Tax Deductible Rental Property Expenses, Part 1

This portion of the Rental Property Tax Guide concentrates on the various deductible expenses of your gross rental income in order to calculate your net rental income. Given that there are so many deductible expenses, this guide divides the topic into four different types. This first part will look at interest, advertising, and professional fee expenses.

Interest

The primary type of interest you will most likely deduct is mortgage interest. If you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Meanwhile, whenever you are renting a room in your home, or if it’s a duplex and you’re residing in the other unit, you will 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 will always go on Schedule A of your Form 1040 (not on Schedule E). Also, if you own only a part interest in the rental, you have to 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

Promoting a rental property on the open market, through marketing efforts such as posting newspaper ads or paying for internet marketing, is a tax deductible expense.

Professional Fees

If you pay an attorney at law to write a lease or initiate legal proceedings in order to evict a renter, you may deduct these payments. Also you can deduct the fees of an accountant for preparing the Schedule E of your return from the year prior. 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 professional realty groups for managing your rental property are deductible as well.

Seattle CPA +John Huddleston has written numerous articles on accounting and other tax related matters of interest to small business owners.