How to Deduct the Operating Expenses of an Investment Property

You must pay federal, state and local income taxes on revenue you receive from your investment property. You can lower your income tax obligation by deducting all the expenses you incur for operating the property. Unlike depreciation, you can deduct operating expenses during the year in which they occur, thus reducing the amount of net income you report from rents you collect. Taking all of your deductions can put you in a lower tax bracket, which means you not only reduce taxes on your investment property, but on all of your income.

Step 1

Calculate your utility payments. If you pay any of the utilities on your investment property, you can deduct these payments at tax time. Total all electricity, gas and water payments, as well as any fees you pay for garbage removal.

Step 2

Add up interest on loans. You can deduct any interest payments you make on loans that are associated with your investment property. You must use an amortization table to determine the exact amounts of your payments that go to interest, because payments that go to principal are not deductible.

Step 3

Total your tax payments. Find a grand total for your property taxes on your investment property. Because this property is part of a business, you can deduct property taxes as a business expense. Include the cost of business licenses, as well as city and county fees in your tax category.

Step 4

Deduct insurance premiums. Insurance you carry on your property qualifies as a business expense. Total all of your premiums for the year. This includes liability insurance as well as property and flood insurance.

Step 5

Group your maintenance costs together. These costs include landscaping, cleaning and repairs for plumbing, roofing and electrical problems. Repairs on your primary residence may not be deducted, so you may not be accustomed to deducting them. However, you may deduct repairs you make on investment property.

Step 6

Deduct property management fees. If you hire a property management company to take care of your property, you can deduct this expense from your income.

Step 7

Track your advertising expenses. You can deduct any money you spend on advertising your property for rent. This includes not only classified advertising, but also display ads in newspapers and magazines, as well as fees for listings in directories and databases.

Step 8

Calculate mileage on your vehicle. Include only mileage that directly relates to your investment property, such as miles driven from your office to the property to inspect it.

Step 9

Deduct legal fees you incur for issues relating to your property. Exclude any personal legal fees for matters not related to the investment property.

Step 10

Add up tax preparation fees. Payments to your accountant qualify as deductions. If your accountant also handles other tax matters for you, deduct only that portion related to your property from your investment property income.

Tip

  • Fill out Schedule C to claim all of your deductions. You will not find a category for each expense associated with your investment property, so use the “Other Expenses” section to list categories you don’t find elsewhere on the form.

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About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

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