If you’re renting out a property for income, it’s essential to track and categorize certain fees and expenses accurately for tax purposes. Understanding which costs are deductible—and how to allocate them properly—can save you money and keep you compliant with tax regulations. Let’s break down some common deductible expenses associated with rental properties.
1. Insurance Premiums
Insurance is a necessary expense for protecting your rental property. Most policies are prepaid for a specific coverage period, so it’s important to allocate the expense to the appropriate tax year.
For example, if you purchased a $1,200 insurance policy in March for coverage from April 1 through the following March 31, you would deduct only the premiums applicable to the current tax year. In this scenario:
- Coverage for April through December (9 months) would be deductible for the current year, amounting to $900 or $100 per month.
- The remaining balance for January through March would be allocated to the next tax year.
Important Notes:
- Bundled Policies: If your insurance carrier offers bundled packages (e.g., combining personal and business coverage), ensure only the rental property portion is deducted on your tax return. Personal coverage may qualify for a different deduction.
- Title Insurance: This is not deductible as a current expense. Instead, it must be added to the property’s Cost Basis for capital gains calculations.
2. Cleaning and Maintenance
Routine cleaning and maintenance are deductible expenses, provided they directly relate to the rental property during approved rental periods. Common examples include:
- Cleaning services for common areas.
- Window cleaning.
- Appliance upkeep.
- General property maintenance to ensure it’s in usable condition for tenants.
Limitations:
- Rental Period Only: Cleaning and maintenance costs are deductible only for days the property is available as a rental. Expenses related to personal use days are not deductible.
- Structural Repairs vs. Maintenance: Routine maintenance is deductible, but structural repairs or improvements (e.g., a new roof, major plumbing upgrades) must be added to the Cost Basis of the property and depreciated over time.
3. Repairs
Occasionally, you may need to address small repairs to keep the property functional and appealing. Examples include:
- Fixing appliances.
- Touching up paint.
- Repairing minor damages.
Key Points to Remember:
- Ordinary and Necessary Repairs: Deduct costs that are ordinary, necessary, and directly related to the rental property.
- Rental Days Only: Like maintenance expenses, repair costs must be prorated for the rental period. If the property is used personally for part of the year, repairs during that time are not deductible.
Where to Find More Information
For detailed guidelines, refer to IRS Publication 527: Residential Rental Property (Including Rental of Vacation Homes). This publication provides comprehensive information on allowable deductions, depreciation, and tax rules for rental property owners.
John Huddleston, a Seattle-based CPA and founder of Huddleston Tax CPAs, has been serving small business owners since 2002. He holds degrees from Washington State University and the University of Washington School of Law. With extensive experience in tax matters, he offers valuable insights for rental property owners navigating complex tax regulations.
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