Tax Deductible Rental Property Expenses, Part 1

Interest

The primary type of interest you will likely deduct 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. On the other hand, when you’re renting a room in your own home, or if it’s a duplex and you’re living in the other unit, you 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 will always go on Schedule A of your Form 1040 and not on Schedule E. Additionally, 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

Promoting your 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 legal counsel to compose a rental contract or start legal actions for you to evict a tenant, you could deduct these payments. You can also deduct fees paid to a tax accountant for the preparation of the Schedule E of your tax return from the year prior. But do not forget to pro rate the overall 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 realtor groups for managing the rental property are deductible as well.

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