How do I report a rental property on Schedule E, and what can I deduct?

If you own rental property in your own name, you report the rent, the expenses and depreciation in Part I of Schedule E, with a separate column for each property.

That covers owning one or several rentals, renting out your former home after a move, and handing a property to a property management company that sends you monthly statements. U.S. tax residents with rentals abroad report that rent too, but foreign rentals follow different depreciation rules and are calculated separately.

Common deductible expenses:

• Mortgage interest (not principal), property tax and insurance
• HOA dues, property management and leasing fees
• Repairs, cleaning, landscaping and pest control
• Utilities the landlord pays
• Advertising, legal and accounting fees
• Travel to and from the property for rental business
• Depreciation on the building, improvements, and appliances or furniture used in the rental

The building is depreciated on a straight line over 27.5 years. Land doesn't wear out, so it's never depreciated. Before you can depreciate anything, you split the purchase price between building and land.

Work down the steps; each step uses the result of the one before.

Step	Calculation	Notes
1	Purchase price + capitalized closing costs	Title insurance, recording fees, etc.
2	Minus land value	Often the land share of the county tax assessment, or an appraisal
3	= Depreciable basis of the building	Step 1 minus step 2
4	÷ 27.5 years	Spread evenly by year
5	= Annual depreciation	Prorated in the first year by the month the property was placed in service
Later improvements	Added separately and depreciated on their own	From the month they're placed in service

For example, say you paid $400,000 and the county assessment puts land at about 20% ($80,000). The building portion is $320,000, and $320,000 ÷ 27.5 ≈ $11,636 a year, prorated in the first year. Depreciation costs you no cash, but it reduces your taxable rental income every year.

Work that keeps the property in its existing condition is a repair, deductible this year. Work that makes it better, bigger, longer-lasting, or adapts it to a new use is an improvement, which is capitalized and depreciated.

• Repairs: fixing a leak, patching and painting walls, replacing a few damaged floorboards, replacing a water heater part.
• Improvements: a full new roof, new flooring throughout, a whole new HVAC system, an addition, a full kitchen remodel.

There's also a de minimis safe harbor. Costs of $2,500 or less per invoice or per item can be expensed in the year paid instead of capitalized, as long as you attach the election statement to a timely filed return. Once you elect it, it applies to every qualifying item that year. A $1,800 refrigerator on one invoice can be expensed. A $6,000 HVAC replacement is over $2,500, so it's capitalized as an improvement.

Read from the top; follow the first row that fits.

The expense	How to treat it
Doesn't make the property better, bigger or longer-lasting, or adapt it to a new use	Repair, deduct this year
Makes it better, bigger or longer-lasting or adapts it to a new use, but is $2,500 or less per invoice or item and you've made the de minimis election (with statement)	Expense this year
Makes it better, bigger or longer-lasting or adapts it to a new use, and is over $2,500 or no de minimis election was made	Improvement, capitalize and depreciate

Paying down principal is repaying a loan. It isn't an expense, so it isn't deductible. Interest is the cost of borrowing, so it is. Your lender's Form 1098 shows the year's interest. If your payment includes escrow for property tax and insurance, you deduct those separately based on what was actually paid.

Whether a rental loss (expenses plus depreciation above rent) can offset wages and other income this year depends on the passive activity rules, which turn on your income and how actively you manage the property. Losses you can't use now carry forward to future years.

Start with three facts: when the property was first rented, how the price splits between land and building, and what you've spent since.

• Situation A: You missed depreciation in earlier years. If it's one year, you can amend that return. For two or more years, you generally file Form 3115 (change in accounting method) and catch up all the missed depreciation on this year's return, without amending each year.
• Situation B: Receipts everywhere, repair records lost. Rebuild from bank and credit card statements, property manager reports, home-improvement store purchase history and emailed invoices. Sort everything by property and by Schedule E category, separating repairs, improvements and items under $2,500.
• Situation C: First year renting. Pin down the placed-in-service date, pull capitalizable costs from your closing disclosure, set the land allocation, and put every bill into one system from month one instead of waiting until December.