Tax Deductible Expenses
As a Landlord, there are many expenses you may incur related to your business activities. Most expenses, which are considered ordinary and necessary operating costs for the rental property, are deductible as a business expense. This includes costs like:
- Advertising for new tenants
- Commissions for finding tenants
- Travel to and from the rental property for maintenance/management purposes
- Property management fees
- Legal fees for evictions or other rental issues
- Utilities if paid by the landlord
- Property taxes
- Insurance
- Interest on mortgages used to buy/improve the property
- Repairs and routine maintenance like painting, carpet cleaning, landscaping, pest control etc.
However, there are also certain costs that are not allowed as tax deductions.
Non Tax Deductible Expenses
Any expense for personal use of the rental property is not an allowed deduction, although it may be deductible limited to your personal Adjusted Gross Income if you report it on your Schedule A.
For example, if you stay at the rental property for a weekend, rent equivalent for those days would not be deductible as a business expense. Similarly, if you allow a family member to use the property and they do not pay fair rent at market rates, then you cannot deduct that loss of rental income.
In order for rent to be valid and rental costs deductible, there must be an arms length rental agreement and rent payments at fair market value, even with relatives as tenants. If market rate rent is not received, then this lost income and associated time is not deductible against rental earnings.
Expenses for improvements and upgrades to the property also generally cannot be deducted and instead must be capitalized. This includes things like:
- Adding or renovating rooms
- Major renovations like kitchen or bathroom upgrades
- Installation of new doors, windows, siding etc.
- Upgrades like new appliances or fans
- Building upgrades like new flooring, countertops, cabinets etc.
These type of expenses appreciably extend the life of the property, increase its value, or adapt it to new uses. Therefore they cannot be immediately deducted but rather must be depreciated over time or added to the basis of the property when sold for tax purposes.
In contrast, normal wear and tear repairs can still be deducted as regular business expenses rather than capital improvements.
Some other specific non deductible costs:
- Security deposits– While costs like background checks to screen tenants can be deducted, security deposits themselves cannot. Rather, only the portion of deposits not returned to tenants upon move out is deductible.
- Barter services– If part of the rent is exchanged for services from the tenant, the value of those services is non deductible. It should be documented though to show the full market rent and portion being exchanged for services rather than paid in cash.
So in summary, operating expenses for managing the property can generally be deducted each year, while an allocable portion of personal use, lost rents from below market rates, improvements that extend the life of the property, and security deposits themselves are required to be capitalized or handled specially. Tracking these areas accordingly allows maximizing eligible business expense deductions each year.
For more information please review IRS Publication 527 and 946.
