses
18. Subscriptions and memberships
The costs of many subscriptions, dues, and services are deductible. These include:
- Dues paid to professional organizations
- Subscriptions to trade publications (but not general magazines or “waiting room” magazines)
- Buying or subscribing to software, apps, and online tools used to run the business
- Cloud accounting tools
- Productivity apps
- Cloud storage
- Social media management tools
- Online shopping carts
- Stock image services
- Digital downloads
19. Meals and entertainment
After the Tax Cuts and Jobs Act (TCJA) of 2017, fewer costs for meals and entertainment are deductible, and the deduction is capped at 50 percent.
These costs must be directly related to running a business in the industry, the taxpayer has to be there, and the amount can't be lavish or extravagant.
- Catering office meetings
- Meals eaten on business trips and at conventions, conferences, or seminars
- Meals provided for the convenience of the employer on the employer's premises
- Office snacks, water, and coffee
- Meals provided along with charitable event tickets
These deductions are set to fully expire by 2025 unless Congress decides otherwise. Investors can still get a 100 percent deduction on all recreational or social employee events so long as they're open to everyone and don't discriminate based on employee compensation.
In order for meals for business purposes to count for a tax deduction, the investor has to be present for said meal. (Credit: Getty Images)
Education and training for the rental property business can be written off, although there are many stipulations for this one, so owners must perform due diligence.
A description of the service or item should be enough to make the deduction. Deductible expenses include:
- Networking events
21. Interest paid on loans or credit cards
Most residential property owners know they can write off their mortgage interest, but they'll often forget to write off interest paid on other loans or credit cards.
If the loan or credit card was used to buy, maintain or repair something at a rental property, they can deduct interest. Property owners should be careful not to mix business expenses with personal ones.
22. Marketplace fees
Costs for short-term rental services such as Airbnb and HomeAway for business purposes are entirely deductible.
23. Petty cash expenses
Many of the items in this article are petty cash expenses (food, parking, printing documents, etc.). Property owners should make sure to keep track of all these, because they're tax-deductible.
They can use a logbook, vouchers, etc., to note the time, date, amount, and what was paid for, and add them all to their bookkeeping at the end of the month.
24. Travel, parking, and tolls
Owners can deduct travel expenses if they are for the purpose of making repairs, but if they are used to make improvements, they have to be depreciated. They can use the expenses incurred (gas, repairs, upkeep) or the standard mileage rate, which changes yearly (this should be confirmed with the IRS).
If travel requires staying overnight, all the associated costs, such as airfare, lodging, and food, are deductible. As always, business owners should keep thorough records.
Parking garages, tolls, and meters can also all be counted so long as the owner is driving or parking anywhere other than the principal place of business (like an office). If the office is the principal place of business, business parking and tolls are deductible.
25. Home office or workshop
The home office deduction is a bit tricky, and for that reason, many owners opt to steer clear. But this deduction can be highly valuable, so it's worth looking into.
Office furniture, tools, and a portion of other expenses, like utilities and home maintenance, might also qualify as write-offs. Before taking this deduction, it is wise to consult with an accountant to be sure they understand the minimum requirements that make these spaces eligible for write-off.
26. Expenses for preparing documents
If property owners have documents printed, bound, laminated, shipped, etc., the costs are deductible so long as they are for the businesses. However, they cannot deduct:
- Legal fees for buying business assets. Owners may be able to bundle these with the depreciation of the asset.
- Fees for personal work, like funding rental real estate into a trust. If an owner is invoicing for something that serves both business and personal functions, they have to separate the two out and deduct only the business part.
27. Selling the property to one's own S Corp
In rare circumstances, it might make sense for an owner to sell her rental property back to herself by creating an S corporation. For instance, selling a property to her S corp may allow her to shield the appreciated value through capital gains protection.
For example, Jane purchased a property in 2005 and made significant capital improvements to it before moving out in 2009. She has rented it out ever since.
If Jane sells the home now, the appreciated value is subject to capital gains tax because she hasn't lived in the property as a primary residence for two of the last five years.
Instead, if she had sold the property to her own S corp sometime between 2009 and 2012, she could have excluded capital gains because the requirements for the two-year rule would have been met.
Selling to an S corp can be complicated, and this tactic shouldn't be used by everyone. Owners should consult with a tax advisor before deciding to go this route.
This is why property owners should know how to pick the right legal entity for their real estate investment business.
28. Depreciate more than the standard 1/27.5 years
When an investor buys a rental property, the purchase includes multiple assets: the land the building sits on, the improvements to the land such as landscaping, the building itself, and any property included with the sale.
Most investors depreciate all of these items together over the standard 27.5-year recovery period. But each asset can also be depreciated separately.
This depreciation method, known as cost segregation, is more complicated. Still, it allows property owners to accelerate depreciation because land improvements and personal property have shorter depreciation periods than real property, usually between five and seven years.
The total depreciation won't be different, but cost segregation gives the investor a larger depreciable deduction during the first several years. Every rental property owner should consider having a validated accounting firm perform a cost segregation study to determine whether this approach can save them money.
29. Capital improvements and repair costs
An improvement is work that adds value to a rental property. Because the value added by the improvement extends over time, it's written off yearly as a depreciation. Meanwhile, a repair is anything that allows an owner to keep operating their property.
Examples of improvements:
- Additional dwelling units (ADUs)
- Adding an AC
- New hardwood floors
- Replacing a roof
Examples of repairs:
- Updates made to match local code
- Upgrading a sink because the old one broke and the previous model was discontinued
- Patching a hole in the roof
Differentiating a repair from an improvement can be tricky. A useful delineation is that improvement adds value to the property while repairs return things to their original condition.
When in doubt, investors can use the BAR acronym to identify if the work is a repair or an improvement:
Betterment: Does it remedy a problem that was around before they purchased the property? Does it physically make the property bigger or better?
Adaptation: Will the owner be using the property in a way other than how she planned to use it when she first bought the property?
Restoration: Is the owner restoring the property to like-new condition? Has the damage already cost her money?
If the owner said yes to any of these questions, the IRS would call it an improvement and it would fall under depreciation.
30. Faster depreciation for personal property
Property investors can speed up depreciation for a personal property using the Modified Accelerated Cost Recovery System (MACRS). It has to be personal property that's inside the rental property or property that's used as part of the rental business. For example:
- Appliances, carpeting, and furniture can be depreciated over five years.
- Fences and driveways can be depreciated over 15 years.
Investors can consult the IRS's list of assets to learn more.
31. 100 percent bonus depreciation and Section 179 deduction
Tax law typically requires businesses to spread out depreciation deductions for an asset over the “useful life” of the asset, but 100 percent bonus depreciation and Section 179 deductions allow them to take a depreciation deduction all at once.
In 2023, the 100 percent bonus depreciation deduction will begin decreasing 20 percent every year until 2027, at which point it will no longer exist. Both deductions apply only to specific improvements and purchases.
Bottom line on investor tax deductions
Those who own rental properties should always be looking for ways to maximize their return on investment. Taking these valuable rental property tax deductions is a great way to shield income earned as a real estate investor.