Blog & Advice

Tax Tips for Rental Property Owners

Filing taxes can be complex for first-time investors and experienced property owners alike. To maximize your investment, it’s worth researching all the rental home tax deductions available and creating a system to organize expenses related to rental property ownership. We’ve put together some of our top tax tips for landlords to help you realize your investment's true value, whether you’re claiming rental income on taxes or reviewing the tax implications of buying a rental property.

This guide is broken into four sections to make it easy to digest information and plan your 2024 taxes before the April 15 deadline.

- Home Rental Property Tax Deductions
- Claiming Rental Home Income on Taxes
- Tax Consequences of Selling a Rental Property
- Tax Implications of Buying a Rental Property

There’s a lot here, and every investor’s situation is unique. For expert tax advice for rental property owners, contact the Real Property Management location nearest you to speak with a professional.

Home Rental Property Tax Deductions

Rental investors can claim many recurring and one-time rental property expenses related to acquiring, maintaining, and using rental properties. Some write-offs for rental property owners, like repairs, are straightforward and well-known, but there are other landlord deductions you may not know about.

Some of the most important rental house tax deductions include:

- Mortgage interest – This is deductible on both your primary residence and rental properties
- HELOC – You can deduct interest from any home equity line of credit (HELOC) or loans used to improve the property.
- Property taxes – This is deductible in the amount that was most recently assessed.
- Insurance – Premiums are tax deductible for all property insurance.
- Maintenance and repairs – These are costs to keep the property in working order. Not all improvements are tax deductible, although many upgrades, such as installing energy-efficient HVAC systems, may still be eligible for some rebates.
- Depreciation – This is tax deductible, although the deduction only applies to the building's value, not the land’s value.
- Advertising – This is tax deductible as long as it is directly related to finding tenants.
- Travel – Property owners can deduct expenses related to travel to and from their rental property for inspections or assisting tenants.
- Professional fees – Property management, accounting, and legal costs are tax deductible.
- Utilities – These are tax deductible for rental property owners as long as the landlord pays for them and the bills are in the landlord’s name.
- Vacancy losses – You may be able to deduct an additional portion of mortgage interest and property taxes from during the vacant period.

Can You Write Off Property Management Fees?

Yes, rental investors can write off property management fees on their taxes. Property management falls under the professional services deduction category, just like accounting and legal representation.

Most property management tax deductions are offered at the federal level, but there may be additional benefits at the state level worth exploring.

Is Mortgage Interest Tax Deductible on a Second Home?

While mortgage interest is deductible on additional properties, there are some important limitations. The total amount of mortgage interest you can deduct across any number of properties is limited to $750,000 for married couples filing jointly and $375,000 for married couples filing separately, or for individuals. The loans must also be used to acquire a property (i.e., a mortgage) or to build or improve a property (i.e., HELOC). You must also itemize deductions on Schedule A of your taxes. In many cases, rental income and expenses must be separated by personal and rental use.

How to Claim Rental Income on Taxes

Rental income is taxable and must be claimed on federal and state taxes. To report your rental income, you’ll need a detailed accounting of all rental income and expenses, your net rental income or losses, and a 1040/1040-SR.

Rental income includes:

- Rent payments from the tenant
- Security deposits
- Income from subleases (if applicable)
- Any additional payments for the use of the property, including parking or additional storage space

You can offset that rental income by including relevant expenses. Rental expenses include all the costs listed above under “Rental Property Tax Deductions,” though the biggest expenses are typically:

- Mortgage interest
- Insurance
- Utilities
- Repairs

Calculating Net Rental Income (NRI)

The formula to calculate net rental income is:

NRI = Total rental income – total rental expenses

Real Property Management clients have access to our Wealth Optimizer, a tool that forecasts the long-term growth of rental income and profit – crunch the numbers on your investment.

Is Rental Income Taxed as Ordinary Income?

In nearly every scenario, rental income is taxed at the same rate as wages, salaries, or other forms of earned income. However, there is an additional tax on selling a rental property: the capital gains tax.

The Tax Consequences of Selling Rental Property

In most cases, investors sell rental properties at a net gain, but they don’t get to keep all their returns. Selling a rental property involves additional taxes. Owners must pay a capital gains tax on the investment property the year after selling it.

Capital gains are the financial profit of selling an asset for more than you paid. The capital gains tax rate on rental property depends on the length of ownership:

1. Long-term capital gains apply if you’ve owned the property for more than a year. Long-term capital gains tax rates are usually lower than ordinary taxable income rates.
2. Short-term capital gains apply if you’ve owned the property for less than a year. Short-term rates are usually the same as ordinary taxable income.

How Do I Calculate Capital Gains on a Rental Property?

Calculating the capital gains tax on a rental property also accounts for depreciation and your income tax bracket. In addition to the final sale price, you’ll also need to establish an adjusted basis, which is the initial cost of the property plus the value of any improvements you’ve made.

This results in the formula:

Capital gain = Sale price – Adjusted basis

The resulting figure is then taxed at your household income tax rate, ranging from 10% to 37%.

Is Rental Income Capital Gains?

No, rental income is not considered capital gains and is not included in the calculation. Rental income is taxed at the same rate as normal salaried income in nearly all scenarios.

Tax Implications of Buying a Rental Property

Investors often decide to buy rental properties to lower taxes, diversify their portfolio, and hedge against market volatility. Especially for first-time buyers or those inheriting a property, rental tax deductions are just one of many considerations; other important decisions for investors include hiring a property management company and separating personal and business finances.

Take advantage of the many tax deductions listed above as soon as possible. After completing the sale, always start claiming rental property tax deductions the next time you file taxes.

Do I Need an Accountant for My Rental Property?

Depending on your available time and your experience in financing, accounting, and tax regulations, it may be a smart decision to start working with an experienced real estate accountant. Tax regulations become increasingly complex with each additional property and with high income or expenses; sometimes it’s difficult to identify the right deductions. Real Property Management offers comprehensive accounting to maximize deductions and inspire peace of mind.

Do I Need a Separate Bank Account for Rental Property?

While not technically required, it’s highly recommended that you have a separate bank account for your rental property or properties. This establishes a clear separation between personal and rental income, expenses, and liabilities. In some cases, it may be beneficial to establish a limited liability corporation (LLC) as a vehicle for rental property finances. Some multiple-property owners establish a different LLC for each property; for more advice on organizing your properties, consider contacting a legal expert.

Make Rental Property Tax Deductions Work for You

Leveraging tax deductions is important for realizing investment gains, whether you own one property or a dozen. Real Property Management offers investors accounting and financial support, and a range of services designed to maximize property value and returns. See what our experienced team can do for you; find a location and request an assessment today.