Can You Deduct Your Own Labor on Rental Property? A Guide (2024)

Owning a rental property can provide great investment returns, but it also involves being aware of complex tax rules. As a landlord, you may wonder if you can expense the value of work you do on your own property.

You likely spend lots of time prepping your rental, making repairs, or interacting with tenants. So, it's natural to question whether your sweat equity counts as a tax-deductible expense.

We’ll explore some of the most common write-offs landlords can take and what expenses are non-deductible. We'll also cover how you can properly document everything along the way, as this helps make sure that you don’t miss out on available tax deductions.

Let’s uncover potential rental property tax savings in detail. With some upfront planning, you can maximize deductions and returns at tax time.

Can you deduct your own labor?

The short answer is no, you cannot deduct the value of your own labor on a rental property, even if you act as the property manager or perform maintenance and repairs yourself. This applies whether you are a full-time or part-time real estate investor.

The reason is that the tax code prohibits deducting "the value of your own labor" as a business expense. Your time and effort essentially have no monetary value for tax purposes when you work on your own property.

The good news is that there are still plenty of rental property expenses you can deduct!

Rental property tax deductions

Even though your sweat equity doesn't count towards deductions, you still have numerous other legitimate tax deductions for rental properties at your disposal. These include expenses like property taxes and professional services. The most common deductible expenses that landlords claim are:

Mortgage interest

One of the biggest expenses for rental property owners is mortgage interest. You can deduct all mortgage interest paid over the tax year on loans used to finance the purchase of the rental property. This includes interest paid on the first mortgage, second mortgage, home equity loans, or any other debt that went toward the purchase price or improvements.

You can also deduct points and loan origination fees over the life of the loan. The interest deduction applies to rental properties owned by individuals, partnerships, LLCs, trusts, and corporations. You'll want to keep detailed records of mortgage interest paid as reported on Form 1098 by your lender.

Property taxes

You can deduct state and local property taxes imposed on the rental property itself in the tax year that the taxes are paid. This includes city and county taxes charged on the assessed value of the property. You can also deduct any special assessment taxes for improvements like sidewalks, sewer systems, or roads that benefit the property.

Use an accounting system to track and keep copies of tax bills and proof of payment. If you pay your property taxes through an escrow account, the mortgage lender will provide a statement showing taxes paid.

Insurance

Rental property owners can deduct the costs of insurance premiums related to the rental property, such as hazard, flood, and liability insurance, in the tax year paid. This includes payments made directly by the owner or through an escrow account with the mortgage lender.

Be sure to maintain documentation like insurance bills and proof of payment. Note that if you have insurance claims and proceeds, you'll report those differently.

Repairs and maintenance

You can deduct expenses for repairs and routine maintenance that keep the rental property in an operational and habitable condition. Examples include painting interiors and exteriors, appliance and HVAC repairs, plumbing repairs, flooring replacement, yard maintenance, and regular pest control.

Repairs must be related to wear and tear or damage to restore the property. However, upgrades and renovations that improve the property fall under the capitalization rules. Keep copies of invoices for all work you've done on your rental property.

Utilities

The costs of electricity, gas, water, trash pickup, cable, internet, and other utilities paid by the landlord are deductible operating expenses unless the lease requires they be paid directly by the tenant. If you can, having tenants pay utilities directly saves the hassle of splitting bills.

Store details of utility bills in your name and proof of payment. If the tenant pays, you don't need to keep copies of their bills.

Travel to the property for management purposes

Travel costs related to managing or maintaining the rental property are deductible, such as mileage to visit the property for repairs, tenant meetings, and inspections. This includes gas costs, standard mileage deductions, tolls, airfare, and lodging if an overnight stay is required. Use a system to maintain detailed records with the reason for travel, dates, receipts, and mileage logs.

Depreciation

You can recoup a portion of the purchase price of the rental property each year through depreciation deductions. Complex rules and tables determine depreciation amounts based on the components of the property, like the building structure itself, land improvements, and personal property like appliances. This is an important category that lets the owners deduct some of the purchase and improvement costs over 27.5-39 years.

Legal and professional fees

Legal and tax advice costs related to operating the rental property are deductible, including attorney fees for drafting leases or evicting tenants, as well as tax preparation fees specifically related to reporting rental income and expenses. The costs of business licenses, permits, and rental association fees are also deductible. Be sure to save your invoices from attorneys and tax pros.

Advertising

The expenses associated with advertising the rental property to find tenants are deductible in the tax year incurred. Examples include classified ads, lawn signs, flyers, and website costs for listings on listing sites like Craigslist or Zillow.

Management fees

Hiring a property management company makes management fees deductible rental expenses. However, if the owner personally performs management duties such as finding and screening tenants, collecting rent, and coordinating repairs, they cannot deduct that value.

Supplies

Things like cleaning supplies, minor tools, locks, HVAC filters, and landscaping supplies purchased for use at the rental property are deductible in the year of purchase.

Expenses during vacancy periods

Periodic vacancies where the property sits empty between tenants but is actively marketed for rent can still qualify for deductible expenses. This includes mortgage interest, taxes, insurance, maintenance, utilities, and certain other costs. However, if you decide to use the property for personal use while it's vacant, you cannot deduct expenses during this time.

What isn't deductible?

While the list of deductible expenses is long, the IRS does limit certain types of expenses. Some costs that you cannot deduct are:

Personal use portion of expenses

If you personally use your rental property for a portion of the year, you cannot deduct expenses during that period of personal use. For example, if you use your beach rental property for two months in the summer, you cannot deduct those two months of mortgage interest, taxes, insurance, and utilities.

Travel expenses to the property are also not deductible during periods you used the property for vacation rather than for renting it out.

You must prorate and reduce your expenses to account for personal use based on the total number of days you rented out the property versus the days of personal use.

Cost of improvements

Expenses for improvements that prolong the useful life of the property or improve it beyond the original condition fall under capitalization rules. This means the cost must be added to the tax basis of the property and recovered through depreciation deductions over a number of years rather than fully deducted in the year incurred.

Improvements include remodeling, upgrading appliances or flooring to higher quality materials, or adding exterior elements like decks. Maintenance versus improvement can be a gray area that confuses landlords on what qualifies as a deductible repair versus capital improvements. Always consult a tax professional for large projects.

Purchase price and acquisition fees

You cannot deduct the original purchase price and expenses associated with buying the investment property. This means you cannot deduct attorney fees, closing costs, mortgage fees, title searches, transfer taxes, and title insurance.

Instead, you'll add these costs to the tax basis of the property.

Penalties and fines

Fines paid to government entities on the property for violations of local laws, such as zoning or safety issues, cannot be deducted. Penalties for late payment of property taxes or late deposits of employee payroll taxes are also non-deductible.

Cost of travel not related to managing the property

You can only deduct travel costs directly related to managing the rental property. Travel costs for investment purposes, such as visiting an out-of-town property to determine market rent for setting lease rates or evaluating the need for upgrades, are not considered deductible management expenses. Travel to inspect a prospective rental property for purchase is also non-deductible.

Condominiums and cooperatives rules

Special rules apply when renting a unit in a condominium or cooperative building.

For condos, the owner can only deduct mortgage interest and property taxes based on their percentage of ownership in the building. You must categorize special assessments as deductions or improvements based on IRS rules.

For co-ops, you can deduct mortgage interest only if more than 80% of the building is used for residential purposes, as the owner does not directly own real estate. Property taxes also cannot be deducted.

Owners of condos or co-ops should consult a tax professional to confirm proper deduction treatment.

Record-keeping tips

Keeping proper records helps you to take full advantage of rental property tax deductions. Here are some tips for record-keeping:

• Create a separate checking account just for the rental property to track income and expenses easily. Make sure to deposit all rents received and pay all bills from this account.
• Save all receipts, bills, invoices, bank statements, and supporting documentation. Organize by year and type of expense. Retain records for at least three years.
• Use accounting software designed for rental properties to classify expenses and generate reports.
• Note details on receipts: property name, account charged, business purpose, date, amount.
• Keep a log of improvements made, their cost, and the date. Track the expected life for depreciation.
• Log rental property visits for management, miles driven, tolls, and parking.
• Create files for lease agreements, rent records, tax returns, insurance documents, licenses, and legal and professional services.
• Document all rental searches, advertising costs, tenant screening, and leasing fees paid.
• Track utility costs.
• Note all details on repair costs, such as date, description, and service provider.

How to claim a rental property tax deduction

To properly claim tax deductions for rental properties:

1. Report all rental income on Schedule E of IRS Form 1040. This flows through to the first page of Form 1040 for inclusion in total taxable income.
2. List rental expenses on Schedule E by category, with supporting details on Form 4562 if required for depreciation. Submit receipts if deducting over $75 in an expense category other than utilities.
3. Take the standard deduction or itemize to determine total tax-deductible expenses that can offset rental income.
4. Report any net profit or loss from rental real estate activities on Schedule E and carry forward losses to future tax years if applicable.
5. Consult a tax professional if you have issues determining whether an expense is deductible, how to categorize mixed-use properties, and making optimal use of passive loss rules. Doing taxes yourself with rental property can be extremely complex.

Mastering tax deductions for rental property

Owning a rental property can provide valuable tax deductions that reduce your tax bill. However, maximizing these deductions requires some effort. You need to understand which expenses related to your rental property are deductible and which are not.

While this upfront work takes time, it's worth it. Using all the rental property tax deductions available can substantially lower your taxable income and taxes owed. This puts more money in your pocket and improves your rental property's cash flow and return on investment.

The benefits over time usually far outweigh the initial effort required. Taking the time to utilize all legal tax deductions will make sure you maximize your financial rewards as a landlord.

Can I deduct my labor on a rental property? FAQs

What is the 14-day rule for the IRS?

The 14-day rule for the IRS states that any rental property with personal use of over 14 days will result in the loss of deductions for that property. This includes the deduction of mortgage interest, property taxes, and expenses.

Can I deduct my own labor when flipping a house?

No; similar to managing a rental property, when flipping a house, you cannot deduct the value of your own labor. The IRS does not allow individuals to deduct the value of their personal labor on a project, whether it's for repairs, renovations, or improvements.