There are many deductible expenses connected with owning a rental property. In this article we will focus on expenses regarding interest, advertising, and professional fees, these are expenses you may deduct from your gross rental income so as to calculate your net rental income.
The primary type of interest you will most likely deduct is interest on the mortgage. 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, if you’re renting a room in your home, or if it is a duplex and you are residing in the other unit, you need 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 and not on Schedule E. Additionally, if you own only a part interest in the rental, you will need to 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.
Any fees you incur to list your property on the open market and promote the property are deductible. For example, classified ads that you purchase in the local newspaper, or any Internet advertising you pay for, are deductible.
If you pay an attorney to set up a rental agreement or start court actions for you to evict a tenant, you’ll be able to deduct these charges. Also you can deduct the fees of an accountant for preparation of the Schedule E of your tax return from the year prior. Be sure to pro rate the total 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 property are deductible as well.
Seattle CPA +John Huddleston has written extensively on tax and accounting topics of interest to small business owners. He is a graduate of the University of Washington School of Law with a Juris Doctorate and a Masters in Tax Law.