Part 1: Tax Deducible Rental Property Expenses

This segment the Rental Property Tax Guide concentrates on the various types of expenses that you may deduct from your gross rental income in order to determine your net rental income. Because there is a variety deductible expenses, this guide breaks down this series of articles into four different forms. This first chapter will target interest, advertising, and professional fee expenses.

Interest

The primary type of interest you will most likely be deducting is interest on the mortgage. If you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Whereas, if you’re renting a room in your home, or if it’s a duplex and you are occupying the other unit, then you’ll have to pro rate the mortgage expense. For more on personal use, see the article entitled Personal Use of Rental Property, which is included in the Tax Guide for Landlords. Personal use mortgage interest always goes on Schedule A of your Form 1040 and not on Schedule E. Also, 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. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. 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.

Advertising

Any fees you incur to promote your rental property and list it on the open market are deductible. For example, advertisements that you pay for from a local newspaper, or any expenses in online advertising, are deductible.

Professional Fees

If you pay legal counsel to write a rental contract or start court actions to be able to evict a tenant, it’s possible to deduct these payments. Also you can deduct the fees of an accountant for preparation of the Schedule E of your tax return from the year before. Make sure to pro rate the total fee between the rest of your return versus the Schedule E portion of you return based on time spent. Any fees unrelated to the Schedule E appear on Schedule A as personal tax preparation expenses. Also any management fees or commissions to realty groups for managing your property are deductible as well.
CPA +John Huddleston has written numerous articles on accounting and other tax related subjects of interest to small business owners. He holds a Masters in Tax Law from the University of Washington.