What Are The Tax Benefits Of Rental Property Ownership?

By

The tax benefits of rental property ownership can’t be underestimated. In fact, you could argue the tax write-offs for rental property owners are on par with the cash flow generated by the assets themselves. After all, saving is equally as important as making money, if not more so.

Whether you already own rental property, or you are considering breaking into the industry, you need to familiarize yourself with the tax benefits of rental property ownership; it’s the only way you will truly be able to maximize an investment’s potential.

Property Tax Deductions For Rental Property Owners

Property tax deductions for rental property owners don’t get enough credit for the amount they contribute to a passive income investor’s bottom line. If for nothing else, rental property tax deductions act as a shelter for the cash generated by the property; one that can save a lot more money than many people initially realize. What’s more, qualifying landlords with a rental property that is currently generating income from tenants can claim some or all of the deductions I will discuss moving forward. Some of the most common expenses include, but are not limited to:

  • Mortgage Interest
  • Property Tax
  • Operating Expenses
  • Depreciation
  • Repairs

To be clear, however, rental property owners are not allowed to deduct every dollar they spend on an asset. There are rules to abide by, not the least of which the I.R.S. describe as ordinary and necessary. According to the I.R.S. website, “You can deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.”

Everything you claim will need verification. Do not — I repeat, do not — assume you can simply make deductions without having the proof to back them up. You must keep good records of all your expenses. Good records will make tax season a lot easier on rental property owners, so be sure to keep track of where every dollar is going.

According to the I.R.S., “You must be able to document this information if your return is selected for audit. If you are audited and cannot provide evidence to support items reported on your tax returns, you may be subject to additional taxes and penalties.”

The tax benefits of rental property are as apparent as they are plentiful, but you must keep track of your expenses to take advantage of them.


[ Thinking of buying a rental property? Get a FREE downloadable copy of our “Essential Contract Pack For Cashflow Real Estate Investors” ]


Tax benefits of owning a rental property

Tax Write-Offs For Rental Property Owners

The following represents a comprehensive list of the most common tax write-offs for rental property owners:

  • Loan Interest: The single largest deduction for most rental property owners, the loan interest deduction allows qualifying owners to write off the interest they pay each year. It’s worth noting, however, that most loans are front loaded with interest payments. As owners pay down their mortgage obligation, there’s a good chance their write-offs will decrease in the later stages of the loan.
  • Rental Property Depreciation: Qualifying rental property owners are allowed to write off a portion of the original purchase price each year over what has been deemed by the I.R.S. to be the “useful life” of a property (typically 27.5 years).
  • Taxes: Business-related wage taxes, permit fees and personal property taxes are considered allowable deductions when tax season comes around.
  • Repairs: According to the I.R.S., “an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.”
  • Maintenance: Not to be confused with repairs, maintenance doesn’t require that you fix anything, but rather maintain it. Cutting the lawn, for example, represents maintenance.
  • Monthly Utilities: It is entirely possible to deduct the monthly utilities spent to keep the property operating.
  • Local Transportation Expenses: You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property.
  • Management Fees: Fees associated with hiring a third party management company can be written off.
  • Advertising: Savvy rental property owners can write off their advertising expenses incurred to make sure the property remains in operation.
  • Commissions: Whether they are tenant referral commissions or for other managers, commissions can be written off.
  • Legal & Other Professional Fees: Fees incurred from legal or professional assistance can be written off in the same tax year.
  • Points: Because points are prepaid interest, you generally can’t deduct the full amount in the year paid, but must deduct the interest over the term of the loan.

Tax Benefits Of Rental Property Depreciation

The unsung hero of today’s greatest passive income investors, rental property depreciation is perhaps the greatest benefit nobody is talking about. At the very least, more people would be talking about rental property depreciation if they knew what it was and — more importantly — how incredible it is. In its simplest form, however, rental property depreciation is the single greatest tax benefit awarded to passive income investors.

Rental property depreciation, for the most part, is exactly what it sounds like: the inherent loss in value of a rental property. Not unlike the depreciation of something like a car, rental properties are business expenses that depreciate in value over time. Otherwise known as depreciation losses, the perceived loss in value of a home over time actually plays to the owner’s benefit, as the I.R.S. is willing to compensate the owner for the decrease in value of the rental.

The I.R.S. defines depreciation losses as “allowances for exhaustion, wear and tear (including obsolescence) of property.” According to their website, “You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization, (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.”

Perhaps even more importantly, rental property owners may deduct a portion of the initial cost of the home every year for 27.5 years, the amount of time the I.R.S. has deemed the deductible life of a single-family home.

You may be asking yourself where I am going with all of this. Better yet, you may be wondering how depreciation is so advantageous to rental property owners. The answer is simple: the phantom deduction. Otherwise known as depreciation losses, the phantom deduction is one of the greatest benefits awarded to rental property owners. You see, homes have historically risen in value. While there are certainly times homes drop in value, history tells us they will increase in value more often than not. Therefore, any deductions you make on a single-family home over the course of the allotted 27.5 years are most likely made in the face of rising prices — hence the name phantom deduction.

The tax benefits of rental property ownership are as important as the cash flow passive investors have come to expect. If for nothing else, saving money is just as important to your bottom line as making it. Not only that, but the tax savings could be just what you need to elevate your career to the next level.


Key Takeaways

  • The tax benefits of rental property ownership are as important as the cash flow passive investors have come to expect.
  • Property tax deductions for rental property owners don’t get enough credit for the amount they contribute to a passive income investor’s bottom line.
  • The income tax benefits of rental property are the reason some investors enter the business in the first place.