Rental property expenses and tax treatment

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Rental property expenses and tax treatment

You need to evaluate the costs to determine if 1.) they are eligible to be immediately deducted on your tax return or 2.) whether they are capital improvements that must be capitalized depreciated (link article here for capital improvement / depreciation -> inc image of phasing blocks vs taking everything at once).

Two types of rental income expenses: General Expenses vs. Capital Improvements
  • Capital improvements: A capital improvement is an addition or change that increases a property’s value, increases its useful life, or adapts it (or a component of the property) to new uses. These items fall under categories sometimes called betterments, restorations, and adaptations. If you do determine that an expense is a capital improvement, it needs to be depreciated. Learn more about capital improvements and depreciation.
  • General Expenses: Generally one-time expenses that are incurred to keep your property habitable and in proper working condition. These are considered tax write-offs that can be deducted all at once in the same in the tax year that you paid for them.

In our theoretical example below, a rental property owner has purchased a new appliances (e.g. fridge and stove) for $2,500 in the tax year. If you evaluate the purchase and determine that it is a Capital Improvement you'd spread the cost as a Depreciation Expense over the time that you can expect to use the asset. In this case, $500 per tax year. This is also called the "useful life" of the asset. Alternatively, if you think that purchase of the appliances is an General Expense then you'd include the entire cost of the appliances, all $2,500, on you tax return in the tax year you purchased it and deduct the expense from the rental property income.

Tax Treatment: Capital improvement vs. General expense

In our continuing example, if you evaluate the purchase and determine that it is a Capital Improvement, depreciate it, and take depreciation expense of $500 per month. Pahsing the expense over 5 years. Your theoretical taxable income will be $3,040. Higher in tax year 1.

On the other hand, if you determine that the purchase is a General Expense then you'd take the entire cost of the purchase ($2,500) as an expense in tax year 1. Your theoretical taxable income would be lower in year $2,400.

Theoretical Taxable Income: Capital Improvement vs. General Expense

Now that we've chatted about the differences between Capital Improvement and General Expense let's move on and look at specific examples of each type of expense so you can be sure to properly classify your purchases and think strategically about your rental property income and expenses.

Rental property tax deductions and write-offs

Here's a comprehensive list of common rental property expenses. Make sure to evaluate whether they're general expenses that can be immediately deducted from your tax return or capital improvements that need to be depreciated.

  • 📺 Advertising: Every dollar you spend on Facebook Ads, Google Adwords, etc. is a tax deductible expense
  • 🚗 Auto and travel: See below, "if you drive for work")
  • 🚽 Cleaning: Cleaning up doesn't sound so bad after you know you can deduct it from your taxes!
  • 🗞 Commissions & platform fees: The percentage AirBnB takes for every guest? Don't worry you'll get it back in write offs!
  • 🛡 Insurance: Naturally, you'd have home insurance for your rental property
  • Legal and other professional fees: If you've had to set up an LLC or have other legal fees, accounting, and tax prep for work, that's tax deductible.
  • ✅ Management fees: If you have someone or an agency that helps manage your rental property, you can write this off.
  • 💸 Mortgage interest paid to banks: The mortgage interest on your rental property mortgage is tax deductible.
  • 💰 Other interest: You may have other loans or interest expense that relate to your rental property, these could be tax deductible.
  • 🔧 Repairs, maintenance, or redesign: Write off anything related to keeping your rental space safe and cozy! However, some repairs or improvements may need to be depreciated Learn more
  • Supplies: Hammer, ruler, pencils; Anything you need to get the job done, write it off!
  • 📈 Taxes: Property and other taxes related to owning and maintaining your rental property.
  • 💡 Utilities: If you use your phone for work (who doesn't?) then it's partially deductible. Water and power that isn't paid for by tenant is a write-off!
  • 🔑 HOA Fees: If you purchase or use the property as a rental property, then the IRS will allow you to deduct HOA fee.
  • 🌨 Snow removal & Landscaping: Tenants can't enjoy their yard or get into the property if it's blocked by snow! Yes, both are tax deductions!
  • 🏠 Leasing commissions: Commissions you pay to agents or employees are fully deductible business expenses.
  • 🚜 Depreciation expense or depletion: This is so much fun we're going to dedicate an entire section to it.
  • 📙 Education: Registration fees and materials for courses that help you keep up with how you run your rental property are tax deductible.
  • 🏛 Bank Fees: Yes, you can deduct them if you have a bank account dedicated to supporting your rental property.
  • 👷 Employees & Independent Contractors:  If you employ people that help your rental property, that's tax deductible!
  • 🗄 Home Office Expenses: See, If you work from home below
  • 🍎 Business meals:  If you discuss work at a restaurant below

Airbnb & Short-Term Rentals additional write-offs ...

Opening up your home or using your extra apartments for AirBNB is a great way to get to know travelers and support your income with already available assets. AirBNB has become the go-to for tourists when visiting a new city, but trying to give your guests the warmest welcome to your town can sometimes dip a little too much into your wallet. Don't worry we're here to help you see how you can save that extra dime when tax season comes around.

  • 🍎 Guest amenities & treats
  • 🛁 Hosting essentials
  • 💰 Platform service fees
  • 📺 TV streaming services
  • 🍴 Meals with guests

If you drive for work ...

If you have to drive between the rental properties, for maintenance or to help check-in clients, this still counts as work, and you'll be able to write off on the mileage between properties.

Note: It's also possible to report the miles you drive for work instead of actual car expenses, but unless you drive a lot for work, you'll save more time & money with tracking car expenses. Learn more

  • 🛣 Mileage on car (or car expenses)
  • 🔧 Car maintenance
  • 📰 Car insurance and registration
  • ⛽ Gas
  • 🅿 Parking
  • 🛂 Tolls
  • 🚜 Vehicle depreciation

If you work from home ...

If you're renting out a room in your own home, you'll be able to claim the home office deduction!

Note: you don't need to work from a separate room to claim these write offs. A dedicated desk is sufficient. Learn more

  • 🗄 Home office furniture
  • 📶 Wi-Fi bill
  • 📄 Property insurance
  • 💡 Power bill
  • 🚰 Water bill
  • 💰 Part of your rent

If you discuss work at a restaurant ...

The IRS considers any restaurant expense tax deductible as long as the conversation is work-related. This includes discussing industry trends, and even a chat that could turn into a referral.

  • 🍴 Meals for work

If you leave town for work ...

If you travel to attend an Airbnb or rental agency conference in another city, or to a property further that 100 miles from home, that's considered business travel and you can claim the following expenses.

The IRS considers any restaurant expense tax deductible as long as the conversation is work-related. This includes discussing industry trends, and even a chat that could turn into a referral.

  • 🚐 Transportation
  • 🛎 Lodging
  • 🍴 Meals while traveling
  • 👕 Dry cleaning
  • 💰 Tips

If you use the rental property for personal use for a portion of the year ...

  • 🔢 You can only deduct a portion of the expenses from your tax return.

This article is provided for illustrative purposes only; it does not provide personalized tax, legal, financial, or other professional advice. Your situation may be different; consult a professional for information concerning your individual tax, financial, or legal situation before taking any action.