What Tax Deductions Are Allowed as a Rental Property Owner?
Submitted by HHLOA Allied Partner, Melissa Cottrill, CPA
You can deduct expenses related to the rental of a dwelling unit. According to the IRS, an expense is deductible if it is ordinary and necessary.
Ordinary expenses are common and generally accepted in your business. An example would be laundry costs. Necessary expenses are those that are deemed appropriate such as advertising.
The expenses of managing & maintaining your rental property are deductible. Deductible expenses include mortgage interest, repairs & maintenance, supplies, property tax, advertising, utilities, insurance and other necessary expenses.
You cannot deduct the cost of improvements or capital expenses. Recover these costs through depreciation.
Is there a maximum write-off for property repairs?
While there isn’t a limit on deducting property repairs, it is essential to understand the difference between a repair versus a capital improvement. Repairs maintain the property without adding to its useful life or function. For example, an oil change is considered routine maintenance. A new motor, however, is considered a capital improvement because it adds to the life of the property. Capital improvements enhance the property, provide additional value, improve the quality or adapt it to new use. Consult with your tax advisor if you are in doubt about potential deductions.
How does personal use impact the deductibility of expenses?
If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. A dwelling unit is considered a residence if you use it for personal purposes during the tax year that is more than the greater of:
- 14 days, or
- 10% of the total days you rent it to others at a fair rental price.
Suppose you use the dwelling unit for both rental and personal purposes. In that case, you should divide your total expenses between rental and personal use based on the number of days used for each purpose. You can not deduct your rental expense over the gross rental income limitation. That means the gross rental income minus the rental portion of mortgage interest, real estate taxes, casualty losses, and rental expenses like realtors’ fees and advertising costs. You can carry forward some of these rental expenses to the following year, subject to the gross rental income limitation for that year.