What can I expense against my rental income?
Updated: Aug 30
In general, you can deduct expenses that are ordinary and necessary to operating a residential rental property. However, expenses for the purchase of assets and improvements must be capitalized (by spreading the expense over multiple years) unless you can use an exception. Assets include any real or personal, tangible or intangible property and improvements. Improvements include material additions and corrections, major replacements of substantial parts of property, and property use conversions.
Ordinary and necessary deductible expenses usually include annual property taxes, property insurance premiums, mortgage interest, utilities, and recurring expenses to keep the building in its ordinary condition (or routine maintenance). The routine maintenance expenses include cleaning and replacing damaged or worn parts with comparable parts. The new "parts", unlike capitalized improvements, do not make the property materially better, nor do they return the property to its ordinary condition after being in disrepair. You also must reasonably expect to perform the deductible routine maintenance expense at least twice within the 10-years after acquiring the building property.
An exception to the capitalization rule for the purchase of tangible property is the de minimus safe harbor, which allows you to deduct a purchase of tangible property if the expense amount is low enough and if you report that you're using this safe harbor on your tax return. Currently, this expense amount cannot exceed $2,500 per item on an invoice when have no financial statement that is independently audited or filed with the SEC or state government or agency. You also must treat this expense amount as an expense on your books and you cannot choose to capitalize any purchase that is eligible for this safe harbor in the year that you report using the safe harbor.
Another exception to the capitalization rule for the purchase of improvements is the safe harbor for small taxpayers. You must have a 3-year average annual gross receipts of less than $10,000,000 and the unadjusted basis for the building property must be less than $1,000,000. Also, before you may deduct the expense of an improvement with this safe harbor, your total annual amount paid on the building for all improvements, repairs, and maintenance, cannot exceed the lessor of $10,000 or 2% of the unadjusted basis for the building.
If your annual expenses are too high for the safe harbor for small taxpayers, and the item price is more than $2,500 for the de minimus safe harbor, and the asset or improvement does not qualify for routine maintenance, then you might be able to use the section 179 deduction or the section 168(k) bonus depreciation deduction for purchases except for the cost of the actual building.