Tax Strategies for Landlords & Rental Properties

Master depreciation, expense deductions, and passive activity rules to maximize the tax benefits of your rental property investments.

Rental property income comes with unique tax advantages that make real estate one of the most tax-favored investment classes. Depreciation, the ability to deduct a wide range of expenses, and pass-through deductions can often result in a paper loss on profitable properties, sheltering rental income from taxation.

The cornerstone of rental property tax benefits is depreciation. Residential rental property is depreciated over 27.5 years, allowing you to deduct a portion of the building's cost each year as a non-cash expense. This means you can report lower taxable income (or even a loss) while your property generates positive cash flow.

Understanding passive activity rules is essential for landlords. Rental activities are generally classified as passive, which means losses can only offset passive income. However, real estate professionals who materially participate in their rental activities can deduct rental losses against active income. There is also a $25,000 special allowance for active participation in rental activities for taxpayers with modified AGI under $100,000.

Key Deductions & Credits

Depreciation

$3,000 - $15,000+

Deduct the cost of your residential rental building over 27.5 years (not including land value). A $300,000 building generates approximately $10,909 in annual depreciation.

Mortgage Interest on Rental Property

$3,000 - $20,000

Deduct 100% of mortgage interest paid on rental properties. Unlike personal residences, there is no cap on the deductible debt amount for investment properties.

Repairs & Maintenance

$500 - $5,000

Deduct costs for repairs that maintain the property in its current condition, including plumbing, painting, HVAC servicing, and appliance repairs.

Property Management & Operating Expenses

$1,000 - $8,000

Deduct property management fees, insurance, property taxes, advertising, legal fees, and HOA dues directly against rental income.

Travel to Rental Properties

$200 - $2,000

Deduct mileage (70 cents/mile) or actual expenses for trips to rental properties for maintenance, inspections, and tenant management.

QBI Deduction for Rental Income

$1,000 - $20,000+

Rental income may qualify for the 20% Qualified Business Income deduction under Section 199A if it meets safe harbor requirements or rises to the level of a trade or business.

Forms You May Need

Schedule E (Form 1040) — Supplemental Income and Loss (Rental)

Form 4562 — Depreciation and Amortization

Form 1099-MISC — Miscellaneous Income (report to contractors)

Form 8582 — Passive Activity Loss Limitations

Form 4797 — Sales of Business Property

Filing Tips

Start depreciating rental property from the date it is placed in service as a rental. Use a cost segregation study on larger properties to accelerate depreciation on certain components.
Distinguish between repairs (currently deductible) and improvements (must be capitalized and depreciated). Fixing a leaky faucet is a repair; renovating a bathroom is an improvement.
Track all rental expenses by property if you own multiple rentals. Each property is reported on a separate column of Schedule E.
Understand the passive activity loss rules. If your AGI is under $100,000, you can deduct up to $25,000 in rental losses against active income if you actively participate.
Consider a 1031 like-kind exchange when selling a rental property to defer capital gains and depreciation recapture taxes by reinvesting in a replacement property.
Keep detailed records including lease agreements, rent receipts, expense receipts, and property improvement documentation for at least three years after selling the property.

Common Mistakes to Avoid

Not depreciating rental property, which wastes one of the largest tax benefits of real estate investing and cannot be recaptured later.
Confusing repairs with improvements. Improvements must be capitalized and depreciated rather than deducted immediately.
Forgetting about depreciation recapture when selling. The IRS taxes recaptured depreciation at 25%, regardless of your ordinary income tax bracket.
Not tracking passive losses that carry forward. Suspended passive losses from prior years can offset income when the property is sold.
Deducting personal-use days on a property that is used part-time as a rental and part-time personally.

Recommended Software

TurboTax Premier includes comprehensive Schedule E support, depreciation calculators, passive activity loss tracking, and handles multiple rental properties with step-by-step guidance.

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FAQ

How does rental property depreciation work?

You depreciate the cost of the building (not land) over 27.5 years for residential property or 39 years for commercial property. For example, a building valued at $275,000 generates $10,000 in annual depreciation. This non-cash deduction reduces taxable rental income without reducing cash flow.

Can I deduct rental losses against my W-2 income?

If you actively participate in the rental activity and your modified AGI is under $100,000, you can deduct up to $25,000 in rental losses against active income. This phases out between $100,000 and $150,000 AGI. Real estate professionals with material participation have no such limitation.

What is a 1031 exchange?

A Section 1031 like-kind exchange lets you defer capital gains and depreciation recapture taxes by selling a rental property and reinvesting the proceeds in a replacement property. You must identify replacement properties within 45 days and close within 180 days using a qualified intermediary.

Is security deposit income taxable?

Security deposits are not taxable when received if you plan to return them. They become taxable income only when you keep part or all of the deposit for damages or unpaid rent. If you apply a deposit as last month's rent, it is taxable income in the year applied.