Income and expenses
Rents received are ordinary income. Common deductions: mortgage interest, property tax, insurance, repairs, maintenance, property management fees, depreciation, and travel to the property for business purposes.
Depreciation
Residential rentals depreciate straight-line over 27.5 years. Commercial over 39. Land isn't depreciable; allocate purchase price between land and improvements. Taken depreciation must be recaptured at up to 25% on sale.
Passive activity loss rules
Rental losses are passive by default. Passive losses offset only passive income, not W-2 or active business income. Losses not used in the current year carry forward.
The $25,000 active participation exception
If you actively participate (approve tenants, make management decisions) and your AGI is under $100,000, you can deduct up to $25,000 of rental losses against other income. Phases out to zero at $150,000 AGI.
Real Estate Professional status
Spending 750+ hours per year AND more than half your working hours in real estate trades removes the passive loss limitation. Documenting hours is the compliance challenge.
Short-term rentals
STRs with average stay under 7 days escape passive classification entirely if you materially participate. Losses fully offset W-2 income. This is one of the biggest tax levers in real estate.
Repairs vs improvements
Repairs are current-year deductible. Improvements are capitalized and depreciated. The line is blurry, we document and defend under the tangible property regulations.
Common questions
- Can I deduct my mortgage down payment?
- No. The down payment becomes part of your basis in the property, not a deduction.
- What if I use the rental myself part of the year?
- Mixed-use property rules limit deductions. More than 14 days personal use or 10% of rental days triggers vacation home rules.