Rental Property Tax Deductions: Depreciation, Interest, and Travel

Owning a rental property opens up a long list of rental property tax deductions that reduce what the IRS treats as your taxable income. The main categories are ordinary operating expenses, mortgage interest, property taxes, depreciation, travel to the property, and certain small purchases you elect to expense. Some of these come off your rental income the year you pay them. Others get capitalized and recovered over years, or folded into your cost basis until you sell. Sorting each expense into the right bucket is what separates a clean Schedule E from one that draws IRS questions.¹

Operating Expenses You Deduct the Year You Pay Them

The IRS allows any cost that is ordinary and necessary for managing, maintaining, or conserving a rental property. Ordinary means common in the rental business. Necessary means helpful and appropriate.² These come off your rental income in full during the year paid and land on Schedule E.

Common deductible operating expenses include:

Repairs and maintenance such as fixing a broken furnace, patching a roof leak, or repainting.
Insurance premiums for landlord, fire, flood, and liability coverage.
Property management fees and payments to an on-site manager.
Advertising for vacancies.
Legal and professional fees, including accountant fees for the return, attorney fees for lease disputes, and eviction costs.
Utilities you pay on behalf of tenants.
Turnover cleaning, pest control, and landscaping.

Repairs vs. Improvements

The line between a repair and an improvement decides whether you deduct now or depreciate later. Repairs keep the property in its existing condition and are fully deductible in the year paid. Improvements add value, extend the property’s useful life, or adapt it to a new use, and they must be capitalized and depreciated over time. A new roof, a kitchen remodel, or an added deck are improvements. Patching that roof is a repair.²

Property Taxes

Real estate taxes on a rental are fully deductible as an operating expense. The $10,000 SALT cap that limits state and local tax deductions on personal returns does not apply to taxes paid on property used in a trade or business. The statute exempts taxes paid or accrued in carrying on a business from that ceiling.³ If the annual property tax is $8,000, you deduct the full $8,000 on Schedule E regardless of what you’ve already used on the personal side of your return.

Mortgage Interest, Points, and Insurance

Interest paid on a mortgage used to acquire or improve rental property is fully deductible against rental income.⁴ Your lender reports the annual total on Form 1098, which arrives by the end of January.⁵ Because early payments are almost all interest, this deduction is largest in the first years of the loan. Interest on a home equity loan or second mortgage is also deductible if the borrowed funds are used for the rental. The deduction follows the use of the money, not the loan type.

Loan origination fees, or points, cannot be deducted in full the year you buy. They must be spread evenly over the life of the loan. Pay $3,000 in points on a 30-year mortgage and you deduct $100 each year.⁶ If you refinance or sell before the loan matures, any unamortized points can be deducted in that year.⁷

A prepayment penalty for paying off the mortgage early is treated as deductible mortgage interest.⁶ Mortgage insurance premiums on a rental are deductible in the year paid; if you prepay coverage that spans multiple years, only the current year’s portion is deductible now.⁸

Depreciation

Depreciation is the largest non-cash deduction available to rental owners. Under federal tax law, residential rental buildings are depreciated over 27.5 years using the Modified Accelerated Cost Recovery System.⁹ You divide the building’s depreciable cost by 27.5 to get your annual deduction. On a $275,000 building, that’s $10,000 a year, coming off your rental income without a matching cash outlay.

Separating Land From Building

Land does not depreciate, so subtract its value first. The common approach for a single-family rental is the county assessor’s ratio. If the assessor values the land at $60,000 and the building at $240,000 on a property you bought for $300,000, the 20/80 split gives you $240,000 to depreciate. For higher-value or commercial properties, a formal appraisal or comparable land sales data gives you stronger documentation if the IRS questions the split.

When Depreciation Starts

Depreciation begins on the placed-in-service date, not the closing date. A rental is placed in service when it is ready and available to rent, even without a tenant yet.¹⁰ Buy in October, renovate in November, list in December, and December is your placed-in-service date. The first and last years give you a partial deduction based on the month the property enters or leaves service.

Cost Segregation

A cost segregation study reclassifies certain components into shorter recovery periods. Appliances, carpeting, some lighting, and landscaping can qualify as five-, seven-, or fifteen-year property instead of riding along with the 27.5-year building. That front-loads deductions into the early years of ownership. Under the original TCJA phase-down, bonus depreciation drops to 20% in 2026, though recent legislation may have altered this schedule. Whatever the bonus rate, the cost segregation study itself remains a permanent strategy for accelerating deductions on qualifying components.

Closing Costs: Deducted or Added to Basis

Most settlement costs are not deductible the year you buy. The IRS treats them as part of your cost basis, which raises your investment on paper and reduces your taxable gain years later when you sell.¹¹ Costs added to basis include legal fees, recording fees, title insurance, transfer taxes, and survey fees.

A few closing items behave differently. Prorated property taxes covering the seller’s portion of the year are added to basis rather than deducted. Prepaid interest between closing and your first mortgage payment is deductible as mortgage interest in the year paid. The Closing Disclosure itemizes every fee and is the document to keep for setting up your basis and sorting each line.

Travel and Mileage

Driving to the rental for repairs, showings, or maintenance is deductible. For 2026, the IRS standard mileage rate is 72.5 cents per mile.¹² Drive 1,200 miles managing a rental and you deduct $870. You can instead track actual vehicle costs like gas, insurance, and maintenance, but most individual landlords stick with the standard rate. Either way, keep a mileage log with date, destination, purpose, and miles. Without the log, the IRS will disallow the deduction in an audit.

Small Purchases Under the De Minimis Safe Harbor

The de minimis safe harbor election lets you deduct a tangible item costing $2,500 or less per invoice immediately, rather than capitalizing and depreciating it.¹³ An $800 dishwasher or a $1,500 water heater can be expensed in full. To qualify, you need a written accounting policy in place at the start of the tax year, and you must attach an election statement to a timely filed return for each year you use the safe harbor. Splitting one renovation across smaller invoices to slip under the ceiling does not work.

Passive Activity Loss Limits

Most rental activity is passive under the tax code, meaning losses from the property can only offset other passive income.¹⁴ This is where many first-time landlords hit a wall. They expect a paper loss from depreciation to shrink their W-2 tax bill, and it doesn’t.

The $25,000 Active Participation Allowance

There is an exception for landlords who actively participate. If your modified adjusted gross income is $100,000 or less, you can deduct up to $25,000 in rental losses against non-passive income like wages. Active participation is a low bar: making management decisions, approving tenants, and setting rental terms qualifies. You don’t have to swing the wrench yourself.¹⁴

The $25,000 phases out once MAGI passes $100,000, shrinking by $1 for every $2 of income above that line, and disappears at $150,000. Married taxpayers filing separately who lived together at any point during the year cannot use the allowance.

Real Estate Professional Status

Taxpayers who qualify as real estate professionals sidestep the passive activity rules entirely and can deduct unlimited rental losses against any type of income. Two tests: more than 750 hours during the year in real property activities in which you materially participate, and more than half of all your personal services in any trade or business performed in real property. Hours as a W-2 employee outside real estate count against the “more than half” test unless you own more than 5% of the employer.¹⁵ Realistic for full-time landlords, property managers, and real estate agents. For someone with a full-time day job outside the field, the math rarely works.

Passive losses you cannot use in the current year are not lost. They carry forward indefinitely, offsetting passive income in later years or releasing in full when you sell the property in a taxable transaction.

The 3.8% Net Investment Income Tax

Rental income can carry an extra 3.8% tax on net investment income if your MAGI exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).¹⁶ The 3.8% applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. Deductible rental expenses, depreciation included, cut net investment income before this tax is figured, so maximizing deductions does double work. Real estate professionals who materially participate are exempt from this tax on that rental income.

Depreciation Recapture When You Sell

Every dollar of depreciation you claim lowers your adjusted basis, which raises your taxable gain on sale. The IRS recaptures the benefit by taxing the depreciation you took, or should have taken, at a maximum rate of 25%, above the long-term capital gains rate that applies to the rest of the profit. If you claimed $80,000 in total depreciation, that $80,000 is taxed at up to 25% on sale, potentially adding $20,000 to the bill. Many sellers are caught off guard because depreciation felt like free money during the holding period. A 1031 exchange can defer both the capital gain and the recapture, but only if you reinvest the proceeds into another qualifying property within strict deadlines.

Forms and Records

Rental income and expenses go on Schedule E of Form 1040.¹ If you claim depreciation, you also file Form 4562, which walks through the calculation for the building and any personal property used in the rental.¹⁷ Your lender’s Form 1098 gives you the mortgage interest total, and your Closing Disclosure supports the original cost basis and each acquisition fee.

Record retention is where rental returns differ from a typical filing. The general statute of limitations is three years from filing, extending to six years if you underreport income by more than 25%. For rental property, records tied to basis, depreciation, and improvements must be kept until the statute of limitations expires for the year you sell or otherwise dispose of the property.¹⁸ Own the property fifteen years and sell, and you’ll need those original purchase documents for at least eighteen years total. A digital backup starting from day one is the only practical way to hold that line.

1
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
2
Internal Revenue Service. Publication 527 – Residential Rental Property
3
Office of the Law Revision Counsel. 26 U.S. Code 164 – Taxes
4
Office of the Law Revision Counsel. 26 U.S.C. 163 – Interest
5
Internal Revenue Service. About Form 1098, Mortgage Interest Statement
6
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
7
Internal Revenue Service. Topic no. 504, Home Mortgage Points
8
Internal Revenue Service. Rental Expenses
9
Office of the Law Revision Counsel. 26 U.S.C. 168 – Accelerated Cost Recovery System
10
Internal Revenue Service. Depreciation Reminders
11
Internal Revenue Service. Publication 551 – Basis of Assets
12
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents
13
Internal Revenue Service. Tangible Property Final Regulations
14
Office of the Law Revision Counsel. 26 U.S.C. 469 – Passive Activity Losses and Credits Limited
15
Internal Revenue Service. Publication 925
16
Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
17
Internal Revenue Service. About Form 4562, Depreciation and Amortization (Including Information on Listed Property)
18
Internal Revenue Service. How Long Should I Keep Records