Rental Property Taxes: Deductions, Depreciation, Losses
What landlords deduct, how a building is depreciated, repairs versus improvements, the passive loss limits, and what comes back at sale.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Rental income is reported on Schedule E, net of operating expenses — mortgage interest, property taxes, insurance, repairs, management, utilities — and depreciation of the building over 27.5 years for residential property. Losses are passive and limited unless you qualify for the $25,000 allowance or real estate professional status. Depreciation claimed is recaptured at sale.
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What is deductible?
| Expense | Treatment |
|---|---|
| Mortgage interest, property tax, insurance | Deducted as paid |
| Repairs (fixing what is broken) | Deducted as paid |
| Improvements (new roof, addition, kitchen remodel) | Capitalized and depreciated |
| Building purchase price, excluding land | Depreciated over 27.5 years (residential) or 39 years (commercial) |
| Appliances, carpet, furniture | 5-year property; 100 percent bonus depreciation for property acquired after January 19, 2025 |
| Management fees, advertising, legal and accounting | Deducted as paid |
| Travel to the property | Deductible with records; local mileage at the standard rate |
| Owner's own labor | Not deductible |
How do repairs and improvements get sorted?
A cost that keeps the property in ordinary operating condition is a repair; one that betters the property, restores it after it has deteriorated, or adapts it to a new use is an improvement. Three safe harbors simplify this: the de minimis election for items at or below $2,500 per invoice or item (for owners without an audited financial statement), the routine maintenance safe harbor, and the small taxpayer safe harbor. That last one lets an owner with average annual gross receipts of $10 million or less deduct all of a year's repairs, maintenance, and improvements on a building with an unadjusted basis of $1 million or less, if the year's total for that building does not exceed the lesser of $10,000 or 2 percent of its unadjusted basis.
Why does depreciation matter so much?
Depreciation is a non-cash deduction that often turns positive cash flow into a tax loss. It also reduces basis, and at sale the depreciation taken (or allowed, even if not taken) is recaptured at a maximum 25 percent rate. A cost segregation study can accelerate depreciation by reclassifying components into shorter lives.
How are losses limited?
Rental losses are passive. They offset passive income from other sources; a net loss is allowed only up to the $25,000 active participation allowance, phased out between $100,000 and $150,000 of modified adjusted gross income, or without limit for real estate professionals. Suspended losses carry forward and are released when the property is sold in a taxable sale.
Does rental income qualify for the 20 percent deduction?
Rentals that rise to a trade or business do; the deduction is now permanent under the 2025 tax law. The IRS safe harbor requires 250 or more hours of rental services a year (by the owner, employees, or contractors) — or in three of the last five years for an enterprise in existence at least four years — separate books, and contemporaneous records. Triple-net leases are excluded from the safe harbor.
Frequently asked questions
Do I need to issue 1099s to contractors who work on my rental?
Landlords operating as a trade or business must issue Form 1099-NEC to unincorporated contractors paid $2,000 or more for payments made in 2026 ($600 or more before 2026).
Is rental income subject to self-employment tax?
Not for ordinary rentals. Short-term rentals with substantial services can be.
What if I use the property personally part of the year?
Expenses are allocated between rental and personal days, and deductions may be limited to rental income under the vacation home rules.
Does Florida tax rental income?
Florida has no personal income tax, but state sales tax and local tourist development taxes apply to rentals of six months or less, and furnishings in rentals may be subject to tangible personal property tax.
Official sources
The IRS explains: “You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.” — Internal Revenue Service, Publication 527 (2025), Residential Rental Property, https://www.irs.gov/publications/p527
The IRS explains: “You are not required to capitalize as an improvement, and therefore may be permitted to deduct, the costs of work performed on owned or leased buildings, e.g., repairs, maintenance, improvements or similar costs, that fall into the safe harbor election for small taxpayers.” — Internal Revenue Service, Tangible property final regulations, https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk sets up depreciation schedules and tracks suspended losses property by property. See pricing or book a free fit call.
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