Part 1: Tax Deducible Rental Property 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. On the flip side, when you’re renting a room in your house, or if it’s a duplex and you are occupying the other unit, you have to pro rate the mortgage expense. See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use. Personal use mortgage interest always goes on Schedule A of your Form 1040 (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

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

Professional Fees

You can deduct professional fees incurred in connection with the rental. For example, if you paid a law firm to write a rental contract, or even to initiate legal proceedings to evict an errant tenant, you may deduct these fees. Also, you’ll be able to deduct fees you paid to a CPA for preparing the Schedule E of your return from the year earlier. Take care to pro rate the total preparation fee between the Schedule E and the rest of the tax return dependent upon the percentage of time the respective sections of the return took. Any fees for preparation of any part of the return other than Schedule E will go on Schedule A as individual tax preparing expense. And, if you pay any commissions or management fees to a realtor for overseeing your rental, then you may deduct these expenditures too.

Tax Accountant +John Huddleston has written prolifically on accounting and other tax related issues of concern to small business owners. He holds a Masters in Tax Law from the University of Washington.