Owning rental property comes with a tax filing obligation most new landlords underestimate — and a set of deductions most underuse. The IRS taxes your net rental income (revenue minus allowable expenses), and depreciation is the most powerful deduction available: it lets you write off the cost of the building over 27.5 years, even while the property's market value rises.
What Counts as Rental Income
The IRS considers any payment you receive for the use of your property as rental income, including:
- Monthly rent payments (cash, check, digital)
- Advance rent — first and last month collected upfront
- Security deposits you keep (only the portion you keep, not refundable amounts)
- Services rendered in lieu of rent (e.g., a tenant who repairs the deck in exchange for rent)
- Lease cancellation fees paid by the tenant
Deductible Rental Expenses
Against that income, you can deduct ordinary and necessary expenses for managing and maintaining the property. Keep receipts for everything.
- Mortgage interest (not principal — only the interest portion)
- Property taxes
- Landlord insurance premiums
- Repairs and maintenance (not improvements — see below)
- Property management fees
- Advertising and tenant screening costs
- HOA fees (if the property is in an HOA)
- Professional services: accountant fees, legal fees related to the rental
- Travel to the property for management purposes
- Home office deduction if you run the rental as a business from a dedicated space
Depreciation: Your Biggest Deduction
Depreciation allows you to deduct the cost of the building (not land) over 27.5 years — the IRS-mandated useful life for residential rental property. This is a non-cash deduction: you don't spend any money to claim it.
Annual Depreciation = (Purchase Price − Land Value) ÷ 27.5 Example: $280,000 property, $50,000 land value → Depreciable basis = $230,000 → Annual deduction = $230,000 ÷ 27.5 = $8,364/year This can shelter $8,364 of rental income from tax annually — even if the property is cash-flow positive.
Repairs vs Improvements
Repairs are immediately deductible. Improvements must be capitalized and depreciated over their useful life. The distinction matters:
- Repair (deduct now): fixing a broken window, patching drywall, repainting a room, replacing a broken faucet
- Improvement (depreciate): adding a new bathroom, replacing the entire roof, renovating a kitchen, adding central air to a property that didn't have it
- Gray areas: replacing a worn-out appliance is often a repair; installing a new appliance in a unit that didn't have one is an improvement
Passive Activity Rules and the $25,000 Allowance
The IRS classifies rental income and losses as "passive" for most landlords. Passive losses can normally only offset passive income — not wages or business income. However, there's an important exception:
If you actively participate in managing your rental (approving tenants, setting rents, approving repairs) and your modified AGI is below $100,000, you can deduct up to $25,000 of rental losses against ordinary income. This phases out between $100,000 and $150,000 AGI.
Real estate professionals (those who spend 750+ hours/year in real estate activities and more than 50% of their working time in real estate) can deduct rental losses without the passive activity limitation.
Keeping Clean Books from Day One
Open a dedicated checking account for each rental property. Run all income and expenses through it. This makes tax filing dramatically simpler and protects you in an audit. Track income and expenses monthly — don't reconstruct a year from bank statements in April.
Most landlords use Schedule E (Form 1040) to report rental income and expenses. If you own multiple properties, each gets its own Schedule E entry.
Every trip to the property for management purposes — showing units, meeting contractors, making repairs — is deductible at the IRS standard mileage rate. Use a mileage tracking app (MileIQ, Everlance) from your first month. Reconstructing trips at tax time is nearly impossible.
Rental property taxes reward landlords who keep good records. The combination of operating deductions and depreciation often makes a cash-flow-positive property show a paper loss for tax purposes — legally sheltering that income. Work with a CPA who has rental property experience, especially in year one when the setup decisions (cost basis, land allocation, depreciation method) affect your taxes for decades.
