Operating expenses for a rental property are the recurring, ordinary costs you pay each year to keep the building running, legally compliant, and occupied. Federal tax law lets you deduct these costs in the year you pay them, dollar for dollar against your rental income, as long as they are ordinary and necessary to the activity.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses You report them on Schedule E. The catch is that not every check you write for the property qualifies. Some costs are capital improvements that must be depreciated over years instead of deducted at once, and knowing which is which is where most landlords get tripped up.
The Main Categories of Deductible Operating Expenses
Schedule E has dedicated lines for the categories the IRS expects to see. Here is what typically fills each one.2Internal Revenue Service. Publication 527 (2025), Residential Rental Property
Maintenance and Repairs
Routine upkeep is one of the largest categories. It includes landscaping, lawn care, and snow removal; fixing leaky faucets, patching walls, and replacing hardware; HVAC filter changes, gutter cleaning, and seasonal system servicing; professional cleaning between tenants; pest control; and painting or minor cosmetic touch-ups. A typical service call for a minor interior repair runs between $100 and $300, and regular landscaping visits generally cost $50 to $150 each. All of it is fully deductible the year you pay it, provided the work maintains the property rather than improves it.
Property Taxes
Local governments tax real property based on assessed value, and effective rates vary widely by location — from under half a percent of market value in some areas to over two percent in others. You deduct property taxes in the year you pay them. One boundary: charges for local benefits that increase the property’s value, like new sidewalks or a sewer installation, are capital costs added to basis, not operating expenses.
Insurance
A standard homeowner’s policy does not cover a property rented to someone else. You need a landlord or dwelling fire policy that includes liability coverage plus structural protection. Annual premiums typically range from roughly $1,000 to $2,500 depending on location, age, and coverage limits, and properties in high-risk areas can cost substantially more.3National Conference of State Legislatures. Homeowners and Renters Insurance 2025 Legislation Most lenders require it. The full annual premium is deductible.
Mortgage Interest
If you carry a mortgage on the property, the interest portion of each payment is deductible with no cap based on the loan balance — unlike the mortgage interest deduction for a personal residence.4Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Only interest qualifies; principal is not deductible because it builds equity. Loan origination fees and points are treated as prepaid interest and spread over the life of the loan rather than deducted all at once. Other upfront costs like abstract fees, recording fees, and mortgage commissions are not deductible at all; they get added to your basis in the property.
Management and Professional Fees
Property management companies typically charge 8 to 12 percent of monthly gross rent for tenant communications, rent collection, and coordinating repairs. Many also charge a leasing fee, often one month’s rent, each time they place a new tenant. Attorney fees for drafting leases, handling evictions, or resolving tenant disputes are deductible, as are CPA fees for the tax filings and depreciation schedules that come with owning rental property.
Utilities
Any utility cost you cover as the landlord is deductible. Water and sewer are frequently landlord-paid, especially in multi-unit buildings with a single meter. Trash collection is often billed to the property owner. Electricity and gas for common areas — hallway lighting, lobby heating, shared laundry, exterior lights — typically run on the owner’s account. Even when tenants pay their own utilities, you may cover bills during vacancies to prevent frozen pipes or maintain security lighting.
Advertising and Administrative Costs
Listing a unit on rental platforms, yard signs, and online advertising all qualify. Background and credit checks generally run $30 to $75 per applicant. Property management software often costs $1 to $10 per unit per month for small portfolios. Office supplies, postage for legal notices, and travel to the property for inspections or contractor meetings are deductible, as long as the primary purpose of the trip is managing or maintaining the rental. Keep receipts that link each cost to your rental activity, especially for mileage.
HOA Dues
If your rental sits in a homeowners association, regular dues are deductible operating expenses. A special assessment to fund an improvement, such as resurfacing all the parking lots, is a capital expense you depreciate instead.
Repair or Capital Improvement: The Line That Matters Most
The single most important distinction in rental accounting is whether a cost is a deductible repair or a capital improvement you have to depreciate. A repair keeps the property in its current working condition. A capital improvement adds value, extends useful life, or adapts the property to a new use. The IRS applies three tests, and if any one applies, the cost must be capitalized:
- Betterment: fixing a pre-existing defect, enlarging the property, or increasing its capacity or quality, like adding a second bathroom or rewiring the building.
- Restoration: replacing a major structural component, repairing casualty damage, or rebuilding to like-new condition, such as replacing an entire roof.
- Adaptation: converting the property to a use it wasn’t originally intended for, like turning a garage into a rental unit.
Capitalized costs are added to your basis and recovered through depreciation over the applicable recovery period rather than deducted all at once.
The De Minimis Safe Harbor
For smaller purchases, the IRS offers a shortcut. Under the de minimis safe harbor, you can deduct tangible property — tools, small appliances, replacement parts — as long as each item or invoice totals $2,500 or less. If your business has audited financial statements, the threshold rises to $5,000.5Internal Revenue Service. Tangible Property Final Regulations You make the election each year by deducting the amounts on a timely filed return. It’s useful for borderline purchases like a new dishwasher or window unit that might otherwise land in the capital column.
How to Report Everything on Schedule E
Rental income and operating expenses go on Schedule E (Form 1040), Part I. The form has dedicated lines for advertising, cleaning and maintenance, insurance, legal and professional fees, management fees, mortgage interest, repairs, taxes, and utilities. Total operating expenses reduce gross rental income to arrive at net rental income, or a loss if expenses exceed rent collected.
Depreciation sits on its own line and is not an operating expense. It’s a separate deduction that recovers the cost of the building itself, not the land, over 27.5 years using the straight-line method.6Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System You claim it every year you own the property, even though there is no cash payment behind it. Capital improvements are depreciated over their own recovery periods.
Categorize each payment as it happens, save every receipt, and keep operating expenses separated from capital improvements throughout the year. If the IRS questions a deduction, the burden is on you to show it was ordinary, necessary, and connected to the rental.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
1099-NEC Filing for Contractors You Pay
When you pay an independent contractor — a plumber, electrician, property manager, or other service provider — $2,000 or more during the calendar year, you must file Form 1099-NEC with the IRS and send a copy to the contractor. This threshold increased from $600 to $2,000 for payments made after December 31, 2025 under P.L. 119-21, and it will be adjusted for inflation beginning in 2027.7Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide Failing to file can trigger IRS penalties, so track every payment to non-employees as you go, not at year’s end.