Tax Deductions for Investment Properties

What should investment property owners know about taxes? 

Owning investment property comes with a range of tax considerations that can impact your annual return, your long-term investment strategy, and your estate. Knowing what qualifies as a deduction—and what doesn’t—can help you plan ahead and avoid missed opportunities or costly surprises. 

Whether you're a first-time landlord or have multiple units, understanding the basics of rental property taxation can make a meaningful difference. You can also avoid common tax mistakes when buying investment property.  

Who reports the income and deductions for my investment property?

If you own investment property in your name or through a single-member LLC, your rental income and expenses are reported directly on your personal income tax return. You'll typically use IRS Schedule E to do this. 

What expenses can I deduct as as an investment property owner?

Some of the deductible costs may include: 

• Necessary expenses like mortgage interest, property taxes, and insurance premiums. 

• Operational costs such as advertising and cleaning. 

• Maintenance and repairs needed to keep the property in good condition. 

• Legal fees, such as those related to eviction proceedings. 

• Travel expenses when visiting the property for business-related purposes, such as maintenance or rent collection. 

Can I deduct investment property capital improvement costs?

Not in the year you pay for them. Capital improvements—such as renovations or new systems—must be added to the property’s basis and depreciated over time. Even travel related to these improvements isn’t fully deductible right away. 

What is the QBI deduction and do I qualify? 

The Qualified Business Income (QBI) deduction, made permanent by the OBBBA in July 2025, may allow you to deduct 20% of qualified income from rental properties—if the rental activity qualifies as a trade or business. Eligibility depends on your income, how involved you are, and other factors. Talk with a tax advisor to explore your options. 

How do passive activity rules affect my taxes? 

Unless you meet the IRS definition of a real estate professional, rental income is usually considered passive. Passive losses—when your expenses exceed rental income—can only offset other passive income. However, you may be allowed to deduct up to $25,000 in passive losses annually, depending on your income, filing status, and participation level. 

What counts as rental income? 

It includes more than just monthly rent. According to IRS rules: 

• Advance rent is taxable in the year received. 

• Last month’s rent paid at lease signing is also income in the year received. 

• Security deposits aren't income unless withheld for damages. 

• Lease cancellation fees from tenants count as income. 

• Bartered services (e.g., a tenant performs maintenance in lieu of rent) must be reported at fair market value. 

Rental income tax example: 

Let’s say your tenant gives you $1,500 as a security deposit and another $1,500 for their last month’s rent up front. 

• The security deposit is not reportable as income if you plan to return it, but it becomes income if you withhold part of it later for damages. 

• The last month’s rent, however, must be reported as income in the year it’s received—even if the tenant won't live there until the following year. 

Understanding these distinctions helps ensure compliance and accurate reporting. 

Should I include my investment property in my estate plan?  

Absolutely. Like other real estate, rental properties should be considered in your estate planning checklist. Tools like trusts can help ensure a smooth transition to your heirs and may reduce estate tax liability.  

How can Sachetta help? 

At Sachetta, our team works with wealth management clients to consider the role of investment property in your financial plan. We solve tax questions before they become tax problems. Whether it’s about reporting rules, tax-saving strategies, or estate planning, we’re here to help investment property owners plan with confidence. 

If this topic is relevant to you, you might want to learn more about becoming a client. Our clients turn to us for advice on this and similar topics. 

About the Author:

George Liakakis, CPA, CFP® , MSA is Sachetta’s CFO and holds a Master’s Degree in Accounting from the University of Massachusetts Lowell. He is a licensed financial advisor. He focuses on both business and individual taxation, as well as financial planning.