How to Deduct Property Management Expenses

There are many tax deductions available to landlords. Unfortunately, many landlords fail to take advantage of them and end up paying more taxes on their properties than they have to. It's important to know what property management expenses you are entitled to deduct. Keep your receipts, records and canceled checks well organized throughout the year.

Difficulty: Easy

Instructions

Things You'll Need:

• Records
• Tax forms
• Receipts
• Canceled checks

Deduct Property Management Expenses

1. Organize your rental income and expenses. It's a good idea to use a spreadsheet or other software program. You must group your property management income and expenses for each property separately.

2. Report property management expenses on IRS Schedule E.

3. Enter income from all properties on line 3. You can list information for up to three rentals on one Schedule E. Use additional Schedule E forms for other properties.

4. Deduct property management expenses on lines 5 through 18. Enter the total on line 19.

5. Compute your depreciation deduction on IRS Form 4562. Deductions for the original cost of the property plus major improvements must be spread out over the useful life of the property.

6. List your depreciation expense on line 20.

7. Compute your total expenses by adding lines 19 and 20 and enter on line 21.

8. Subtract line 21 from line 3 (rents received) and enter that amount on line 23. This is your total income or loss from rental property.

9. Combine your total net income for all properties listed on Schedule E and list on line 24.

10. Combine your total net losses for all properties and list them on line 25.

11. Combine lines 24 and 25 and enter the total on line 26. This is your total income or loss.

12. Enter your income or loss on IRS Form 1040, line 17.

Tips & Warnings

• Deductible property management expenses include mortgage interest, taxes, utilities, cleaning and maintenance, legal and professional expenses, auto and travel, depreciation and repairs needed to maintain your property.
• If you perform repairs and maintenance on property you own, do not deduct the cost of your own labor.
• Renting real estate is usually considered a passive activity even when you are actively involved in managing a property or properties. The IRS limits your total loss for all properties to $25,000 per year. The rules for Passive Activity Losses can be found in the instructions for Schedule E.
• If you are not actively involved in the management of your rental, it is considered investment property and you may be required to file Form 8582 (Passive Activity Loss Limitations). Your rental expenses will not be allowed to exceed your rental income. You cannot deduct a loss.