The Biggest Tax Deductions for Rental Property Owners

Rental real estate is one of the most tax-advantaged investments available, but only if you actually claim the deductions you are entitled to. Here are the biggest ones, and the tools to size them up.

1. Depreciation

The largest deduction most landlords never write a check for. You depreciate the building portion of your property over 27.5 years for residential or 39 for commercial, which shelters a big chunk of your rental income every year. Estimate yours with the depreciation calculator.

2. Accelerated depreciation through cost segregation

You do not have to depreciate the whole building slowly. A cost segregation study reclassifies 20 to 40 percent of the basis into 5 and 15-year property, and with 100 percent bonus depreciation restored, much of that can be deducted in year one. See the bonus depreciation calculator for the current percentage.

3. Mortgage interest

The interest on your rental loan is fully deductible. In the early years of a loan, this is one of your largest expenses and a significant deduction.

4. Operating expenses

Nearly everything you spend to operate the rental is deductible: property taxes, insurance, property management, repairs and maintenance, utilities you pay, HOA dues, and supplies. Keep clean records, because these add up.

5. Professional and travel costs

Legal and accounting fees, advertising, software, and travel to and from your rental for legitimate business purposes are deductible.

The one to plan around: recapture

Depreciation deductions lower your basis, so more of your gain is taxed when you sell, up to 25 percent recapture. You can defer that with a 1031 exchange into another property. Plan your exit so the deductions do not become a surprise bill.

Bottom line

Depreciation, cost segregation, and mortgage interest are the heavy hitters, but the small operating deductions matter too. Run your property through the investor tax tools to size the big ones, and work with a CPA to capture the rest.