In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted
from your rental income.
Listed below are the most common rental expenses.
Auto and travel expenses.
Cleaning and maintenance.
Legal and other professional fees.
Local transportation expenses.
Mortgage interest paid to banks, etc.
Some of these expenses, as well as other less common ones, are discussed below.
Depreciation is a capital expense. It is the mechanism for recovering your cost in an income producing property and
must be taken over the expected life of the property.
You can begin to depreciate rental property when it is ready and available for rent. See
Placed in Service
under When Does Depreciation Begin and End
in chapter 2.
Insurance premiums paid in advance.
If you pay an insurance premium for more than one year in advance, you cannot deduct the total premium in the year
you pay it. For each year of coverage, you can deduct only the part of the premium payment that applies to that year. See
chapter 6 of Pub. 535 for information on deductible premiums.
You can deduct mortgage interest you pay on your rental property. When you refinance a rental property for more than
the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally
cannot be deducted as a rental expense. Chapter 4 of Pub. 535 explains mortgage interest in detail.
Expenses paid to obtain a mortgage.
Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses,
which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in
Form 1098, Mortgage Interest Statement.
If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form
1098 or similar statement showing the interest you paid for the year. If you and at least one other person (other than your
spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the
Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Attach a statement to your return showing
the name and address of the other person. On the dotted line next to line 13, enter “See attached.
Legal and other professional fees.
You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you
paid to prepare Schedule E, Part I. For example, on your 2016 Schedule E you can deduct fees paid in 2016 to prepare Part
I of your 2015 Schedule E. You can also deduct, as a rental expense, any expense (other than federal taxes and penalties)
you paid to resolve a tax underpayment related to your rental activities.
Local benefit taxes.
In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges
for putting in streets, sidewalks, or water and sewer systems. These charges are nondepreciable capital expenditures and must
be added to the basis of your property. However, you can deduct local benefit taxes that are for maintaining, repairing, or
paying interest charges for the benefits.
Local transportation expenses.
You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental
income or to manage, conserve, or maintain your rental property. However, transportation expenses incurred to travel between
your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal
place of business. See Pub. 587, Business Use of Your Home, for information on determining if your home office qualifies as
a principal place of business.
Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses
using one of two methods: actual expenses or the standard mileage rate. For 2016, the standard mileage rate for business use
is 54 cents per mile. For more information, see chapter 4 of Pub. 463.
To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Pub. 463. In addition,
you must complete Form 4562, Part V, and attach it to your tax return.
You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from
the time you make it available for rent.
Rental of equipment.
You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts
are actually purchase contracts. If so, you cannot deduct these payments. You can recover the cost of purchased equipment
Rental of property.
You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental
purposes, you can deduct an equal part of the cost each year over the term of the lease.
You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip
is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses
between rental and nonrental activities. You cannot deduct the cost of traveling away from home if the primary purpose of
the trip is to improve the property. The cost of improvements is recovered by taking depreciation. For information on travel
expenses, see chapter 1 of Pub. 463.
To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Pub. 463.
If you are a cash basis taxpayer, do not deduct uncollected rent. Because you have not included it in your income,
it is not deductible.
If you use an accrual method, report income when you earn it. If you are unable to collect the rent, you may be able
to deduct it as a business bad debt. See chapter 10 of Pub. 535 for more information about business bad debts.
Vacant rental property.
If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including
depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct
any loss of rental income for the period the property is vacant.
Vacant while listed for sale.
If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing,
conserving, or maintaining the property until it is sold. If the property is not held out and available for rent while listed
for sale, the expenses are not deductible rental expenses.
The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage.
These charges are also called loan origination fees, maximum loan charges, or premium charges. Any of these charges (points)
that are solely for the use of money are interest. Because points are prepaid interest, you generally cannot deduct the full
amount in the year paid, but must deduct the interest over the term of the loan.
The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. In
this case, points are equivalent to OID, which is the difference between:
The amount borrowed (redemption price at maturity, or principal), and
The proceeds (issue price).
The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the
mortgage loan), including the OID resulting from the points, is insignificant or de minimis. If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct.
De minimis OID.
The OID is de minimis
if it is less than one-fourth of 1% (0.0025) of the stated redemption price at maturity (principal amount of the loan) multiplied
by the number of full years from the date of original issue to maturity (term of the loan).
If the OID is de minimis
, you can choose one of the following ways to figure the amount of points you can deduct each year.
On a constant-yield basis over the term of the loan.
On a straight line basis over the term of the loan.
In proportion to stated interest payments.
In its entirety at maturity of the loan.
You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax
return for the tax year in which the loan is issued.
Carol took out a $100,000 mortgage loan on January 1, 2016, to buy a house she will use as a rental during 2016. The loan
is to be repaid over 30 years. During 2016, Carol paid $10,000 of mortgage interest (stated interest) to the lender. When
the loan was made, she paid $1,500 in points to the lender. The points reduced the principal amount of the loan from $100,000
to $98,500, resulting in $1,500 of OID. Carol determines that the points (OID) she paid are de minimis based on the following computation.
|Redemption price at maturity (principal amount of the loan)
|Multiplied by: The term of the
loan in complete years
|De minimis amount
The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Under the straight
line method, she can deduct $50 each year for 30 years.
If the OID is not de minimis
, you must use the constant-yield method to figure how much you can deduct each year.
You figure your deduction for the first year in the following manner.
Determine the issue price of the loan. If you paid points on the loan, the issue price generally is the difference between
the principal and the points.
Multiply the result in (1) by the yield to maturity (defined later).
Subtract any qualified stated interest payments (defined later) from the result in (2). This is the OID you can deduct in the first year.
Yield to maturity (YTM).
This rate is generally shown in the literature you receive from your lender. If you do not have this information,
consult your lender or tax advisor. In general, the YTM is the discount rate that, when used in computing the present value
of all principal and interest payments, produces an amount equal to the principal amount of the loan.
Qualified stated interest (QSI).
In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan
of the issuer) at least annually over the term of the loan at a fixed rate.
The facts are the same as in the previous example. The yield to maturity on Carol's loan is 10.2467%, compounded annually.
She figured the amount of points (OID) she could deduct in 2016 as follows.
|Principal amount of the loan
|Minus: Points (OID)
|Issue price of the loan
|Multiplied by: YTM
|Points (OID) deductible in 2016
To figure your deduction in any subsequent year, you start with the adjusted issue price. To get the adjusted issue price,
add to the issue price figured in Year 1 any OID previously deducted. Then follow steps (2) and (3), earlier.
Carol figured the deduction for 2017 as follows.
|Plus: Points (OID) deducted
|Adjusted issue price
|Multiplied by: YTM
|Points (OID) deductible in 2017
Loan or mortgage ends.
If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage
ends. A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. However, if the refinancing
is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs,
but may be deductible over the term of the new mortgage or loan.
Points when loan refinance is more than the previous outstanding balance.
When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable
to loan proceeds not
related to rental use generally cannot be deducted as a rental expense.
Charles refinanced a loan with a balance of $100,000. The amount of the new loan was $120,000. Charles used the additional
$20,000 to purchase a car. The points allocable to the $20,000 would be treated as nondeductible personal interest.
Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize
You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results
in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1
shows examples of many improvements.
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition,
enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property,
repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or
rebuilding your property to a like-new condition.
Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with
the intended ordinary use of your property when you began renting the property.
Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements
when you sell or depreciate your property.
The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property.
Table 1-1.Examples of Improvements
Lawn & Grounds
Storm windows, doors
Heating & Air Conditioning
Central air conditioning
Soft water system
Pipes, duct work