What Are Specific Examples for Deducting Operating Expenses?

As mentioned above, as a landlord, you have to deal with daily expenses such as maintenance, supplies, taxes and other expenses. The deduction for operating expenses is comprehensive, but it does not cover everything you can imagine. On the one hand, it excludes long-term capital expenditures (such as equipment purchases). On the other hand, it excludes expenses that could be considered excessive or personal.

In IRS terms, you can request a tax deduction only if an operating expense is:

  • Ordinary and necessary

  • Current, which means, likely to be used, or used up, within a year

  • Directly related to your rental activity, excluding expenses for your personal benefit

  • Reasonable, excluding luxury expenses

Here are examples of expenses that the IRS recognizes as ordinary and necessary for a rental business:

  • Interest payments on mortgage loans, other loans, and credit cards

  • Property and other taxes

  • Professional fees. For example, attorneys’ fees, accounting, property management, and rental brokers.

  • Renewal of licenses. If you must register your rental with a local government, these fees are deductible.

  • Insurance premiums in progress. This includes not only homeowners’ insurance, but also a portion of your car insurance if you use the car for your proprietor´s business on a regular basis.

  • Quotas of the homeowners association. If your property is a condominium, a townhouse, or in community development, you will be paying association fees, which cover repairs and maintenance.

  • Local transportation expenses, for example, travels from your office to make regular property visits or to purchase supplies. You can deduct an amount from the IRS based on mileage, or the actual costs of owning and operating your car.

Tellus TIP:

Note that if you don’t work from home, trips from your home to your place of business are considered nondeductible commutes.

  • Out-of-town travel costs. You may have to travel overnight and outside your city limits to spend time at the property or see to related business matters, for example, attending a real estate seminar or visiting an attorney.

  • Transportation, hotel, and related expenses, such as internet access, phones, and laundry are fully deductible.

  • Meals and beverages are deductible at 50% of their cost.

  • As an alternative to actual meal expenses, you can deduct a standard daily meal allowance, or "per diem" (which varies depending on your destination).

Tellus TIP:

If you plan to mix vacation time into your trip, the value of your deduction may be reduced depending on the percentage of time you spent on rental activities—spending at least four hours a day on rental activities will protect you.

  • Maintenance costs. Upkeep costs include property repairs, maintenance, cleaning, environmental remediation of problems that arose after you purchased the property and in the ordinary course of business operations and gardening.

  • They exclude improvements or work that improve ownership, which must be deducted via depreciation.

  • Disability access. You can deduct the costs of making your property accessible to the elderly or to people with special needs according to the Federal Americans with Disabilities Act (ADA) standards. It has a limit of $15,000.

  • This is a special deduction because such changes are normally considered "improvements," and as such, subject to depreciation.

  • Office supplies. You can deduct the cost of supplies you use in your office, including software, paper, shipping costs, and notebooks.

  • Note that you cannot deduct equipment and other long-term assets.

  • Education and information. Books, magazine or newsletter subscriptions, classes, and seminars are deductible.

  • Advertising and tenant screening. Unless you rent via word-of-mouth and skip any screening of potential tenants, which is certainly not advisable, you will need at least a "For Rent" sign and will probably pay for classified ads and prospective-tenant credit checks, unless you take advantage of free tenant screening and listing syndication through Tellus.

  • Utilities. If you pay the gas, water, garbage, electric, or other utility bills, you can deduct them.

  • Not applicable cases where the tenant pays for them.

  • Business meals and entertainment, for example, taking the head of the local landlord association for lunch in order to get some advice.

  • These costs are only 50% deductible.

  • Deduct meals and entertainment with caution, since deducting too many of these could be a red flag for the IRS.

  • Business gifts. These are limited to $25 per gift recipient per year.

  • However, if you give a gift to all the employees of a particular business, such as a holiday fruit basket delivered to your gardening service, you may deduct the entire cost, provided that it is reasonable.

  • Membership fees. Joining a landlords’ association would be considered reasonable.

  • Not applicable to deducting fees for country, social, or athletic clubs.

  • Home office expenses. You may deduct these expenses, but it is tricky.