When you own a rental property, knowing the difference between repairs and improvements is crucial for maximizing tax deductions. Repairs are immediate fixes to keep your units habitable, while improvements increase the long-term value of your asset. Classifying expenses correctly ensures you deduct the right amount at the right time and stay aligned with IRS rules.
Repairs restore your rental to its original condition after wear or damage. They do not add significant value or extend the property’s useful life. Common repair examples include:
You generally deduct repair costs in the year you incur them.
Improvements enhance or upgrade your rental property, extending its lifespan or increasing market value. These expenses must be capitalized and depreciated over several years. Typical improvements include:
The IRS requires you to spread the deduction for improvements over the property’s recovery period.
Getting the classification right affects your taxable income and audit risk. Under-deducting repairs costs means you miss immediate savings. Over-deducting improvements can trigger red flags with the IRS. Use the table below as a quick reference:
Recording every repair accurately is the first step toward claiming these deductions. If you skip this, you leave money on the table.
You can write off costs for:
Digital tools make record-keeping easier. Consider:
By standardizing your tracking system, you’ll be ready if the IRS ever requests proof of expenses.
Although improvements must be capitalized, that doesn’t mean you lose the deduction. You simply spread it across the asset’s useful life.
When you spend on an improvement, record it as an asset rather than an expense. Your journal entry might look like:
Then claim depreciation each year based on the IRS recovery period.
If you qualify, Section 179 allows immediate expensing of certain property costs in the year of purchase. Eligible items often include appliances and some HVAC components. Limits apply, so consult a tax professional before applying Section 179 to your rental property.
You may also be eligible for energy credits when you install:
These credits reduce your tax liability dollar-for-dollar, on top of depreciation deductions.
If you hire a property manager or pay a leasing agent, you can deduct those fees as an expense.
Management fees may include:
List management fees under “Expenses” on Schedule E of your tax return. Keep detailed invoices or contracts in case of an audit.
Even if you own the property yourself, any third-party management fees count. If you handle everything personally, you cannot deduct your own labor, but you can still write off office supplies, postage, and marketing costs.
Interest on loans you use to acquire or improve your rental property is generally deductible.
For each loan tied to your rental property, you can deduct the interest portion of your mortgage payment. This is often one of the largest deductions you’ll claim.
If you take out a home equity line of credit or loan and use the funds strictly for your rental, that interest is also deductible. Be sure to track and document the purpose of the loan.
Depreciation lets you recover the cost of your rental property over time, reducing your taxable income each year.
The IRS assigns a 27.5-year recovery period for residential rental property. You depreciate the building (not the land) at about 3.636% each year.
If you own a mixed-use building or a purely commercial property, the period extends to 39 years. Your annual rate is around 2.564%.
In some years the IRS permits bonus depreciation, allowing you to write off a larger portion of eligible assets in the first year. Check current tax law to see if bonus depreciation applies to your improvements.
Whenever you travel to manage or inspect your rental property, those costs can add up to significant deductions.
For 2025, you can deduct 65.5 cents per mile driven for business related to your rental property. Keep a mileage log with:
Beyond mileage, you may deduct:
Use a dedicated mileage log book or mobile app. Save fuel receipts and lodging invoices. Tie each record back to a specific property address and purpose.
Good record-keeping is the backbone of your tax strategy. It protects you in an audit and makes filing smoother.
Accounting software often has built-in attachments. Link each transaction to scanned documents. Use consistent naming conventions like “2025-04-10RoofRepair123MainSt.pdf.”
Even when you sell, strategic planning can minimize your tax bill.
When you sell a rental property, the IRS requires you to “recapture” depreciation and pay tax on that portion at a maximum rate of 25%. Factor this into your sale price and profit projections.
Long-term capital gains rates may apply if you owned the property over one year. Your net gain equals your sale price minus adjusted basis (purchase price plus improvements minus depreciation).
A 1031 like-kind exchange lets you defer capital gains and depreciation recapture by reinvesting the proceeds into another qualifying rental property. Strict timelines and rules apply, so start planning well before your sale.
By mastering these top deductions and tracking strategies, you’ll keep more of your rental income in your pocket. From repairs and management fees to depreciation and travel costs, every deduction counts. Use our tips to set up a robust record-keeping system, so you never overlook another write-off. Ready to boost your bottom line on your next rental property investment? Start today with an organized log of expenses and watch your savings grow.
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