A&W Tax Services

Rental Property Taxes: What Landlords Can Deduct and How It's Reported

Renting out a house, a condo or the home you moved out of? Rental income is taxable, but landlords get a long list of deductions, including one, depreciation, that many people miss. Here's how it works.

By the Enrolled Agents and CPAs at A&W Tax Services · Updated

What counts as rental income

  • Monthly rent
  • Advance rent, taxed in the year you receive it
  • Security deposits you keep, for example for damage or unpaid rent
  • Fees a tenant pays you, such as late fees or a lease-cancellation fee
  • Expenses a tenant pays for you in place of rent

What you can deduct

  • Mortgage interest and property taxes
  • Insurance, HOA dues and utilities you pay
  • Repairs and maintenance
  • Property management and leasing fees
  • Advertising, legal and accounting fees
  • Travel to the property for rental business
  • Depreciation of the building and improvements

Depreciation

You can't deduct the cost of a residential rental building all at once. Instead you depreciate it over 27.5 years, starting when it's ready to rent. Only the building depreciates, not the land, so the purchase price has to be split between the two. Improvements such as a new roof or HVAC system are depreciated too, while ordinary repairs are deducted right away.

Depreciation lowers your tax every year, but it reduces your basis, and the IRS taxes depreciation you were allowed when you sell, even if you didn't claim it. Claim it every year.

Rental losses

Rentals are generally passive activities, so losses can only offset passive income. There's an important exception: if you actively participate, for example by approving tenants and setting rent, you can deduct up to $25,000 of rental losses against other income. That allowance phases out as modified adjusted gross income rises from $100,000 to $150,000. Losses you can't use carry forward to future years or to the year you sell.

Special situations

  • Rent a home for 14 days or less in a year and the rent is generally tax-free
  • Use a property personally for more than 14 days, or 10% of the days it's rented, and expenses must be split and losses limited
  • Short-term rentals with an average stay of seven days or less follow different rules
  • When you sell, the gain attributable to depreciation is taxed at up to 25%