Are you one of the millions of American landlords and tenants in the current residential rental market? For both parties, it's often easy to get wrapped up in the general aspects of the deal, like finding an apartment or a tenant, making sure that rent is paid, and maintaining the premises. In the meantime, the tax deductions for landlords and tenants are often overlooked and sometimes even ignored.

Landlords can take deduction for things like mortgage interest, and in some states tenants can take a deduction for real estate taxes paid on the property.

State and federal tax laws can get complicated for landlords and tenants, so before taking any deductions, look at both the federal tax laws for residential property, as well as the tax laws in your area. Or, get the advice of an experienced real estate or tax attorney.

Landlord's Deductions

As a landlord, you're a property owner, and as such, you're entitled to the same tax deductions as any other property owner, such as:

  • Mortgage interest payments, so long as leased premises secure the loan and you're responsible for paying the loan
  • Property taxes that are assessed against the leased premises and paid to a local government, such as a county or city
  • Costs associated with financing or getting a loan for the premises, such as mortgage closing costs
  • Casualty losses, which occur when the home or real estate is destroyed or damaged, either totally or partially, by some sudden, unexpected or unusual cause, such as a flood, hurricane, or fire

As a landlord, however, you're entitled to take many other tax deductions, such as a deductions for:

  • Reasonable and ordinaryexpenses associated the property, like the cost of repairs made to the premises that keep the property in good condition but don't substantially increase its value. "Repairs" include things like painting and roof maintenance. Other expenses related to the rental property that are deductible include advertising (when trying to fill a vacancy), and fire, theft, and flood insurance
  • Travel expenses for going to and from the property to collect rent or maintain or repair the premises
  • Professional fees paid for preparing the Internal Revenue Service (IRS) schedule on which you report your income and losses from the rental, as well as fees paid to attorneys and property management personnel for services related to the property

But, be careful of some limits on your deductions for expenses:

  • If you use the rental property as your residence, you have to divide or separate the cost of the expense between your personal use and rental use, and you can only deduct the expense for rental use. The IRS has detailed instructions and formulas
  • Improvements are not repairs, and so you can't deduct their full costs in the year you paid them, but you can depreciate them, that is, you'll take a small deduction for the cost of the improvement every year for several years for the decreased value improvement that's caused by age, usage, and ordinary wear-and-tear. Improvements are things that add value to the property, like whole room additions

All these deductions are for federal income tax purposes, but many states allow for them as well, so be sure to check the tax laws in your area.

Tenant's Deductions

A residential tenant, as a non-property owner, has limited tax deductions. At the federal level, however, you can take deductions for:

  • Property taxes, if the lease requires you (rather then the landlord) to pay those taxes
  • Casualty losses, if you use the premises as your home, as opposed to business uses

In addition, some states, like California and Maryland give some tenants a "Renter's Credit." This credit is intended to offset the amount of property taxes that tenants pay as part of the rent. In other words, because most landlords pass on the cost of property taxes to their tenants, these credits give tax relief to the persons who are actually paying the taxes: the tenants.

These tax credits have residency, age, and income requirements that determine the amount of your credit, so if your state gives such a credit, make sure you read the requirements carefully to make sure you get the maximum amount of the credit.

Questions for Your Attorney

  • Does our state have a renter's tax credit?
  • I rent a condo and pay property taxes. The condo owner asked to take over the payment because she needs the tax break, but I need it, too. Do I have to let her pay the taxes? Can we split it?
  • What can happen if I take a casualty loss and later my insurance company reimburses part of my loss?