Part 1: Tax Deducible Rental Property Expenses

Interest

The primary type of interest you will likely deduct is mortgage interest. If you’re renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. On the other hand, whenever you are renting a room in your own home, or if it’s a duplex and you’re living in the other unit, you will need 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

Ads in the local newspaper or any paid online marketing for example are deductible expenses when promoting a rental property on the open market.

Professional fees

You can deduct professional fees you incur in connection with the rental. For example, if you paid a law firm to draft a rental agreement, or even to initiate legal action to evict an errant tenant, you may deduct these fees. Additionally, it’s possible to deduct charges paid to an accountant/CPA for preparing the Schedule E of your return from the past year. Make sure to pro rate the total preparation fee between the Schedule E and the rest of your return based upon the percentage of time the respective sections of the return took. Any fees for preparing any section of the return separate from Schedule E go on Schedule A as a individual tax prep expense. Also, whenever you pay any management fees or commissions to a professional realtor for managing your rental, you can deduct these expenditures also.

Auburn CPA +John Huddleston has written numerous articles on accounting and tax topics of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.