I am a licensed Texas REALTOR®, not a CPA or a tax advisor. What follows is general information meant to help you ask your accountant better questions, not tax advice for your situation. Tax law changes, and the details depend on your filing status, your income, and how you use the property. Confirm anything here with your accountant before you act on it. Figures current as of August 2026.
Investment Property
- Repairs are deductible in the year you pay them. Improvements are capitalized and depreciated over time rather than deducted all at once.
- Insurance deductible as a rental expense
- Mortgage interest deductible as a rental expense
- Property taxes deductible as a rental expense, and not subject to the combined cap that applies to your primary home
- Depreciation on the building
- Income tax and capital gains tax due on the sale. Depreciation you claimed along the way is generally recaptured and taxed as well, so ask your CPA what that does to your number before you sell.
- You may also be eligible to deduct 20% of qualified business income if you meet the IRS safe harbor requirements. Worth raising with your accountant.
- 1031 Exchange allowed
Primary Property
- Improvements NOT deductible, though they may add to your cost basis
- Insurance NOT deductible
- Mortgage interest: deductible on up to $750,000 of home acquisition debt for homes bought after December 15, 2017, or $1 million for debt taken on between October 1987 and December 2017. Half those amounts if married filing separately. There is no dollar cap on the interest itself.
- State and local taxes: capped at $40,000 combined, or $20,000 married filing separately. That one cap covers your property tax plus your state and local income or sales tax together, not property tax alone. It phases down at higher incomes but never below $10,000.
- Can’t write off depreciation
- Capital gains on the sale of your primary home are excluded up to $250,000 filing single and $500,000 married filing jointly. You need to have owned the home two years and lived in it two of the past five. Gain above those amounts is taxable.
- 1031 Exchange not allowed
Tax benefits of Investment
Improvements
An improvement means anything that adds value. Preserving the value is a “repair.” Improvement is something an appraiser would count as value.
For example, a new roof is an improvement; patching a hole in the roof is a repair. The distinction matters at tax time, because repairs come off this year and improvements get depreciated over time. So if you are selling or renting your primary and moving to another primary, then do improvements on the original home after you’ve already purchased the new primary. An auditor wants to see you’re in the process of getting out of the primary and moving to another home to write off improvements. Landscape improvement for investment.
Business write offs for working from home. If you use part of your home regularly and exclusively for business, a share of your home expenses may be deductible, calculated from the portion of the home used for the business rather than a flat percentage. The rules differ depending on whether you are self-employed or a W-2 employee, so confirm which apply to you. You will need proof of the business, like income or a website.
Expenses that can be claimed on your tax return:
- Advertising
- Cleaning and maintenance
- Commissions to Realtor
- Legal and Professional fees
- Management fees
- Interest, Taxes, Insurance, and Depreciation
- Repairs
- Vacancy Rate
Rental Income and Depreciation
Depreciation lets you recover the cost of the building over time on a property you hold as a rental.
- The IRS allows you to depreciate the value of the building.
- The value of the home is fixed from the first time you claim depreciation.
- The higher the value of the home the larger the depreciation.
- Calculating depreciation by dividing the value of the building by 27.5
- Claim rental income on tax return
Formula for Depreciation
$300,000 (building value, not including land) ÷
27.5 = $10,900 annual depreciation
Land is not depreciable, so separate the building value from the land value before you run this. Your appraisal district already splits the two on your account, and your accountant can confirm the allocation.
1031 Exchange
Unlike a primary home sale, there is no exclusion for investment property, so the full gain is taxable, and depreciation you claimed along the way is generally recaptured and taxed as well. A 1031 exchange is a way to defer taxes on your capital gains from selling an investment property. A 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds into a similar property. (Tax deferred- not tax free).
Read the book Rich Dad Poor Dad as a great example of how to grow wealth through 1031 exchanges. A smart investment strategy is to start small (like a 1 bedroom condo) and over time you can exchange that property to a house, then to multifamily and then apartment complexes.
Scenario
- Building Value: $300,000
- Depreciation: $10,900 / yr
- Gross Rent: $24,000 / yr, $2,000 / mo
- Expenses: $2,400 / yr, $200 / mo
PITI:
- Principal Payment = $3,900 / year
- Interest = $10,700 / year
- Taxes = $7,200 / year
- Insurance = $950 / year
- PITI: $22,750 / year, $1,895 / month
Accountant will write off 100%:
- Depreciation
- Mortgage Interest (no cap)
- Taxes
- Insurance
- Repairs
- Expenses
Total = $32,150
Formula Accountant Uses
Gross Rent – Write-offs = Total Write-Off
Total Write-off: $24,000 – $32,150 = -$8,150
Even if you are cash flow positive, meaning rent exceeds your mortgage payment, the write-offs can still show a loss on your tax return.
One important limit before you plan around that loss. Rental real estate is generally treated as a passive activity, and passive losses that exceed your passive income are usually disallowed for the current year and carried forward to the next one instead. There are exceptions, including for people who qualify as real estate professionals. Whether you can use a loss this year depends on your situation, so confirm it before you count on it.
A mortgage lender doesn’t consider depreciation a “loss”. So when you want to buy another property, the lender will add the write-offs back as income. This improves your Debt to Income ratio and thus increases the loan amount you can be approved for.
Formula Mortgage Lender Uses
Net Rental Income (or loss) = Total Income – Total Expenses
Total Income:
- (Gross Rent + Annual Depreciation + Interest + Taxes + Insurance)
- $53,750 / year or $4,479 / month
Total Expenses
- (PITI + Expenses)
- $25,150 / year or $2,095 / month
Net Rental Income (or loss) = $28,600 / year or $2,383 / month
When turning your current home into a rental property and buying a primary home, a lender can count 75% of future “gross rent” towards your income to improve your DTI ratio. The lender will need a signed 12-month lease that states the rental rate and lease start date, as well as evidence the homeowner has cashed the first month’s rent (or security deposit).
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