The Landlords Tax Secrets Handbook + FAQs
- December 19, 2024
- 7 min read
If you think you’ve got your rental taxes handled, think again—according to a 2021 National Association of Realtors study, 58% of landlords fail to claim their full property depreciation deductions, missing out on thousands in annual tax savings.
Since you want to keep more profits where they belong (in your pocket), we reveal exactly how the pros legally squeeze the most tax benefits from every rented square foot.
Key Tax Terms
Rental Income
Rental income includes the rent you collect plus certain fees. If your tenant pays $1,500 each month, that $18,000 a year is rental income (IRS Pub 527). Security deposits may not count as income if you plan to return them.
Depreciation
A way to spread out the cost of buying property over several years on your taxes.
Basis
The starting value you use to figure out gains, losses, and depreciation on your property.
Ordinary and Necessary Expenses
Common and helpful costs that keep your rental running, such as repairs and insurance.
Repairs vs. Improvements
Repairs fix something broken and can be deducted right away, while improvements add value and must be spread out over time.
Passive Activity
An income source where you are not actively involved, like most rental properties.
Material Participation
When you spend enough time and effort managing a rental to treat it as active work for tax purposes.
Real Estate Professional Status
A tax category for people who work mostly in real estate, letting them fully use rental losses against other income.
Cost Segregation
A method of breaking your property into parts so you can write off some parts faster than the building itself.
Capital Improvements
Big changes that raise your property’s value or extend its life, rather than just fixing something.
Amortization
Spreading out certain costs, like loan fees, over a set period instead of deducting them all at once.
Schedule E
The tax form landlords use to report income and expenses from rental properties.
Choosing a Business Structure
The way you set up your rental business can affect both your tax liability and personal risk.
For example, a sole proprietorship is the simplest structure but offers no personal protection if something goes wrong. An LLC can create a legal wall between you and your rental activities, protecting your personal assets if a tenant sues.
Other options, like S corporations, can help reduce your tax burden by allowing you to pay yourself a set salary and reduce your overall taxable income.
Sole Proprietorship
You own the rental in your own name. You buy a small house and rent it out, and all income and expenses are yours directly.
Who It’s Best For
First-time landlords starting out on their own.
Number of Units
Ideal for those with just 1 rental unit.
Short vs. Long Term
Better suited for long-term tenants rather than frequent guest turnover.
Why
Easiest to set up and no special filings, but no personal liability protection if a tenant sues.
Partnership
You share ownership with one or more people. You and a friend each invest in a duplex and split the money earned and the costs.
Who It’s Best For
Two or more investors who trust each other and want to share decision-making.
Number of Units
Works well with a small portfolio, like 2-4 units.
Short vs. Long Term
More stable for long-term rentals rather than unpredictable short-term stays.
Why
Simple to form, easy to split profits, but everyone shares liability if something goes wrong.
Limited Liability Company (LLC)
Your personal stuff is safer if someone sues your business. If a tenant gets hurt and sues, they go after the LLC’s property, not your personal bank account.
Who It’s Best For
Owners who want personal asset protection and flexibility as they grow.
Number of Units
Good for mid-sized holdings, around 4-10 units.
Short vs. Long Term
Can handle both long-term leases and short-term guest rentals without risking personal assets.
Why
Creates a legal shield between your personal and business assets, while keeping management relatively simple.
S Corporation
A special type of business that can save you money on certain taxes. You can pay yourself a set salary and pay less tax on the rest of the income.
Who It’s Best For
Landlords running a more formal business, looking for tax savings on self-employment income.
Number of Units
Generally best once you have 10 or more units and are treating your rentals as a business.
Short vs. Long Term
Suited for both, but often used when long-term stability allows steady owner salaries.
Why
Can reduce certain taxes by paying yourself a salary plus dividends, but comes with more rules and paperwork.
C Corporation
A regular corporation that pays its own taxes, separate from you. If your big rental business becomes a C Corp, the company itself pays tax before you pay tax on any money you take out.
Who It’s Best For
Large-scale investors building a significant rental empire.
Number of Units
Typically for those with 20+ units and big growth plans.
Short vs. Long Term
Flexible, can mix short-term and long-term rentals, often focusing on reinvestment and expansion.
Why
The corporation itself pays taxes, allowing profits to stay in the business for major growth, though dividends face double taxation if paid out to owners.
Use Depreciation for Bigger Savings
Depreciation Basics
You cannot deduct the full cost of your rental building in one year. Instead, you write off a part of it each year—usually over 27.5 years for a residential rental (IRS Pub 527). For example, if your rental home’s basis (not including land) is $275,000, you might deduct about $10,000 a year.
If you claim about $10,000 in yearly depreciation on a $275,000 property (building portion only), and you’re in a 22% tax bracket, that’s roughly $2,200 saved each year in actual taxes.
Cost Segregation
Cost segregation splits the property into parts that wear out faster, like appliances or carpeting (IRS Cost Segregation ATG). These items may be depreciated over 5 or 7 years. This gives you bigger deductions early on. For example, a $5,000 appliance might be deducted quicker than the building structure.
Let’s say you identify $5,000 in items that can be depreciated over 5 years instead of 27.5. Depreciating $1,000 per year at a 22% tax rate saves about $220 annually. Over the shorter timeframe, you’ll get that $1,100 total tax savings much sooner than if spread over 27.5 years.
Bonus Depreciation and Section 179
For some years, tax laws allow bonus depreciation or Section 179 deductions (IRS Pub 946). This can let you write off part or all of an item’s cost right away. For example, if you buy new rental furniture, you might deduct it in full this year instead of over many years.
If you claim $10,000 as bonus depreciation in the first year instead of spreading it out, and you’re in a 22% bracket, that’s around $2,200 saved in the current tax year.
Deducting Expenses to Lower Taxable Income
Property-Related Costs
Mortgage interest, property taxes, and insurance are common deductions (IRS Pub 527). If you pay $8,000 in mortgage interest, that reduces your taxable income by $8,000. HOA fees and utilities you pay also count.
Yard Waste Disposal Bins
Special bins for garden clippings keep outdoor spaces tidy.
Fire Extinguishers and Safety Gear
Safety equipment that protects tenants and property.
Winterizing Supplies
Tools like salt and shovels that prevent slips and damage in cold weather.
HOA Special Assessments
Extra fees from homeowner associations for property improvements.
Noise Monitoring Devices
Tools to track and prevent disruptive noise.
Pest-Preventive Landscaping
Landscaping measures that reduce pests and protect the property.
Repairs vs. Improvements
Fixing a broken door is a repair and is fully deductible right away. Replacing all the doors in the house is an improvement, which you must depreciate (IRS Tangible Property Regulations).
A $200 plumbing fix is a direct deduction now, while a full kitchen remodel costing $5,000 is spread out over many years.
Repairs
Fixes that restore something to its original condition without adding new value or extending its life.
Leaky Faucet Repair
Fixing a dripping tap to save water and prevent damage.
Patchwork on Drywall
Sealing holes or cracks to keep walls smooth and appealing.
Replacing Broken Tiles
Swapping out damaged tiles to maintain safe, even surfaces.
Fixing a Faulty Thermostat
Adjusting or replacing controls for consistent heating or cooling.
Repairing a Damaged Fence
Mending panels or posts for security and curb appeal.
Replacing a Cracked Window Pane
Restoring a window’s integrity for safety and efficiency.
Unclogging Drains
Clearing blockages for proper water flow and avoiding backups.
Fixing a Malfunctioning Outlet
Ensuring outlets work safely for tenant electronics.
Improvements
Changes that add value, extend the property’s life, or upgrade its usefulness.
Window Treatments
Curtains or blinds that make units more appealing.
Pet-Friendly Additions
Features like pet doors or waste stations to attract animal-loving renters.
Furnished Rental Items
Basic furniture or housewares to boost rental value.
Keyless Entry Systems
Modern locks for added security and convenience.
Laundry Room Upgrades
Installing coin-ops or better machines to add tenant amenities.
Operational Expenses
Advertising, tenant screening, and property management fees reduce your taxable income (IRS Pub 535). Keep mileage logs for trips to your rental. If you drive 200 miles a year at the IRS standard mileage rate, that’s a direct deduction.
Lockbox for Keys
A secure place to store tenant keys.
Lease Management Software
Online tools for drafting and signing rental agreements.
Tenant Gift Cards
Small incentives that improve tenant relations.
Professional Rental Staging
Temporary décor to show units in their best light.
Eviction Filing Fees
Court costs when removing a non-paying tenant.
Credit Card Processing Fees
Costs from accepting rent payments online.
Local Market Reports
Paid research to guide pricing and management decisions.
Holiday Decorations
Seasonal décor that improves property appeal.
Professional Services
Fees paid to accountants or attorneys for rental-related work are deductions. If you pay a CPA $900 for a rental’s tax return, that’s $900 off your taxable income (IRS Pub 535).
Rental Education
Online classes teaching better rental management.
Handyman Subscription Services
Monthly plans ensuring quick and consistent repairs.
Professional Photography Editing
Polishing listing photos to attract more prospects.
Green Certification Costs
Fees to get official eco-friendly property status.
Social Media Management
Outsourcing posts and ads to attract new renters.
HVAC Maintenance
Regular service agreements that keep heating/cooling running smoothly.
Emergency Hotline Services
A 24/7 call line for urgent tenant issues, improving response times.
Dealing with Losses and Passive Activity Rules
Passive Activity Loss Rules
Rental income is usually passive. Passive losses can only offset passive income, not your job’s salary (IRS Pub 925). If you lose $2,000 on your rental but have no other passive income, you cannot deduct that loss against your work income this year. The loss often carries forward.
Real Estate Professional Status
If you spend most of your working hours and more than 750 hours a year in real estate, you may become a “real estate professional” (IRS Reg. §1.469-9). This can let you treat rental losses as nonpassive, so they offset other income.
For instance, if you qualify and lose $10,000 on rentals, you might reduce your taxable salary by $10,000.
Combining Properties
If you own multiple rentals, you can treat them as one activity (IRS Pub 925). This can help meet the time tests and combine income and losses in your favor.
Tax Credits and Special Incentives
Green Upgrades
Energy-efficient upgrades, like solar panels, can earn tax credits (IRS Residential Energy Credits). A $1,000 credit cuts your tax bill by $1,000. Lower utilities can also draw good tenants.
Low-Income Housing Credits
Renting to low-income tenants under certain programs can qualify you for the Low-Income Housing Tax Credit (HUD LIHTC Info). This can be complex, but it’s worth exploring if you meet the rules.
Historic Building Credits
If your rental is in a historic building, you may claim credits for approved restoration work (National Park Service Historic Tax Credits). The building must be certified as historic, and the work must follow set rules.
Timing Strategies
When to Spend Money
If you expect high income this year, make major repairs before year’s end. This lets you claim the deductions now, when your income is higher. For example, if you plan a $2,000 repair, doing it in December might reduce this year’s taxes.
Deferring Gains with 1031 Exchanges
If you sell a rental property and use the proceeds to buy another “like-kind” property, a 1031 exchange defers the tax on the gain (IRS Like-Kind Exchanges). For example, if you sell a rental for a $50,000 profit, you can reinvest in another property now and pay no tax on that gain yet.
Adjusting Rent and Lease Terms
In some cases, adjusting rent timing may help manage taxable income. This is advanced and may require a CPA’s advice. For instance, if a new tax law reduces deductions next year, you might want more rental income this year when you can still claim big deductions.
Good Recordkeeping and Compliance
Keep Good Records
Organized records protect you if the IRS questions your return. Keep receipts, invoices, bank statements, lease agreements, and mileage logs (IRS Recordkeeping). Consider using bookkeeping software or hiring a bookkeeper. This makes it easier to prove your deductions.
Avoiding Audit Red Flags
Some landlords claim huge expenses compared to income. This may trigger an audit. Be accurate and separate personal and rental expenses. If you pay for a personal vacation, don’t try to deduct it as a rental cost.
Stay Updated
Tax laws change. Deductions, credits, and depreciation rules may shift each year. Check official IRS publications or follow trusted tax news sources (IRS Newsroom). Review your strategy yearly.
Avoiding Common Mistakes
Avoid these errors to skip audits, protect write-offs, and keep more rental income. Remember that tax penalties and interest can be accessed retroactively. Each mistake prevented is like paying yourself a bonus.
Misclassifying Repairs and Improvements
Calling a major improvement a repair could be a red flag. Follow the rules. If in doubt, ask a CPA.
Forgetting to “Dispose” of Old Parts After an Improvement
When you replace a large component (like a roof), you can often write off the remaining value of the old roof in the same year. Many landlords never make this partial-disposal election, missing a major one-time deduction.
Not Reviewing Strategies Regularly
A strategy that worked last year may not work now if laws changed. Always review your approach. Stay current.
Misclassifying a Short-Term Rental as Passive
Short-term rentals (like Airbnb properties) can sometimes be treated as non-passive if you provide substantial services. Landlords who lump these into the passive category may be forfeiting valuable loss offsets.
Ignoring Energy-Efficient “Placed in Service” Dates
Many tax credits for energy-saving improvements require that equipment be “placed in service” by a certain date. Installing solar panels in December but not activating them until January could cost you the entire credit.
Misreporting Self-Rental Activities
Renting a building you own to your own business has special “self-rental” rules. Many landlords treat that income as passive when it’s often considered non-passive, resulting in lost opportunities to offset other income.
Forgetting to Track Hours
If you want real estate professional status, track your work hours carefully (IRS Reg. §1.469-5T). Without proof, the IRS may deny that status.
Next Steps
Maximizing rental profits through tax strategies is about using the law correctly. Start by keeping better records and understanding key concepts like depreciation.
Then consider a cost segregation study or look into professional help. Even small changes can yield big savings.
Over time, these moves can protect your income and help you reinvest in your properties. A well-planned tax strategy can make owning rental homes more rewarding.
The IRS code may be complex, but with the right guidance, you can turn that complexity into an advantage since others will say this is too hard.
Some landlords claim huge expenses compared to income. This may trigger an audit. Be accurate and separate personal and rental expenses. If you pay for a personal vacation, don’t try to deduct it as a rental cost.
FAQs
Get answers to common questions about rental tax strategies.
If I turned my spare bedroom into a home office for managing rentals, can I deduct it?
Yes, if it’s used exclusively and regularly for rental management. You can deduct a portion of your home expenses—like utilities or insurance—based on the office’s square footage.
I listed my place on Airbnb for short-term stays. Can I still count it as a rental and claim deductions?
Yes, but rules for short-term rentals can differ. If you provide services like cleaning, breakfast, or tours, the IRS may treat it more like a business than passive rental income, affecting how you claim deductions.
My tenant skipped rent this month. Can I deduct the unpaid rent as a loss?
No. Lost or unpaid rent isn’t a deductible expense. You never reported that income in the first place, so there’s no deduction to claim for it.