It's Tax Time!

Owning rental property isn’t just about collecting rent — it’s also one of the most tax-advantaged investments available. If you’re a landlord, understanding the deductions and strategies available to you can significantly reduce your taxable income and improve your overall return. Here are the key tax breaks every rental property owner should know about.

1. Depreciation: The Most Powerful Deduction

Depreciation is often the single biggest tax benefit for rental property owners. The IRS allows you to depreciate residential rental property over 27.5 years. This means you can deduct a portion of the property’s value each year — even if the property is increasing in market value.

It’s important to note that only the structure can be depreciated, not the land. For example, if you purchase a rental property for $200,000 and the land is valued at $40,000, you can depreciate the remaining $160,000. That translates to about $5,818 in annual depreciation — a non-cash deduction that reduces taxable income without affecting cash flow.

2. Repairs vs. Improvements

Understanding the difference between repairs and improvements is critical.

Repairs — such as fixing a leak, replacing a broken appliance, repainting between tenants, or repairing HVAC components — are typically fully deductible in the year they’re incurred.

Improvements — like installing a new roof, replacing an HVAC system entirely, or remodeling a kitchen — must generally be depreciated over time. While improvements don’t offer an immediate full deduction, they still provide long-term tax benefits.

Keeping detailed records helps ensure you categorize expenses correctly and maximize deductions.

3. Mortgage Interest and Property Taxes

If you finance your rental property, mortgage interest is fully deductible as a business expense. For many landlords, this is one of their largest annual deductions, especially in the early years of a loan.

Property taxes are also deductible as a rental expense. Unlike personal property taxes, rental property taxes are not subject to the $10,000 SALT cap that applies to personal itemized deductions.

4. Operating Expenses

Most ordinary and necessary expenses related to managing and maintaining a rental property are deductible. This includes:

• Insurance premiums
• Property management fees
• Advertising and marketing costs
• HOA dues
• Lawn care and pest control
• Cleaning and maintenance
• Utilities (if paid by the landlord)

These expenses directly reduce taxable rental income.

5. Mileage and Travel

If you drive to your rental property for showings, inspections, repairs, or to meet contractors, you can deduct mileage. The IRS allows you to use the standard mileage rate or deduct actual vehicle expenses based on business use. Maintaining a mileage log is essential to substantiate this deduction.

6. Qualified Business Income (QBI) Deduction

Many rental property owners may qualify for the Section 199A Qualified Business Income deduction. If your rental activity rises to the level of a trade or business, you may be eligible to deduct up to 20% of your qualified rental income. Eligibility depends on income levels and how the rental activity is structured.

7. 1031 Exchanges

When it’s time to sell, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds into another “like-kind” property. This strategy enables investors to grow their portfolios without paying taxes at every sale.

Rental property ownership offers significant tax advantages, but only if you understand and properly apply them. Working with a knowledgeable CPA and keeping detailed records throughout the year can help you maximize deductions, improve cash flow, and build long-term wealth through real estate.