Rental property tax deductions: a complete guide for landlords.

Whether you rent out a duplex in East Dallas, a house you used to live in, or a single room, the rent you receive is taxable income. The good news is that almost every cost of running the rental comes off before tax is worked out, and one of the biggest deductions, depreciation, does not cost you anything out of pocket each year. This guide explains what landlords can deduct, the rules that trip people up, and what to bring to your appointment.

How rental income is taxed

Most individual landlords report rental income and expenses on Schedule E, which is filed with your Form 1040. You add up the rent you received during the year, subtract your deductible expenses and depreciation, and the result is your rental profit or loss. A profit is added to your other income. A loss may reduce your other income, subject to limits explained below.

Rental income includes more than monthly rent:

• Advance rent, such as the first and last month paid at move-in, is income in the year you receive it.
• Fees a tenant pays you, such as late fees or a lease cancellation payment.
• Expenses a tenant pays on your behalf instead of rent, such as a repair bill.
• A security deposit becomes income only if you keep it, for example to cover unpaid rent or damage. A deposit you plan to return is not income.

The deductions most landlords can claim

Keep a receipt or invoice for each expense and note which property it belongs to if you own more than one. Our rental property tracker sorts each cost into the categories Schedule E uses.

Repairs or improvements? The question that matters most

This is where most landlord returns go wrong. The difference decides whether a cost is deducted this year or spread over many years.

• A repair keeps the property in good working order without adding value or extending its life: patching a roof leak, fixing a dripping faucet, replacing a few broken tiles, repainting. Repairs are deducted in full in the year you pay them.
• An improvement makes the property better, restores it after major damage, or adapts it to a new use: a new roof, a kitchen remodel, new central air, an addition or new flooring throughout. Improvements are capitalized and depreciated over time.

There are helpful safe harbors. Under the de minimis safe harbor, many landlords can deduct items costing up to $2,500 each (per invoice or item) in the year of purchase, such as a new refrigerator, instead of depreciating them, if they make the election on the return. A separate safe harbor for small landlords can allow routine repair and maintenance spending to be deducted in full when the building and the yearly spending are below certain limits. These are elections we make for you when they apply.

Depreciation: the deduction people skip

You cannot deduct the price of the rental property in the year you buy it. Instead, the cost of a residential building, not the land under it, is deducted gradually over 27.5 years. On a rental house where the building portion is worth $220,000, that is roughly $8,000 a year of deduction without spending a dollar.

Depreciation starts when the property is ready and available to rent, not when you bought it or when the first tenant moved in. Improvements are depreciated separately, also usually over 27.5 years for the building, with shorter periods for things like appliances, carpet and furniture.

To set up depreciation correctly, bring the closing statement from your purchase, the county appraisal showing the split between land and building value, and a list of improvements with dates and costs.

When the rental makes a loss: passive activity rules

Rental real estate is usually a passive activity, which means losses can normally only offset passive income. There is an important exception for ordinary landlords. If you actively participate, by approving tenants, setting rent and approving repairs, you may deduct up to $25,000 of rental losses against your wages and other income each year.

That allowance phases out as modified adjusted gross income rises from $100,000 to $150,000. Above that, losses are carried forward and used in future years or when you sell the property. They are not lost, just delayed. Real estate professionals who meet strict hours tests are treated differently.

Renting part of your home, or a home you also use

• Renting a room: you report the rent and deduct expenses for the rented part, such as a share of utilities and insurance based on the space used.
• Short-term rentals: if you rent a property for 14 days or fewer during the year and use it as a home, that rent is not taxable, and you do not deduct rental expenses.
• Mixed use: if you use a property personally for more than 14 days, or more than 10% of the days it is rented at a fair price, whichever is greater, it counts as a residence and expenses must be divided between personal and rental use, with limits on deducting a loss.
• Renting to family: renting to a relative below fair market rent counts as personal use, which limits deductions.

Short-term rentals through apps

If you rent through a short-term rental platform, you may receive a Form 1099-K once you pass the reporting threshold. Report the gross rent and deduct the platform's fees, cleaning, supplies and other costs. If you provide hotel-like services such as daily cleaning or meals, the income may be treated as a business on Schedule C with self-employment tax. Texas and the City of Dallas also have hotel occupancy tax rules for short-term rentals.

Selling a rental property

When you sell, your gain is the sale price minus your adjusted basis, which is what you paid plus improvements minus depreciation allowed. The part of the gain caused by depreciation is taxed at a rate of up to 25%, and the rest is usually a long-term capital gain. A rental is not your main home, so the home sale exclusion generally does not apply, although special rules exist if you lived in it. Investors who plan to buy another property may look at a like-kind (1031) exchange. Talk to us before you list the property, not after.

What to bring to your appointment

• Rent received for each property, ideally month by month.
• Form 1098 mortgage interest statements, property tax statements and insurance bills.
• Receipts for repairs, maintenance, management and supplies.
• Your mileage log for trips to the rental.
• Closing statements for any property bought or sold during the year.
• A list of improvements made, with dates and costs.
• Last year's return if we did not prepare it, so prior depreciation carries over correctly.
• Any 1099-MISC or 1099-K you received for rent.

Common questions

Own a rental and want it set up properly? Book a free consultation or call 972-686-1005. The IRS's full guide is Publication 527, Residential Rental Property. This article is general information, not tax advice for your situation.