10 rental property tax deductions to maximize profits

March 28, 2023

Rental real estate investments are a proven way to earn passive income and build wealth. Awareness of the many tax-deductible expenses involved with rental property is valuable to increase profits. Here are ten of the most common deductions.

1. Property depreciation

Rental property is depreciated over 27.5 years at a rate of 3.636%. Each year the total amount paid for the property (minus the value of the land) will be deducted from your taxes. Land does not wear out, so the cost cannot be deducted. 

For example, a property that costs $240,000 with an assumed $40,000 value on the land would be deductible by $200,000. $200,000 at 3.636% equals a $7,272 deduction on your taxes each year.

2. Mortgage Interest

The amount you pay yearly in interest on a mortgage for the property can also be deducted. Your mortgage company will send you a form 1098 detailing this amount each year. Combined with the property depreciation, you will already have a fair-sized yearly deduction.

3. Insurance

You will want to secure adequate insurance coverage for your property. In addition to hazard, fire, and liability insurance, additional coverages are available. Earthquake, hurricane, flood, and loss of income insurance are options. Loss of income insurance covers the loss of income if your rental property becomes uninhabitable due to damage. All insurance to protect your rental property against losses can be deducted.

4. Property Taxes

Property taxes paid on your real estate investment are another deduction the IRS allows. Up to $10,000 (married) or $5,000 for single filers can be deducted. This limit does not apply to business activities. Your level of involvement in the rental property determines if you can use the larger business activity amount. 

5. Capital improvements, repairs, and maintenance

Capital improvements and repairs are both works performed on the rental property. The difference is that capital improvements improve, restore, or adapt the rental property to a new or different use, while repairs fix the property back to its original condition. Capital improvements are generally more expensive and involve projects that must be deducted over several years, while repairs will reduce taxes in the year they are performed.

6. Utilities

Utilities that you pay for on your rental property are tax deductible. Essentials like gas, electricity, and water to provide a comfortable and livable space can be claimed on your yearly taxes. Additionally, conveniences like internet and cable can be deducted.

Single-family property owners often have renters pay for the utilities. However, these rental properties can be renovated to provide additional rooms with PadSplit. Even though the host pays for the utilities with this form of affordable housing, the ROI is higher with the income from extra bedrooms. Making use of the utility tax write-off increases profits further. 

7. Travel Expenses

You may need to travel more as your rental portfolio grows. These transportation expenses are deductible. This includes visits to your properties and traveling to meet with accountants, property management, contractors, or attorneys. The standard mileage rate was increased to 62.5 cents per mile for the second half (July 1-December 31) of 2022.

8. Home Office

Space set aside at your house as an office for your rental property needs is tax deductible. This portion of the residence must be exclusively used regularly for business purposes. The simplified option to calculate this is $5 per square foot times the square footage of the space. This simplified option is capped at 300 square feet.

9. Tax and legal fees

Any costs incurred through legal fees to oversee rental agreements or resolve issues can also be deducted. If you hire a CPA to prepare your rental property tax return, they will write off their costs during your tax preparation. Detailed record-keeping is vital to maximizing deductions and increasing your profits.

10. Property Management/Advertising Costs 

Rental properties require time and money to advertise, screen renters, schedule repairs/maintenance, and more. Many people hire a property manager to take care of this. This expense can be deducted yearly as well. PadSplit provides rental property management and advertising while providing 100% better returns.

Make more money with your rental property

At PadSplit, we believe in providing affordable housing while giving our hosts higher returns. This is why we say, “Make more money, do more good.” With a 97% collection rate, simplified screening, reduced vacancy costs, and resident management, hosts are provided with a simple way to earn passive income. Use our calculator to see how much more you could earn with PadSplit, and then contact us to become a host and increase your profits.

Explore our posts

10 rental property tax deductions to maximize profits
PadSplit Impact Report
The Las Vegas housing crunch: Is coliving the answer?