Rental Property Tax Deductions: What Landlords Can Write Off in 2025

The IRS allows landlords to deduct expenses that are ordinary and necessary for managing, conserving, and maintaining rental property. An ordinary expense is one that is common and accepted in the rental property business. A necessary expense is one that is helpful and appropriate for your rental activity.

Mortgage principal payments are not deductible because they represent repayment of a loan rather than an expense. The value of your own labor managing the property cannot be deducted. Improvements that add value or extend the useful life of the property must be capitalized and depreciated rather than deducted as current expenses.

Deductible vs. Non-Deductible Rental Expenses

Residential rental buildings must be depreciated over 27.5 years using the Modified Accelerated Cost Recovery System (MACRS). Depreciation allows you to recover the cost of the building over its useful life as defined by the IRS. Land is not depreciable because it does not wear out or become obsolete.

Depreciation begins when the property is placed in service, meaning when it is ready and available for rent. Report depreciation each year on Form 4562 and carry the deduction to Schedule E. Even if you do not claim depreciation in a given year, the IRS treats it as allowed and will require recapture when you sell the property.

The depreciable basis of your rental property equals the purchase price plus certain settlement costs, minus the value of the land. Publication 946 provides detailed guidance on how to calculate basis and apply MACRS.

Bonus depreciation under Section 168(k) applies to certain business property but generally does not apply to the residential rental building itself. The 27.5-year recovery period for residential rental property is specifically excluded from bonus depreciation treatment. Bonus depreciation may apply to other shorter-lived assets used in your rental activity, such as appliances or certain land improvements, if they meet the requirements in Publication 946.

When you sell a rental property, the IRS requires you to recapture depreciation taken on the building. Recaptured depreciation is taxed as ordinary income at a maximum rate of 25 percent, separate from any capital gain on the sale. Publication 527 addresses how to report the disposition of rental property, including depreciation recapture calculations.

Rental activities are generally considered passive activities under Section 469 of the Internal Revenue Code. Losses from passive activities can only offset passive income, not wages, salary, or portfolio income. If your rental expenses exceed your rental income, the resulting loss may be suspended and carried forward to future years when you have passive income or dispose of the property.

Publication 925 provides the complete rules for passive activity losses. Taxpayers who need to calculate suspended losses or apply limitations use Form 8582.

Landlords who actively participate in managing their rental property may deduct up to $25,000 of rental losses against non-passive income each year. Active participation means making management decisions such as approving tenants, setting rental terms, or approving repairs. This is a lower standard than material participation.

The $25,000 allowance phases out as modified adjusted gross income (MAGI) rises above $100,000 and is eliminated entirely at $150,000. For every $2 of MAGI above $100,000, the allowance is reduced by $1. Publication 925 contains the detailed calculations.

Taxpayers who qualify as real estate professionals under Section 469(c)(7) may treat rental activities as non-passive if they materially participate. This allows rental losses to offset other income without the $25,000 limitation. Qualifying requires meeting specific hour tests: more than 750 hours in real property trades or businesses in which you materially participate, and more than half of your personal service time must be in those real property activities.

The requirements and implications are substantial. See our real estate professional tax guide for a detailed explanation of qualifying criteria and material participation tests.

Short-term rentals such as vacation rentals or properties listed on platforms like Airbnb may be treated differently than traditional long-term rentals. The tax treatment depends on the average rental period and whether substantial services are provided to guests.

If the average rental period is seven days or less, the activity is generally treated as a business rather than a rental activity for passive loss purposes. If substantial services are provided to occupants, similar to those offered by hotels, the income may also be subject to self-employment tax.

Publication 527 and Publication 925 address how to determine whether an activity qualifies as a rental activity. The characterization affects which forms you use and whether passive loss rules apply. Short-term rental operators should review these publications carefully or consult a tax advisor to determine proper reporting.

The Section 199A qualified business income (QBI) deduction may allow eligible landlords to deduct up to 20 percent of their net rental income. This deduction is separate from Schedule E deductions and is claimed on Form 8995 or Form 8995-A.

To qualify, the rental activity must rise to the level of a trade or business. The IRS provides a safe harbor under Revenue Procedure 2019-38 that allows rental real estate enterprises to be treated as a trade or business if certain requirements are met, including maintaining separate books and records and logging at least 250 hours of rental services per year.

For tax year 2025, the QBI deduction is available in full if taxable income before the QBI deduction is $197,300 or less for single filers, or $394,600 or less for married filing jointly. Above these thresholds, limitations based on W-2 wages and qualified property begin to phase in. These figures come from the Instructions for Form 8995-A (2025).

The QBI deduction is an additional benefit on top of Schedule E deductions, not a replacement. For more detail on the safe harbor and how to document rental services, see our article on rental real estate safe harbor and qualifying services.

Good recordkeeping is essential for claiming rental property tax deductions and documenting Schedule E deductions if the IRS reviews your return. Publication 527 emphasizes that landlords should maintain contemporaneous records of income and expenses.

Records to retain include:

• Receipts and invoices for repairs, maintenance, and services
• Mileage logs for travel to and from rental properties
• Lease agreements and tenant correspondence
• Bank and credit card statements showing rental transactions
• Settlement statements and closing documents from purchase
• Depreciation schedules maintained year over year
• Insurance policies and payment records
• Documentation of capital improvements with dates and costs

Keeping rental activity in a separate bank account simplifies recordkeeping and provides a clear trail for income and expenses. Retain records for at least three years after filing the return, though seven years is advisable for records related to property basis and depreciation.

Most rental income from residential properties is not subject to self-employment tax. Rental income is generally considered passive and does not constitute earnings from self-employment under Section 1402.

Exceptions apply when substantial services are provided to tenants, such as daily cleaning, meals, or concierge services similar to hotel operations. In those situations, the income may be treated as business income subject to self-employment tax. Real estate dealers who hold property primarily for sale to customers may also have different treatment.

Publication 925 discusses the distinction between rental activities and business activities for self-employment tax purposes.

Rental property taxation involves depreciation schedules, passive loss limitations, potential QBI benefits, and recordkeeping that carries forward across years. A real estate tax accountant can review your specific situation, identify deductions you may be missing, and help you plan for property sales or portfolio growth.

Accolade Accounting works with landlords and real estate investors throughout Atlanta and beyond. Contact us to schedule a consultation and build a tax strategy that fits your investment goals.