Tax Deductions on Investment Property: Depreciation and Loss Rules

Tax deductions on investment property let you subtract the ordinary and necessary costs of running a rental from the rent you collect, so you pay tax only on the net profit. The IRS treats rental real estate as a business activity, which opens the door to write-offs for operating costs, mortgage interest, repairs, depreciation, professional help, and travel.¹ The catch: passive activity rules, personal use limits, and depreciation recapture at sale can all shrink or defer the benefit. What follows applies to the 2026 tax year.

Operating Expenses You Can Deduct Each Year

Recurring costs to keep a rental running come off your taxes in the year you pay them, provided they are ordinary and necessary for the business.² The staples:

Local real estate taxes on the rental, deducted in full on Schedule E. These are not subject to the $10,000 SALT cap that applies to personal residences, because they are paid in carrying on an income-producing activity.³
Insurance premiums, including fire, flood, liability, and landlord policies.
HOA dues on a property inside a managed community.
Utilities you pay for the tenant, such as water, gas, electricity, or trash service.⁴
Local rental licensing or registration fees.

Everything goes on Schedule E. Keep receipts, statements, and payment confirmations. The IRS doesn’t dictate a format, but if your return is questioned, you’ll need documentation matching every line.

Mortgage Interest and Loan Points

Interest on debt used to buy or improve a rental is deductible.⁵ For most investors, this is the largest write-off in the early years of a loan, when the monthly payment is nearly all interest. Your lender sends a Form 1098 each January summarizing what you paid.

Interest on other borrowed funds also counts, as long as the money went to the rental. A credit card used only for appliances at the property, or a personal loan taken out to fund a renovation, both produce deductible interest. Keeping rental debt in accounts separate from personal finances makes tracking simple and avoids splitting mixed-use interest at tax time.

Points paid to a lender to reduce your rate cannot be deducted all at once on an investment property. You spread the deduction evenly across the life of the loan.¹ Pay $3,000 in points on a 30-year mortgage and you deduct $100 each year. Loan principal is never deductible; only the interest portion of your payment reduces taxable income.

Repairs Versus Improvements

Day-to-day fixes that keep the property in working order are deductible in full the year you pay for them.⁶ Patching drywall, replacing a broken faucet, repainting between tenants, servicing the furnace: these restore the property to its existing condition without making it substantially better or extending its life. A capital improvement, like a full roof replacement, has to be depreciated over years instead.

A rough test: if the work fixes something broken or worn out and puts it back roughly where it was, it’s a repair. If it upgrades capacity, adds something new, or significantly extends the life of a building component, it’s an improvement and gets capitalized.

The De Minimis Safe Harbor Election

For smaller purchases, the de minimis safe harbor lets you immediately expense any tangible item costing $2,500 or less per invoice if you don’t have audited financial statements.⁷ A new dishwasher, a window AC unit, or a set of smoke detectors that would normally be capitalized can be written off in the current year. With an applicable financial statement, the threshold rises to $5,000 per item.

You make the election each year by attaching a statement to your timely filed return. It doesn’t renew automatically.

Depreciation

Depreciation is usually the most powerful deduction available on rental property, and it doesn’t require you to spend a dollar in the current year. It accounts for the aging of the physical structure by letting you deduct a portion of the building’s cost each year over a set recovery period.

Standard MACRS Recovery Periods

Residential rental property is depreciated over 27.5 years using the straight-line method; commercial property uses 39 years.⁸ Only the building depreciates. Land never wears out, so you separate its value from the structure’s when you buy in. Most investors use the split shown on the county property tax assessment or an appraisal at purchase.

Capital improvements follow the same rules. A new roof, central AC, or a finished basement adds to the building’s depreciable basis and gets its own schedule.

Bonus Depreciation and Cost Segregation

The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.⁹ Building components that qualify as personal property or land improvements with shorter recovery periods, such as carpeting, appliances, parking lot paving, and landscaping, can be written off entirely in the year they’re placed in service instead of over 5, 7, or 15 years.

A cost segregation study unlocks the benefit. An engineer or tax specialist examines the property and reclassifies components that would otherwise sit in the 27.5- or 39-year building bucket. On average, 20% to 40% of a building’s cost can be reclassified. Because the study itself costs several thousand dollars, it tends to pay off mainly on properties in the $1 million range or larger.

Professional, Management, and Tenant Acquisition Fees

Hiring help is a straightforward deduction. Property management companies typically charge 8% to 12% of monthly rent for tenant screening, rent collection, and maintenance coordination, and the entire fee is deductible.⁶ Fees paid to a real estate attorney, an accountant for tax preparation, or a bookkeeper for monthly records qualify as well.

Tenant acquisition costs sit in the same category. Online listings, background and credit checks, and leasing commissions are deductible.⁴ Keep invoices showing the provider, the service, and the amount. If you pay any single contractor $600 or more during the year, you’re also responsible for issuing a Form 1099-NEC.

Travel and Mileage

Driving to the property for inspections, rent collection, or a hardware store run generates a deductible expense. For 2026, the IRS standard mileage rate for business use is 72.5 cents per mile.¹⁰ That rate covers fuel, maintenance, insurance, and vehicle depreciation. You can instead track actual vehicle expenses, but you must choose the standard mileage method in the first year the vehicle is available for business use if you want that option later.

Long-distance travel is deductible when the primary purpose of the trip is managing the property. Airfare, lodging, and 50% of meals on overnight business trips all qualify. On a mixed trip, only the business portion counts. A weekend meeting with your property manager followed by three days of sightseeing means only the business days are deductible.

The IRS expects a contemporaneous log for each trip: date, destination, miles, and business reason. A mileage app works. A notebook in the glove box works too. Record trips as they happen rather than reconstructing them in April.

The 20% Qualified Business Income Deduction

Section 199A lets eligible taxpayers deduct up to 20% of qualified business income from a rental activity, and the One Big Beautiful Bill Act made this deduction permanent starting in 2026. If your rental qualifies as a trade or business, you subtract 20% of net rental income before calculating tax. It’s an above-the-line deduction, so you get it whether or not you itemize.

Not every rental automatically qualifies. The IRS safe harbor treats a rental as a trade or business if you or your employees, agents, or contractors perform at least 250 hours of rental services during the year. Those hours include tenant communication, repairs, rent collection, and management oversight. You must keep contemporaneous logs, made at or near the time the work happened, and attach a safe harbor statement to your return.

Higher-income taxpayers face additional limits. The deduction phases out above certain taxable income thresholds, and the math turns on wages paid and the property’s depreciable basis. Working through 199A with a tax professional pays off once rental income is meaningful.

Passive Activity Loss Limits

Rental real estate is generally a passive activity, so losses cannot offset wages, self-employment income, or other non-passive income without meeting a specific exception.¹¹ This is where new landlords often get an unpleasant surprise: the property shows a loss on paper but the loss is suspended and provides no current-year tax benefit.

The $25,000 Active Participation Allowance

Landlords who actively participate in managing the rental, by approving tenants, setting rent, and authorizing repairs, can deduct up to $25,000 in rental losses against non-passive income each year.¹¹ The allowance phases out by 50 cents on the dollar once modified adjusted gross income tops $100,000 and disappears at $150,000 MAGI. Above that, losses can only offset other passive income or carry forward until you sell.

Real Estate Professional Status

Real estate professionals bypass the passive activity restrictions entirely. To qualify, you must spend more than 750 hours during the year in real property trades or businesses in which you materially participate, and those hours must be more than half of all your professional working time.¹² On a joint return, only one spouse needs to meet both tests. When you qualify, rental losses can offset any type of income with no dollar cap. The status is heavily scrutinized on audit, so meticulous time logs are essential.

Personal Use Limits

If you use the property yourself beyond certain limits, the IRS restricts your deductions. The property is treated as a personal residence when your personal use exceeds the greater of 14 days or 10% of the days it’s rented at a fair price.¹³ Cross that line and rental expenses can only offset rental income; you cannot generate a deductible loss.

Personal use isn’t just your own vacations. It also counts days used by family members, anyone paying below fair market rent, or anyone under a reciprocal use arrangement.¹³ For vacation and second-home owners, careful tracking is the only way to protect deductions.

A separate rule applies when a property is rented for fewer than 15 days per year. You don’t report the rental income at all, but you can’t deduct any rental expenses either. Homeowners near major events can pocket short-term income tax-free as long as they stay under the 15-day threshold.

The 3.8% Net Investment Income Tax

Rental income can trigger an additional 3.8% surtax on top of regular income taxes. The net investment income tax applies once modified adjusted gross income tops $200,000 for single filers or $250,000 for joint filers.¹⁴ Net rental income, and any gain from selling a rental, generally counts as investment income.¹⁵

The 3.8% applies to the lesser of net investment income or the amount by which MAGI exceeds the threshold. Every deduction covered above reduces net rental income and can shrink or eliminate the NIIT bill. Real estate professionals who materially participate in their rentals may be able to exclude that income from net investment income entirely.

What Happens at Sale: Recapture and 1031 Exchanges

Deductions taken during ownership come back at sale. Every dollar of depreciation you claimed, or were entitled to claim even if you forgot, is recaptured and taxed at a maximum federal rate of 25%.¹⁶ Gain above the recaptured depreciation is taxed at the applicable long-term capital gains rate. For higher-income sellers, the 3.8% NIIT can stack on top of both layers.

Recapture catches many owners off guard. Ten years of holding a residential rental typically produces roughly 36% of the building’s value in depreciation deductions, and that entire amount faces the 25% recapture rate at sale regardless of whether the property actually declined in value. Cost segregation accelerates deductions during ownership but also accelerates the recapture bill.

Deferring the Bill With a 1031 Exchange

A like-kind exchange under Section 1031 lets you sell an investment property, roll the proceeds into another investment property, and defer both capital gains and depreciation recapture indefinitely.¹⁷ The replacement property must also be held for investment or business use. You cannot swap a rental into a personal vacation home.

The deadlines are strict. You have 45 days from the closing on the old property to identify potential replacements, and 180 days to close on the new one.¹⁷ Most exchanges run through a qualified intermediary who holds the sale proceeds in escrow. Touching the money yourself disqualifies the exchange. Property held primarily for resale, such as a flip, does not qualify.

An exchange defers the tax rather than erasing it. The old tax basis carries over to the new property, so the deferred gain stays embedded until a future sale without an exchange. Investors sometimes chain multiple 1031 exchanges over a lifetime, and if the final property is held until death, heirs receive a stepped-up basis that can wipe out the accumulated deferred gain.

1
Internal Revenue Service. Publication 527 – Residential Rental Property
2
Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
3
Office of the Law Revision Counsel. 26 U.S.C. 164 – Taxes
4
Internal Revenue Service. Tips on Rental Real Estate Income, Deductions and Recordkeeping
5
Office of the Law Revision Counsel. 26 U.S.C. 163 – Interest
6
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
7
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
8
Office of the Law Revision Counsel. 26 U.S.C. 168 – Accelerated Cost Recovery System
9
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
10
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
11
Office of the Law Revision Counsel. 26 U.S.C. 469 – Passive Activity Losses and Credits Limited
12
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
13
Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
14
Office of the Law Revision Counsel. 26 U.S.C. 1411 – Imposition of Tax
15
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
16
Office of the Law Revision Counsel. 26 U.S. Code 1 – Tax Imposed
17
Office of the Law Revision Counsel. 26 U.S.C. 1031 – Exchange of Real Property Held for Productive Use or Investment