So You Have a Rental Property. Now What?
Things to Keep in Mind for First-Time Landlords
Owning a rental property sounds like a great way to build wealth, and it can be. But there are a lot of things to be aware of that many first-time landlords overlook.
Whether you’re renting out a second property, inherited a home and didn’t want to sell, or just moved and decided to lease out your old place, here’s what you need to know to keep yourself in the good graces of the IRS.
You Have to Report Rental Income (Even If You Didn’t Get a 1099)
If you’re collecting rent, via Zelle, Venmo, check, or even cash, it needs to be reported as income on your tax return. This goes on Schedule E, and yes, the IRS expects to see it whether or not a platform like Airbnb or a property manager sends you a 1099.
What counts as rental income?
Monthly rent
Security deposits you keep (for damages or if the tenant breaks the lease)
Lease cancellation fees
The fair market value of services provided in lieu of rent (like if your tenant mows the lawn in exchange for a discount)
Note: Refundable security deposits you intend to return are not income; unless you end up keeping all or part of it.
What You Can Deduct
The good news? Rental income is taxable, but you can write off a lot of related expenses to offset it. Some of the most common deductions include:
Mortgage interest
Property taxes
Repairs and maintenance (patching drywall = deductible; renovating the kitchen = not so fast)
Insurance
Utilities (if you cover them)
Property management fees
Travel to and from the property
Legal, tax, and accounting fees
And don’t forget about depreciation. The IRS requires you to write off the cost of the property (excluding land) over 27.5 years for residential rentals. (Commercial properties are treated differently and not covered in this post.) Depreciation is a non-cash deduction that often helps reduce your taxable income even if you’re showing a profit on paper.
Repairs vs. Improvements: Know the Difference
This is one area the IRS loves to scrutinize. Repairs are deductible right away. Improvements have to be capitalized and depreciated over time.
Deductible this year:
Fixing a leaky faucet
Replacing a broken window
Painting a room
Not deductible all at once:
Remodeling a bathroom
Installing a new HVAC system
Replacing the roof
It’s all about whether you’re restoring something to its previous condition or improving the value of the property.
Passive Income Rules Might Limit Your Deductions
Even if your rental shows a loss (thanks to depreciation or high expenses), you may not be able to deduct the whole thing, at least not right away. That’s because most rental activity is considered passive, and losses are subject to passive activity loss limitations.
There are specific rules related to this that I'm not going to dive deeply into in this post. I definitely recommend speaking with a tax professional to make sure you get this one right. Luckily, there happens to be one right here *wink*
Keep Good Records – Always
This isn’t a “set it and forget it” kind of gig. You need to keep:
Proof of rent payments
Receipts for all expenses
Mileage logs if you drive to the property
Closing statements and depreciation schedules
Even if you have a property manager, you’re still responsible for what goes on your tax return.
Final Thoughts
Being a landlord comes with perks, but it also comes with responsibilities, especially at tax time. If you’re not sure whether something is deductible or how to handle your depreciation, this is one of those areas where it pays to ask questions before the IRS starts asking you.
If you're uncomfortable navigating the intricacies of a rental property, book a free consultation. I’d be thrilled to help!