What can I deduct as a landlord on my Texas rental property?
Rental property expenses are reported on Schedule E of your federal return. The main deductible categories are: mortgage interest, property taxes, landlord insurance premiums, property management fees, advertising and tenant screening costs, repairs and maintenance, and professional fees (CPA, attorney). Depreciation is a separate and significant deduction: your building's cost basis divided over 27.5 years. The most important distinction to understand is repairs vs. capital improvements: repairs are deducted in the year incurred; improvements are capitalized and depreciated over their useful life. Work with a CPA for your first year. The setup matters and mistakes compound.
The Core Operating Expense Deductions
Mortgage interest is typically the largest deduction. The full interest portion of your monthly payment is deductible for a rental property, with no $750,000 loan cap that applies to primary residences. Property taxes are deductible in full for rental properties; there is no SALT cap restriction for business-use property. Landlord insurance premiums are deductible in the year paid. Property management fees (the monthly management percentage, placement fees, and renewal fees paid to your PM) are fully deductible as operating expenses. Advertising costs (MLS listing fees, online rental platform costs, signage) and tenant screening fees (background check, credit report costs) are deductible. HOA dues on a rental property are deductible if you are required to pay them as the owner.
Repairs vs. Capital Improvements: the Distinction That Matters
A repair restores the property to its original condition. A capital improvement adds value, extends useful life, or adapts the property to a new use. Repairs are deducted in the year the expense is incurred. Capital improvements are capitalized and depreciated over their useful life, which can be 5, 7, 15, or 27.5 years depending on what the improvement is. Painting interior walls: repair. Replacing a broken HVAC unit: repair. Installing a new HVAC system where none existed before: improvement. Replacing a broken fence section: repair. Replacing the entire fence: potentially an improvement. The line is not always clear, and the IRS has detailed regulations on this distinction. When in doubt, document the condition before and after, note that you were restoring a broken system rather than upgrading it, and let your CPA make the call.
Depreciation: Your Largest Non-Cash Deduction
Depreciation allows you to deduct the cost of your rental building (not the land) over 27.5 years. On a $300,000 property where the land is valued at $60,000, the depreciable basis is $240,000. Divide by 27.5 and you get an annual depreciation deduction of approximately $8,727. This is a non-cash deduction. You are not spending $8,727; you are recognizing the theoretical wear on the asset over time. Depreciation frequently turns a property that has positive cash flow into a tax-paper loss, reducing your ordinary income. It is one of the primary reasons experienced investors hold rental real estate. The catch: depreciation recapture at sale. When you sell, the IRS recaptures the depreciation you claimed at a 25% rate. Your CPA can model this for you before you decide whether to sell or hold.
Professional Fees and Travel
Attorney fees related to the rental (a lease dispute, eviction, contract review) are deductible as operating expenses. CPA or tax preparation fees specifically related to your rental property are deductible. Property management software subscriptions or landlord apps are deductible. Travel to your rental property for legitimate business purposes (an inspection, meeting a contractor, evaluating a repair) is deductible at the current IRS mileage rate. You must document the purpose of each trip. Travel from your home to your rental is not automatically deductible if you live nearby. It must be for a specific business purpose, not just to drive by the property. Keep a simple log: date, mileage, purpose.
What You Cannot Deduct
The purchase price of the property is not deductible. It is capitalized and recovered through depreciation over time. The principal portion of your mortgage payment is not deductible; only the interest is. If you use the property for personal use (staying there for any period) you must pro-rate deductions based on the rental-use percentage of the year. The homestead exemption loss (see the homestead answer) is not a deduction; it is simply a higher tax bill, which is then deductible as a rental property expense. Improvements made before you converted the property to a rental are not immediately deductible. They are added to your cost basis.