If you can deduct the labor costs when someone else fixes your rental property, does that mean you can deduct your own labor as well?

This is a common question among DIY landlords, who assume they can deduct their hard work on rental properties. However, that’s not the case. 

The IRS has strict rules that can be complex, so knowing what expenses are tax-deductible can improve your bottom line and help you remain compliant.

In this article, we share the specifics on deducting rental property expenses with actionable advice. You’ll learn how to report your income and expenses correctly and discover best practices for recordkeeping. 

Can you deduct the cost of your own labor?

The IRS has clear guidelines on whether or not you can deduct your own labor on a rental property.

Personal labor, no matter how extensive or time-consuming, is not deductible. The IRS considers your labor a personal contribution, which doesn’t qualify as a deductible expense.

That means you can’t write off the hours you spend painting, repairing, or maintaining your rental property as an expense on your taxes.

On the other hand, when you pay a contractor for their services, you can deduct those payments as a rental expense. While paying contractors involves an upfront cost, the time savings and tax benefits could make it a financially prudent decision.

But it’s also important to recognize the concept of “sweat equity.”

While your personal labor isn’t tax deductible, it still holds value. Your hard work to maintain or improve your rental property can increase its market value and appeal to potential tenants. This sweat equity is an investment in your property’s long-term profitability.

What rental property expenses are tax deductible?

While your personal labor may not be deductible, numerous other rental property expenses do qualify for tax deductions, including:

• Mortgage interest: The interest paid on your rental property mortgage is deductible.
• Property taxes: You can deduct the property taxes you pay on your rental property.
• Operating expenses: Costs like utilities, insurance, and property management fees qualify for deductions.
• Repairs: Expenses for necessary repairs to keep the property in good condition are deductible.
• Depreciation: You can deduct a portion of the property’s cost over its useful life.
• Advertising: Expenses for listing and marketing your rental property qualify as deductions.
• Professional services: The fees for legal, accounting, and other professional services are deductible.
• Insurance: Premiums for landlord insurance on rental property are deductible.
• Travel expenses: You can usually deduct some travel costs related to managing your property.
• Supplies: Items like cleaning supplies, tools, and other materials used for property maintenance are deductible.
• Property management fees: Fees paid to property management companies are deductible.
• Leasing fees: You can deduct expenses for leasing services, such as tenant placement or lease renewals.

Non-deductible rental property expenses

As with personal labor on your rental property, you should be aware of other non-deductible expenses.

Purchase price and closing costs

A property’s purchase price and certain closing costs, such as title insurance and legal fees, are not deductible as expenses. Instead, you should add these to your property’s cost basis. The cost basis factors into depreciation while you own the property and capital gains when you sell.

Improvements vs. repairs

The IRS views repairs as necessary expenses to keep your property in good condition and allows you to deduct those costs in the year incurred. 

However, improvements are not deductible in the year incurred because they add value or extend the life of the property. Examples of improvements include adding a new roof or remodeling a kitchen, and these costs must be capitalized and depreciated over time.

Personal use of property

If you use your rental property for personal reasons, you can only deduct expenses proportionate to the rental period. For instance, if you treat your property like a vacation home and live in it for 3 months of the year, you can typically only deduct expenses for the remaining 9 months.

Non-business travel expenses

Travel expenses for personal reasons are not deductible. Only travel directly related to managing your rental property qualifies for a deduction, such as trips for property maintenance, tenant meetings, or inspections.

How to report rental income and expenses

Schedule E (Form 1040) is the form most landlords use to report income and expenses from rental real estate. On this form, you detail your rental income, deductible expenses, and overall profitability per IRS requirements.

When filling out Schedule E, you must provide information about the rental property, including its address and the number of days you rented it at fair market value. You’ll also report the total rental income received during the year.

Break down your expenses into categories, such as mortgage interest, property taxes, insurance, repairs, commissions, management, and depreciation. Remember to keep thorough records of all income and expenses to support your claims.

Double-check your entries to help ensure accurate reporting, and consult IRS guidelines or a tax professional if needed. Completing your Schedule E properly keeps you compliant with tax laws and can help you manage your rental property finances effectively.

Best practices for recordkeeping

To help make filing your taxes easier, here are some best practices for tracking, organizing, and maintaining your rental property income and expense records: 

• Create a separate checking account: Open a dedicated bank account for each rental property. That can help you monitor your income and expenses and simplify your tax preparation.
• Save all receipts and documents: Collect and organize your receipts, bills, invoices, and bank statements. Categorize them by year and type of expense to make finding them easy. Keep these records for at least 3 years to comply with tax regulations.
• Keep detailed logs of expenses and improvements: Document every expense related to your rental property, including the date, description, cost, and service provider. For any improvements, track the expense, date, and expected life for depreciation purposes.
• Maintain lease and rent records: Keep a file of all lease agreements, rent receipts, and tenant communications. This way, you have a complete history of your rental activities.
• Use accounting software: Consider using accounting software specifically designed for rental properties. The best software for landlords lets you easily categorize expenses, generate financial reports, and gain real-time insights into your property’s performance.

Tax deductions made easy with Stessa

Take your rental property management to the next level with the Stessa platform, which includes the #1 mobile app for landlords.

Stessa’s user-friendly features include easy receipt scanning and storage, automated transaction categorization, and real-time financial dashboards and insights. Stessa helps streamline the recordkeeping process so you can stay organized, maximize your tax deductions, and make informed decisions.

Experience a more efficient, stress-free way to manage your rental properties. Sign up for a free account with Stessa today.