There are 4 types of tax deductible rental property expenses. These are expenses you can deduct from your gross rental income in order to calculate your net rental income.
Part 1: Interest, Advertising, Professional Fees
Starting with interest, the main type of interest you deduct is mortgage interest. If you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E.
On the other hand, if you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to prorate the mortgage expense.
Personal use mortgage interest always goes on Schedule A of your Form 1040. Additionally, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed.
Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property. For example, if you took out a personal loan in order to replace carpeting, or fix the roof.
Next is advertising. Any fees you incur to promote your rental property, and list it on the open market, are deductible. For example, ads that you purchase in a local newspaper, or even Google ads you pay for, are deductible.
Finally, you can deduct professional fees you incur in connection to the rental. For example, if you paid a lawyer to draft a lease, or initiate court proceedings to evict a tenant, you can deduct these fees. Additionally, you can deduct fees you paid to an accountant/CPA for preparing the Schedule E of your tax return from the previous year.
Take care to prorate the total fee between the Schedule E and the rest of your return based on how much time it took. Any fees for preparing any part of the return other than Schedule E go on Schedule A as personal tax preparation expense.
Finally, if you pay any commissions or management fees to a professional realtor group for managing your rental, you may deduct those expenses as well.
Part 2: Insurance, Cleaning & Maintenance, Repairs
Now that you are engaged in renting your property out for income, it’s important you ensure certain fees and services are properly set up and recorded for tax purposes. Let’s discuss some of these expenses.
Starting with insurance. As with most premiums, this is usually prepaid in advance for a certain period of time.
An example would be if you purchased insurance for your property in March 2018 for $1,200. The coverage period is from April 2018 to March 31, 2019. Since the coverage period exceeds the current tax year, you must apportion and allocate the premiums applicable to this current year only and carry forward the balance for the next reporting period. In this example your allowed premium deduction would be $900; the nine months covered from April to Dec 2018 or $100 per month of qualified rental use.
Please note that some insurance carriers frequently bundle premium packages between personal and business customers for a discounted rate. You must ensure that you only allocate the portion which is applicable to your business rental property from this deduction. The personal and non-business use may be deductible on your personal income tax return.
Finally, title insurance is not applicable as an expense and must be included in the cost basis of the property.
Cleaning and maintenance can be thought of as the day-to-day maintenance of the property. This is an allowed expense provided it is only for common areas and daily cleanliness. These expenses are also limited to the days the rental days and not personal use days. In other words, if you’re living there and have it professionally cleaned, that doesn’t count.
Many property owners have contracts with local services to maintain the property on an ongoing basis to ensure your property is in working and usable order. This may include such services as window cleaning, dusting, appliance cleaning and upkeep. Only these types of services are allowed, any type of structural repairs and or changes must be allocated to the cost basis of the property.
Finally, let’s go over repairs. On occasion, there may be a need for repairs an appliance, touch up some painting, or some task that does not require a major renovation of the property structure. These costs which are ordinary and necessary are deductible in accordance with the rental period of time.
These costs are usually deductible against the income of the rental property. But, as always, you must not include those periods of personal use.
If you’re looking for more detailed recommendations, you can review the IRS Publication 527 for current regulations to get their exact stance on it.
Part 3: Supplies, Taxes, Utilities
As a Landlord, you may incur certain expenses during the course of business that have some significant impact on your profitability. Among these are Supplies, Taxes, and Utilities. As with other business expenses, you must remove any personal use items as well as determine any periods of time in which the property was used for personal reasons. This is the case even if you are using 1040 Schedule C or Schedule E.
Starting with supplies, this expense can be very tricky and sometimes difficult to maintain, however if set up properly then there should be very few problems come tax season.
First, you need to determine what items would fall into this category. Anything that is used (or consumed) solely to maintain the rental place would be considered supplies.
Now I know what you’re thinking, wouldn’t that make supplies, expenses? They’re slightly different. Expenses are items that are in constant use or have a single-use — this sounds more complicated than it is. For instance, a trash can is a single and constant use (that’s an expense). Small appliances are single and constant use. In a different vein, food would be an expense as it’s a single-use. With me so far?
Supplies are items that you would purchase in bulk for the same purpose. The difference is supplies can be held in storage until consumed. For example, bulks of paper towels, toilet paper, pens, pencils, cleaning supplies (sprays, bleach, detergents), trash bags, etc.
It is very important to note that these items should be inventoried periodically to monitor costs as well as quantities on hand. Keeping a supplies and expenses chart of accounts ledge is the best way to handle this.
Next up, over the course of business there are many taxes you’ll have to pay directly related to the property. As with most jurisdictions, you may receive a separate bill for your property, business, and income taxes. If you operated a rental property in which this is not the case, then as we mentioned earlier you must allocate the percentage of personal use to business use.
This is common with a house in which a homeowner may have “residents” living in empty bedrooms and other spaces. This is a very important area since a miscalculation can cause large interest and penalties when discovered after a tax audit review. It is recommended that on each tax bill make a copy of the original bill and on the copy write down the calculated amounts as back up for your records.
This can be somewhat complicated if you are using a Schedule E and have multiple properties and you receive a tax bill with no separation of address. Real Estate taxes are deducted as applicable to the property assessed and should not include the owner’s basis.
Meanwhile utilities, such as electricity, water, gas, communications, and security may be paid by the Landlord on a single bill. If you have multiple properties, sometimes separate bills are issued. However, if there is any personal use, you must allocate the portions which are business from the personal and report them on the appropriate tax schedules.
For further information please review IRS Publication 527.
Part 4: Landscaping, Hired Help, HOA fees
In order for your rental property to be attractive to prospective renter, it should be found in good and presentable order. These expenses can be deducted against the income received from this property provided they meet the business use requirements. Let’s look at Landscaping, hired help, and HOA fees.
Landscaping is pivotal and the seasonal maintenance of the property (such as grassing trimming, floral arrangements, and other weather related tasks) can be applied to the rental income for the property. In some of these services you may be required to pay for the cost of the plants, shrubs, etc. Most of these types of services are performed similar to your main home landscaping, however these costs are limited to only the portion of time in which the property is not personally used.
Next, hired help is also a tax deductible expense that can be used for services such as property security review, greeting new renters, and even a concierge type of service such as a tour guide for the local area.
This service should be set forth in an agreement between yourself and the parties involved, and can be expensed against the revenue of the property during allowed rental days. Please note that these services should not be used in return for rental use otherwise it would be classified as personal use days since you had a material benefit from this.
Also note that these payments may need to be reported under a 1099 if they exceed the $600 threshold. Because of this when using hired help, it is usually best to use a service organization which would handle some of these requirements.
Finally, there’s HOA (Home Owners’ Association) fees that are deductible. Since these types of dues assessments are usually periodic, they can be used to offset the income from the rental property. Many of these associations perform services use as property maintenance, administration services, etc.
Note that HOA’s should not be duplicated in other areas such as landscaping and hired help. Using an HOA can be a benefit since most of the services needed to maintain and run your property can be managed by them as a bundled service assessment fee.
For more information, please review IRS Publication 527 for current regulations. Also, included please review the worksheet which will assist in the allocation between business and personal use time.