PROP HOURS BLOG
Rental Property Tax Deductions: The Long-Term Landlord Guide
Maria bought a duplex outside Columbus in 2021, put long-term tenants in both units, and collected about $29,000 in rent her first full year. After mortgage interest, taxes, insurance, repairs, and depreciation, her return showed a $9,000 loss — and then her CPA told her she could only use part of it. The deductions were all real. The limit was something else entirely: the passive loss rules, which decide how much of a rental loss actually reaches your tax bill.
Long-term rentals live under a different set of tax mechanics than short-term rentals. This guide covers the deductions a long-term landlord can claim, the repair-versus-improvement line that trips people up, and the passive loss limits that decide what you can use this year. (If your property is a short-term rental, start with our Airbnb tax deductions checklist instead — the STR rules play a different game.)
The deductions that do the heavy lifting
Mortgage interest. The interest portion of your mortgage payment is deductible; the principal portion is not. In the early years of a loan, interest is most of the payment, which is why newer landlords are often surprised at how large this deduction is.
Property taxes. Real estate taxes on the rental are deductible as a rental expense. Note the SALT cap applies to your personal itemized deductions, not to taxes paid on rental property — those stay fully deductible on Schedule E.
Depreciation. Residential rental buildings are depreciated over 27.5 years, straight-line, as IRS Publication 527 explains. Land is never depreciable — only the building and improvements. Depreciation is the deduction that most often turns a cash-flow-positive rental into a paper loss, and the paper loss is exactly what the passive loss rules then go after. Our cost segregation guide explains how reclassifying components into 5, 7, and 15-year property can front-load this deduction.
Insurance. Landlord policies, liability coverage, and flood insurance on the rental are all deductible.
Property management fees. What you pay a manager or leasing agent is deductible — which is worth remembering when you compare the cost of management against the hours you would have to log yourself for the participation tests.
Utilities you pay. Water, trash, electric, gas, and internet that the landlord covers are deductible operating expenses.
HOA dues. Deductible as an ordinary rental expense for the months the property is held out for rent.
Advertising and leasing costs. Listing fees, tenant screening, and leasing commissions are deductible. Tenant placement fees are generally amortized over the lease term.
Professional fees. The portion of CPA, bookkeeping, and attorney fees attributable to the rental activity is deductible. Eviction costs and lease drafting go here too.
Travel and mileage. Local trips to collect rent or to manage and maintain a rental — picking up repair parts, meeting a contractor, showing a vacancy — can be deducted at the standard mileage rate or as actual costs, backed by a mileage log with dates, miles and purposes. IRS Publication 527 treats travel between your home and a rental as commuting unless your home is your principal place of business. Our rental property mileage log guide covers which trips count and the 2026 rates.
Repairs vs. improvements: which rental repairs are tax deductible
This is the single most expensive classification mistake landlords make. Repairs keep the property in ordinarily efficient operating condition and are deductible in the year you pay for them. Improvements get capitalized and depreciated over years. Getting it wrong in either direction costs money — expensing an improvement overstates this year's deduction, and capitalizing a repair defers a deduction you were entitled to now.
The tangible property regulations use the BAR test: an expenditure is an improvement if it is a Betterment, an Adaptation to a new use, or a Restoration. Repainting a unit, fixing a faucet, patching drywall — repairs. Replacing the entire roof, installing a new HVAC system, or converting a garage into a bedroom — improvements. When a job has both elements, the invoice detail is what lets your CPA split them, so ask contractors to itemize.
Depreciation, and the paper loss it creates
Depreciation deserves its own section because it is usually the largest deduction and the least understood. You recover the building's cost (not the land's) over 27.5 years, starting when the property is placed in service. A $275,000 building value yields roughly $10,000 a year in depreciation — no cash leaves your pocket, but the deduction is real.
Cost segregation accelerates this by identifying components with shorter lives — appliances, flooring, landscaping, certain electrical — and depreciating them over 5, 7, or 15 years instead. Paired with bonus depreciation where it applies, a study can pull years of deductions into year one. Run the cost segregation calculator to see the rough shape of it, then talk to a professional about whether a study pays for itself on your property.
One more thing depreciation creates: suspended losses. When the passive loss rules (below) block you from using a loss this year, the unused portion carries forward indefinitely until you have passive income to absorb it or you dispose of the property.
The passive loss limits: what decides how much you can actually use
Here is the part Maria ran into. Rental activity is passive by default under §469 (see IRS Publication 925), and passive losses generally cannot offset non-passive income like W-2 wages. Three escape routes exist.
The $25,000 active-participation allowance. If you actively participate — a lower bar than material participation; approving tenants, setting rents, and arranging repairs generally qualifies — you can deduct up to $25,000 of rental losses against other income. The allowance phases out between $100,000 and $150,000 of modified adjusted gross income, and it disappears entirely above that.
Short-term rental rules. For a long-term rental, material participation on its own does not change anything: rental activities are passive regardless of how many hours you put in, unless you qualify as a real estate professional. Short-term rentals are different — when the average guest stay is seven days or less, the property is not a rental activity under the passive rules, and material participation can make its losses non-passive. Our short-term rental tax loophole guide covers that route, and how to prove material participation covers the records.
Real estate professional status. More than 750 hours in real property trades or businesses, plus more than half your total working time — and material participation in each rental activity (or a grouping election treating them as one). Our REPS guide walks through both tests.
Whatever you cannot use this year is not lost — suspended passive losses carry forward on Form 8582 and are released against future passive income or when you sell the property. That carryforward is valuable, but only if the underlying deductions were documented well enough to survive a look-back.
How a rental property loss deduction works on your return
A rental loss reaches your tax return in four steps:
- Figure the loss on Schedule E. Rent minus operating expenses and depreciation, property by property.
- Apply the passive activity rules on Form 8582. If you actively participate, up to $25,000 of the loss can offset wages and other income. The allowance shrinks by 50 cents for every dollar of modified adjusted gross income over $100,000 and is gone at $150,000.
- Carry forward what is disallowed. Suspended losses carry forward with no time limit and offset passive income in later years.
- Release them when you sell. When you dispose of your entire interest in the rental in a fully taxable sale to an unrelated buyer, its suspended losses are generally released and can offset other income that year.
Real estate professionals who materially participate are not held to the $25,000 limit for their rentals. Our Form 8582 guide explains the form itself.
What you cannot deduct
Mortgage principal. Paying down the loan builds equity; it is not an expense. Only the interest is deductible.
Personal use. Days you or family stayed at the property are personal use, not rental activity. Expenses must be allocated, and heavy personal use changes the property's tax character entirely.
Fines and penalties. Code violations, late fees to government agencies — not deductible, ever.
The value of your own labor. Your 40 hours rewiring a unit is worth a lot to the property and exactly zero as a tax deduction. Only amounts you actually paid to others are deductible — which is also why the hours matter for the participation tests even though they are not themselves deductible.
Commuting. Routine travel between home and a property you manage is commuting, not a business trip, unless the facts clearly show otherwise.
Records that survive contact with an auditor
Deductions are only as good as their proof. Keep every invoice and receipt, a rent ledger, and a mileage log — and if you are claiming material participation or REPS, a contemporaneous hour log with dates, properties, tasks, and durations. Reconstructed records are permitted as evidence, but entries made when the work happened carry far more weight. We show what a defensible entry looks like in how to prove material participation.
Maria's $9,000 loss was real, and about $6,000 of it was suspended under the passive loss rules — carried forward, not lost. What she changed for the following year was the recordkeeping: itemized contractor invoices so repairs and improvements split cleanly, a mileage log for property trips, and an hour log that let her CPA test her against the 100-hour and 500-hour tests instead of guessing.
Can I deduct rental losses against my W-2 salary?
Generally only up to the $25,000 active-participation allowance, which phases out between $100,000 and $150,000 of modified adjusted gross income. Beyond that, a long-term rental's losses offset wages only if you qualify as a real estate professional and materially participate; short-term rentals with average stays of seven days or less follow different rules. Unused losses are suspended and carried forward — they are not lost.
What is the $25,000 passive loss allowance?
Landlords who actively participate in their rentals — approving tenants, setting rents, arranging repairs — can deduct up to $25,000 of rental losses against non-passive income like wages. It phases out ratably from $100,000 to $150,000 of modified adjusted gross income.
How do I tell a repair from an improvement?
Apply the BAR test: a betterment, an adaptation to a new use, or a restoration is an improvement and must be capitalized and depreciated. Work that merely keeps the property in ordinarily efficient operating condition is a repair, deductible in the current year. Itemized contractor invoices are what make the split defensible.
Can I deduct unpaid or lost rent?
Usually not. If you use the cash method, as most individual landlords do, rent you never collected was never included in your income, so there is nothing to deduct. Landlords who use the accrual method and already reported the rent may be able to deduct it as a business bad debt.
Can I claim depreciation if my property is gaining value?
Yes. Depreciation is a tax concept based on wear and tear over 27.5 years for residential buildings — it has nothing to do with market value. Only the building is depreciable; the land portion of your purchase price is excluded.
Do I need real estate professional status to use rental losses?
Not to use them at all: the $25,000 allowance and the suspended-loss carryforward work without it. But for a long-term rental, real estate professional status plus material participation is the only way to deduct losses beyond the allowance against other income — material participation alone doesn't change a long-term rental's passive status. See our REPS guide for the 750-hour and more-than-half tests.
What records should a landlord keep?
Every invoice and receipt, a rent ledger, a mileage log with dates and purposes, and — if you are claiming material participation or REPS — a contemporaneous hour log with dates, properties, tasks, and durations. Entries made when the work happened are far stronger than records reconstructed at tax time.
One last thing
Do not wait until tax season to sort repairs from improvements or to reconstruct a year of property trips. The invoice detail, the mileage entry, and the hour log are all cheapest to capture in the moment — and a clean file is what turns a suspended loss into a deduction your CPA can actually defend.
PropHours is built for the hours side of that file: a timer when the work starts, a photo of the receipt when it ends, and a log your CPA can read. The deductions did their part. The proof is yours to keep.
Related reading
If you also run a short-term rental, read the Airbnb tax deductions checklist — the STR rules differ. For bigger depreciation plays, see the cost segregation guide and the cost segregation calculator. And if your losses keep getting suspended, the REPS guide explains the route past the passive limits.
This article describes rental property tax deductions in general terms and is not tax advice. Which deductions apply, how the passive loss limits affect you, and whether an improvement must be capitalized all depend on your facts; review IRS Publication 527 and Publication 925 and consult a qualified tax professional. PropHours records the work you log — it does not determine tax eligibility.