What Can You Deduct From Rental Income?

Owning a rental property comes with expenses, but many costs can be deducted from taxable rental income. These deductions lower a landlord’s tax bill and improve profitability. However, not all expenses qualify, so understanding what can be deducted is essential for maximizing savings while staying compliant with tax laws.

Mortgage Interest and Property Taxes

Mortgage interest is one of the largest deductible expenses for landlords. The interest portion of loan payments for purchasing, improving, or maintaining a rental property can be deducted. This applies to mortgages, home equity loans, and lines of credit, but only for amounts used for rental purposes.

Property taxes, levied by local governments, are another deduction. The full amount paid in a given tax year reduces taxable rental income. Some states offer additional deductions for landlords who provide low-income housing or make energy-efficient upgrades, so checking local tax laws can uncover further savings.

Interest deductions are especially beneficial in the early years of a mortgage when interest payments are highest. For example, if a landlord pays $12,000 in mortgage interest and $5,000 in property taxes in a year, they can deduct the full $17,000. Keeping detailed records, including mortgage statements and tax bills, ensures compliance and maximizes deductions.

Insurance

Insurance premiums for a rental property are deductible. Landlords typically carry policies covering property damage, liability risks, and loss of rental income due to unforeseen events. The IRS allows deductions for premiums paid on policies that insure against fire, theft, vandalism, and natural disasters, as long as the coverage applies specifically to the rental property.

Liability insurance is another deductible expense, protecting landlords from legal claims if a tenant or visitor is injured on the property. Umbrella policies, which provide additional liability protection, are also deductible if they relate to the rental business.

Loss of rental income insurance reimburses landlords for lost rent if a property becomes uninhabitable due to a covered event, such as a fire or severe storm. Since it directly relates to the rental business, the premiums for this coverage qualify as deductible expenses.

Depreciation

Depreciation allows landlords to recover the cost of their property over time. The IRS recognizes that buildings deteriorate, so property owners can deduct a portion of the purchase price each year. Residential rental properties are depreciated over 27.5 years using the straight-line method, meaning an equal amount is deducted annually based on the property’s value, excluding the land.

To calculate depreciation, landlords must determine the property’s basis, which includes the purchase price, closing costs, and improvements made before renting. For example, if a property is purchased for $300,000 and the land is valued at $60,000, only the $240,000 building cost is depreciable. Dividing this by 27.5 results in an annual depreciation deduction of approximately $8,727.

Depreciation also applies to capital improvements, such as a new roof, HVAC system, or structural additions. Unlike routine repairs, these upgrades must be depreciated over their assigned recovery periods. Appliances and carpeting, for example, have a five-year depreciation schedule, while land improvements like fences and driveways typically fall under a 15-year period. Proper classification ensures landlords maximize deductions while complying with tax regulations.

Repairs and Maintenance

The IRS allows landlords to deduct costs for ordinary repairs and maintenance, provided they are necessary and reasonable. This includes expenses like fixing a leaking faucet, repainting walls, patching a damaged roof, or servicing a malfunctioning furnace. These deductions can be taken in the year the expense occurs, directly reducing taxable rental income.

To qualify as a deductible repair rather than an improvement, the expense must restore the property to its original condition rather than add significant value or extend its useful life. Replacing a few broken tiles in a bathroom is a deductible repair, but completely remodeling the bathroom would be classified as an improvement and must be depreciated. IRS guidelines under the Tangible Property Regulations clarify how to differentiate between repairs and capital expenditures.

Utilities and HOA Fees

If a landlord pays for utilities such as water, gas, electricity, or trash collection, these expenses can be deducted in full. The IRS allows deductions for any utility costs incurred while the property is rented or available for rent. If a property is only partially rented during the year, landlords must allocate utility expenses accordingly. Keeping detailed records, such as utility bills and lease agreements, ensures accurate deductions.

For properties in homeowners associations (HOAs), monthly or annual fees are deductible. These fees typically cover shared amenities, landscaping, security, and general maintenance of common areas. However, special assessments for major improvements, such as repaving parking lots or installing new security systems, must be capitalized and depreciated rather than deducted in the year paid. Understanding the distinction between regular fees and capital assessments helps landlords properly categorize expenses.

Professional and Administrative Costs

Hiring a property management company to handle tenant screening, rent collection, and maintenance coordination qualifies as a deductible expense. These companies typically charge a percentage of the monthly rent or a flat fee. Legal and accounting fees associated with lease agreements, evictions, tax preparation, or financial consulting also qualify, provided they are directly related to the rental business.

Administrative costs, such as office supplies, software subscriptions, and mileage for property-related travel, can also be deducted. If a landlord maintains a home office exclusively for managing rental properties, a portion of household expenses like internet, utilities, and rent or mortgage interest may be deductible under the home office deduction. The IRS provides two methods for calculating this deduction: the simplified method, which allows a flat $5 per square foot up to 300 square feet, and the regular method, which requires calculating actual expenses based on the percentage of the home used for business. Proper documentation is necessary to substantiate these deductions.

Advertising and Marketing

Finding tenants requires advertising, and any expenses incurred to promote a rental property are deductible. This includes costs for online listings, print advertisements, signage, and professional photography. Many landlords use platforms like Zillow, Apartments.com, or Craigslist, which may charge listing fees. These fees, along with expenses for creating flyers or hiring a real estate agent to market the property, can be deducted in the year they are incurred.

Digital marketing strategies, such as running paid social media ads or maintaining a website for rental listings, also qualify. If a landlord hires a professional to design a website or manage online advertising campaigns, those costs are deductible. Even referral incentives offered to current tenants for bringing in new renters can be written off. Tracking all marketing expenses ensures landlords take full advantage of available deductions while maintaining a steady flow of tenants.