Topic 02 · 5 min read
Rental Property Tax Advantages
Ordinary and necessary — the two words that decide everything.
Rental income is reported on Schedule E, and nearly every cost of keeping the property rented can be subtracted from it. The test is whether the expense is ordinary (common in the rental business) and necessary (helpful for that business).
What to know
- Schedule E reporting
- Each property gets its own column: rent collected on top, expenses beneath, and the resulting profit or loss at the bottom.
- Operating expenses
- Repairs, cleaning, utilities, management fees, advertising for tenants, legal and accounting fees, and supplies.
- Mortgage interest and property tax
- Usually the two largest deductions in early years, when almost every mortgage payment is interest.
- Insurance and maintenance
- Landlord policies, umbrella coverage, lawn care, pest control, and routine servicing all count.
- Travel
- Mileage or airfare to inspect, maintain, or manage the property is deductible when the trip's real purpose is the rental. A vacation with one walkthrough attached is not.
The tax benefit
Expenses offset rental income dollar for dollar, so a profitable property can show little or no taxable profit.
Worked example
Repair or improvement?
Patching a roof leak for $900 is a repair and is deducted this year. Replacing the whole roof for $18,000 is an improvement and is depreciated over time. Same roof, very different timing.
Watch out for
- Personal use of the property reduces what you can deduct.
- Keep receipts, a mileage log, and a separate bank account for each rental.
- Improvements get capitalized; only repairs are immediate.
Terms from this topic
Schedule EOrdinary and necessaryCapitalizeRepair
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