Investment property tax deductions under joint ownership follow one core rule: each co-owner deducts their proportionate share of every rental expense, matching the ownership percentage shown on the deed. A 70/30 split on title produces a 70/30 split of mortgage interest, property taxes, insurance, repairs, and depreciation. Several federal rules then decide how much of that share you can actually use this year versus carry forward.
How Your Deed Sets Your Share
The form of co-ownership on title controls the math. Joint tenancy with right of survivorship presumes equal shares, so two joint tenants each report 50% of the rental income and claim 50% of the deductions. Tenancy in common allows unequal splits, and the deductions follow whatever percentages the deed records.
IRS Publication 527 states the rule directly: if you own a part interest in rental property, you deduct expenses according to your percentage of ownership.1Internal Revenue Service. Publication 527 – Residential Rental Property
One trap catches co-owners frequently: you can only deduct expenses you actually paid and were legally obligated to pay. If one co-owner covers the entire mortgage but only holds half the title, that person cannot deduct the full payment without a written agreement supporting a different arrangement. Keep title documents, any operating agreement, and payment records aligned. Mismatches are what surface in an audit.
Which Expenses You Can Deduct
Rental property produces a broad set of deductible costs, and each co-owner claims their ownership share of each one.1Internal Revenue Service. Publication 527 – Residential Rental Property
Mortgage interest is usually the largest single deduction. Federal law allows a deduction for all interest paid on debt tied to the property.2Office of the Law Revision Counsel. 26 USC 163 – Interest Unlike interest on a personal residence, there is no dollar cap on investment property mortgage interest.
Property taxes paid to local governments are deductible. An important distinction for co-owners already near the personal SALT cap: the SALT deduction cap (currently $40,400 for 2026) applies to state and local taxes claimed as personal itemized deductions. Property taxes on a rental reported on Schedule E are business expenses, and the statute exempts taxes paid in carrying on a trade or business from the cap.3Office of the Law Revision Counsel. 26 USC 164 – Taxes
Repairs and maintenance are fully deductible in the year paid. Fixing a leaky pipe, repainting between tenants, replacing a broken appliance. The line between a repair and a capital improvement is where disputes arise. A repair restores something to its existing condition. An improvement adds value, adapts the property to a new use, or substantially extends its life. Replacing a water heater is a repair. Adding a second story is an improvement that has to be depreciated over time.
Other common deductions include property insurance, advertising for tenants, pest control, landscaping, property management fees, legal and accounting fees, and travel to inspect or manage the property. Every expense needs documentation. Co-owners who split costs informally without receipts risk losing deductions.
Depreciation and the 2026 Bonus Depreciation Change
Depreciation lets you deduct the cost of the building itself over time even when you spent no additional cash that year. Under the Modified Accelerated Cost Recovery System, residential rental property is depreciated over 27.5 years on the straight-line method.4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Each co-owner claims their ownership share of the annual figure.
Start with the depreciable basis: usually purchase price plus closing costs, minus the value of the land. Land does not depreciate. If a property cost $350,000 and the land accounts for $75,000, the depreciable basis for the building is $275,000. Divided over 27.5 years, that produces $10,000 per year in total depreciation. A co-owner with a 40% stake claims $4,000 annually.
A cost segregation study can accelerate this by reclassifying components such as carpeting, cabinetry, appliances, and parking surfaces into 5-year or 15-year recovery periods. Typically 20% to 40% of a rental’s depreciable value can be moved into those shorter categories.
The One Big Beautiful Bill Act restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025. Components identified through a cost segregation study can be fully deducted in the first year rather than spread over 5 or 15 years.5Internal Revenue Service. One Big Beautiful Bill Provisions The 27.5-year building shell still follows its own schedule.
Loss Limits That Can Defer What You Deduct
Your share of deductions is calculated first. Then federal loss-limitation rules decide how much of a net loss you can actually use this year.
Passive Activity Rules
The IRS classifies almost all rental real estate as a passive activity, regardless of how much time you spend on it.6Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited If your rental expenses exceed rental income, you generally cannot use the loss to offset wages or investment income. It carries forward until you have passive income to absorb it, or until you sell the property in a taxable disposition, at which point suspended losses become fully deductible.
The $25,000 Active Participation Exception
There is a meaningful carveout. If you actively participate in the rental (approving tenants, setting rent, authorizing repairs), you can deduct up to $25,000 of rental losses against non-passive income each year.6Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited You must own at least 10% of the property and cannot be a limited partner. The allowance phases out at $1 for every $2 that adjusted gross income exceeds $100,000 and disappears at $150,000. Higher-income co-owners often see no benefit from this exception in the current year, though the losses still accumulate and release on sale.
A separate boundary: taxpayers who qualify as real estate professionals escape the passive rules entirely, but that status requires more than 750 hours per year in real property trades or businesses and more than half of all personal services performed for the year. It is difficult to qualify if you hold a full-time job outside real estate.
At-Risk Limitation
Before the passive rules apply, a separate limitation caps deductible losses at the amount you have “at risk” in the property. Your at-risk amount generally includes cash contributed, the adjusted basis of other property put in, and borrowed amounts for which you are personally liable. Real estate gets a useful exception: qualified nonrecourse financing secured by the property and obtained from a qualified lender such as a bank counts toward at-risk even though no one is personally liable.7Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk Most conventional-mortgage co-owners are unaffected. Seller-carried notes or loans from related parties can pull the at-risk rules in and require Form 6198.
The 20% Qualified Business Income Deduction
Section 199A gives owners of pass-through businesses, including rental property reported on Schedule E or a K-1, an extra deduction worth up to 20% of qualified business income.8Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income The One Big Beautiful Bill Act made this deduction permanent starting in 2026 and added a $400 minimum deduction for taxpayers with at least $1,000 in qualified business income from a business in which they materially participate.
The IRS does not automatically treat rental income as qualified business income. The activity has to rise to a trade or business. A safe harbor in Revenue Procedure 2019-38 treats a rental as qualifying if you perform at least 250 hours of rental services per year, keep separate books and records, and maintain contemporaneous logs.9Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction Rentals that miss the safe harbor may still qualify on a facts-and-circumstances basis. For co-owners splitting management duties, log the hours each person contributes.
When Partnership Allocations Can Differ From Deed Percentages
If your co-ownership operates through a formal partnership or an LLC taxed as a partnership, the partnership agreement can allocate deductions differently than the underlying ownership percentages. A partner who contributes more capital or takes on more risk might receive a larger share of depreciation, for example. Federal regulations require these special allocations to have “substantial economic effect,” meaning they must reflect real economic consequences and not exist solely to move tax benefits around.10eCFR. 26 CFR 1.704-1 – Partners Distributive Share If the IRS finds an allocation lacks economic substance, it will reallocate based on each partner’s actual interest.
How Co-Owners File
Schedule E for Informal Co-Ownership
When co-owners hold title together without forming a legal partnership, each person files their own Schedule E (Form 1040), Part I, reporting their percentage of rents received and each deduction claimed. The percentages should match ownership interest.11Internal Revenue Service. Instructions for Schedule E (Form 1040) Every co-owner files independently, and consistency between the returns matters.
Married couples who jointly own and manage a rental can elect to treat it as a qualified joint venture rather than a partnership. The election avoids a separate partnership return while still letting each spouse report their share on the joint 1040. Both spouses must materially participate, and each reports their interest as a separate property on Schedule E.11Internal Revenue Service. Instructions for Schedule E (Form 1040)
Form 1065 for Partnerships
A formal partnership or an LLC taxed as a partnership files Form 1065 as an informational return. The entity pays no income tax. It issues a Schedule K-1 to each partner showing allocated income, deductions, and credits, and each partner carries those figures to their personal return.
Accuracy Penalty for Mismatched Returns
Getting the numbers out of sync across co-owners’ returns is a common trigger for IRS review. If one co-owner reports 60% of the income and another reports 60% of the deductions, the mismatch will surface. A substantial understatement or negligence can bring an accuracy-related penalty of 20% of the underpayment.12Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Cross-check your figures against your co-owners’ before anyone files.
Unequal Contributions and the Gift Tax Trap
Co-owners who contribute unequal amounts to a purchase but take title as joint tenants can trigger gift tax consequences. Because joint tenancy creates equal ownership regardless of who paid what, the person who put in more money is treated as making a gift to the other owner for the difference in value.
The 2026 annual gift tax exclusion is $19,000 per recipient.13Internal Revenue Service. Gifts and Inheritances Gifts above that amount reduce your lifetime estate and gift tax exemption and require filing Form 709. Each mortgage payment made by one co-owner from their own funds can also be treated as a partial gift to the other joint tenant.
The cleanest fix is to take title as tenants in common with percentages that match each person’s actual financial contribution. If one person supplies 80% of the down payment and will carry 80% of the mortgage, an 80/20 tenancy-in-common split eliminates the gift issue and lines the deductions up with who is paying.