Rental Deductions: What are the Rules?

Rental deductions are crucial for maximizing your bottom line as a rental property owner. In fact, with the right knowledge, you can take advantage of various rental deductions to lower your taxable income. In this guide, we will delve into what qualifies as a rental deduction, examine common rental expenses, and highlight key IRS safe harbors that can streamline the deduction process.

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February 5, 2023

What are rental deductions?

Rental deductions are expenses that landlords incur while managing and maintaining their rental properties. These deductions help reduce taxable income, ultimately lowering tax liability.

Common rental expenses

These are the common expenses that landlords incur while managing a rental property.

Mortgage interest: You can find this amount on Form 1098 that the mortgage lender sends you.
Property taxes: The limit for property tax deductions on personal homes is $10,000. However, this limit does not apply to business activities.
Insurance premiums: They include fire, theft, and flood insurance, plus landlord liability insurance.
Homeowners Association (HOA) fees: Many rental properties are managed by an HOA, which enforces rules and maintains amenities. If you own a rental property within an HOA, you usually pay monthly fees to the organization.
Repairs: These expenses are to keep the property operational and do not add value like improvements (explanation later). Examples of repairs are fixing a broken faucet, painting walls, and repairing a roof leak.
Maintenance: This includes activities that are for ongoing upkeep of your property, such as landscaping and pool cleaning
Utilities: Water, gas, and electricity are included in utilities.

Generally, these expenses are deductible in the year you incur them and can significantly reduce your taxable rental income.

What are rental improvements?

Improvements enhance the value of the property or extend its useful life. Common examples are:

Adding a new room
Upgrading the heating system
Installing new flooring

While most rental expenses can be immediately deducted, improvement costs must be depreciated over the property’s useful life, typically 27.5 years for residential rental properties. However, there are safe harbors in place that can allow immediate deduction of improvements.

IRS Safe Harbors for rental properties

Small Taxpayer Safe Harbor for rental properties

If your rental property has an unadjusted basis of $1 million or less and your annual gross receipts are $10 million or less, you can deduct expenses for repairs, maintenance, and improvements immediately if they do not exceed the lesser of $10,000 or 2% of your property’s unadjusted basis.

Routine Maintenance Safe Harbor

If you plan to perform maintenance activities more than once over a 10-year period, you can deduct these costs immediately. This applies to tasks like:

Repainting
Regular cleaning
Replacing parts

de minimis safe harbor for rental properties

For items costing up to $2,500 ($5,000 with applicable financial statements), you can deduct them immediately, regardless of whether they are classified as repairs or improvements.

Keeping Good Records of rental expenses

To ensure you can take full advantage of these deductions, it’s essential to keep thorough records. In particular, maintain receipts, invoices, and documentation for all expenses related to your rental property. This not only helps during tax season but also provides support in case of an audit.

Unlocking Your Tax Savings Potential

In summary, understanding rental deductions is a powerful way to maximize your tax savings as a landlord. Particularly, having in mind common rental expenses and the IRS safe harbors and maintaining meticulous records can enable you to navigate the deduction landscape with confidence. Finally, always consider consulting with a tax professional to ensure you’re making the most of your rental property investments.

References

Tangible Property Final Regulations | Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations.