This particular article of the Rental Property Tax Guide (“Guide”) focuses on the different types of expenses that you may deduct from your gross rental income in order to calculate your net rental income. Because there are so many deductible expenses, this guide breaks this series of articles into four different types. This first part will focus on interest, advertising, and professional fee expenses.
The primary type of interest you will likely be deducting is mortgage interest. If you are 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’re occupying the other unit, you will 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 must 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 promote your rental property and list it on the open market are deductible. For example, ads that you purchase in a local newspaper, or any Internet advertising you pay for, are deductible.
You can deduct professional fees you incur in connection with the rental. For example, if you paid a lawyer to draft a lease, or initiate court proceedings to evict a tenant, you can deduct these fees. Additionally, you can deduct fees you paid to an accountant/CPA for preparing the Schedule E of your tax return from the previous year. Take care to pro rate the total fee between the Schedule E and the rest of your return based on how much time it took. Any fees for preparing any part of the return other than Schedule E go on Schedule A as personal tax preparation expense. Finally, if you pay any commissions or management fees to a professional realtor group for managing your rental, you may deduct those expenses as well.