Common Rental Property Deductions

Overview: Common Rental Property Deductions

The most common rental property deductions for multifamily investors fall into a few main categories: operating expenses, depreciation, and interest payments. Here's a breakdown of these categories and when they can be used:

1. Operating Expenses

These are the day-to-day costs of running and maintaining the rental property. These expenses can be deducted in the year they are incurred, as long as they are ordinary and necessary for the business. Examples include:

Repairs and Maintenance: Minor repairs (e.g., fixing a leaky faucet, patching a roof) are deductible in the year the expense occurs. Major improvements (like new roofing) must be depreciated.
Property Management Fees: If you hire a property manager or use a management platform, their fees are deductible.
Utilities: If you pay for water, electricity, or other utilities for the property, those costs are deductible.
Insurance Premiums: Insurance for your rental property is deductible in the year you pay the premium.
Legal and Professional Fees: Fees for accountants, attorneys, or any professional services related to managing the property can be deducted.

2. Depreciation

Buildings: Residential rental property can be depreciated over 27.5 years. Depreciation allows you to recover the cost of the property over time, rather than all at once. Depreciation begins when the property is ready and available for rent (not when you purchase it).
Capital Improvements: Major upgrades or improvements, such as a new roof or heating system, must be capitalized and depreciated over their useful life rather than deducted in the year the expense is incurred.

3. Mortgage Interest

Loan Interest: If you have a mortgage or other loans on the rental property, the interest payments are deductible. Only the interest portion, not the principal payments, is deductible.

4. Taxes

Property Taxes: Any state and local property taxes on rental property can be deducted as an expense.

5. Travel Expenses

Vehicle Expenses: If you use your car to manage your property (e.g., collecting rent, meeting tenants, traveling to the hardware store), those travel expenses can be deductible either by using the standard mileage rate or actual expenses.
Out-of-town Travel: If you own properties in another location and need to travel for property management or maintenance, the travel expenses, lodging, and meals (50% of meals) can be deductible.

6. Casualty Losses

If your rental property is damaged or destroyed by a sudden event (e.g., natural disasters, theft), you may be able to deduct part or all of the casualty losses not covered by insurance in the year the event occurred.

7. Home Office Deduction

If you run your rental business from a home office, you may be able to deduct part of your home expenses (e.g., utilities, mortgage interest, depreciation on the home office portion).

8. Employee and Contractor Payments

Wages or Fees: If you pay workers (e.g., a handyman or cleaning staff), their wages or contractor fees are deductible as long as they are related to the rental business.

9. Advertising and Marketing

Costs associated with marketing vacant units, such as online listings, signs, or other promotional materials, can be deducted in the year they are incurred.

Key Points on Timing:

Ordinary operating expenses are deductible in the year they occur.
Depreciation is spread out over several years (27.5 for residential property, specific schedules for improvements).
Capital improvements must be depreciated, not deducted in the year you incur the cost.

Remember to keep detailed records of all your expenses and consult a tax professional when dealing with depreciation and capital improvements - rules and regulations can be complex.