Are property tax payments deductible as a business expense for rental properties?

So I've been trying to understand how property taxes work for my rental property business. My tax advisor mentioned that property tax is deductible as a business expense when the property is being rented out. I'm trying to figure out which scenario would be more advantageous from a tax perspective. I have two potential investment properties I'm considering, and they would generate similar total income but have different expense structures: Property A: - Monthly rent income: $1,950/month - HOA fees: $450/month - Annual property tax: $13,200/year Property B: - Monthly rent income: $2,600/month - HOA fees: $1,100/month - Annual property tax: $16,800/year Both properties would generate about $17,800 annually after expenses are factored in. I'm wondering which property would be better from a tax perspective given the different property tax amounts. Does having higher property taxes actually benefit me more as a landlord since they're deductible? Or am I missing something about how this works?

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18 comments

GalacticGuru

•8M

Yes, property taxes on rental properties are definitely deductible as a business expense! This is one of the major advantages of owning rental property. In both scenarios, you'd be able to deduct the full amount of property taxes paid on your Schedule E when filing taxes. The same applies to the HOA fees - those are fully deductible as well for rental properties. Looking at your two options, both properties generate similar income after expenses, but Property B has higher property taxes. While higher property taxes do mean a larger deduction, remember that deductions just reduce your taxable income - they don't directly save you money dollar-for-dollar. You're still paying more out of pocket with Property B. What matters more is your overall return on investment and cash flow. I'd suggest comparing the purchase prices of these properties to see which gives you a better cap rate and cash-on-cash return.

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GalacticGuru

•8M

The deductions reduce your taxable income, but you're absolutely right that you're still paying more actual money with Property B. It's never financially advantageous to pay more in expenses just to get a tax deduction - you're still out more money overall. Regarding depreciation, yes, the value of the property (excluding land) affects your depreciation deduction. Residential rental properties are depreciated over 27.5 years. The higher the building value, the more depreciation you can claim annually. But remember, land value isn't depreciable. So if Property B has a higher building value, you would get more depreciation deduction annually.

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Omar Fawaz

•8M

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Sean Doyle

•8M

One thing nobody's mentioned is that you need to consider the overall tax bracket you're in to fully understand the impact of these deductions. If you're in the 24% bracket, then a $16,800 property tax deduction saves you about $4,032 in federal taxes, while the $13,200 property tax saves you about $3,168. But that $3k difference in property taxes means you're still paying about $10k more out of pocket even after tax savings. So Property A would actually leave you with more money overall despite the smaller deduction. Also, don't forget to factor in state taxes! Some states have limits on property tax deductions even if the federal government doesn't.

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Sean Doyle

•8M

Yes, property appreciation is absolutely an important factor in your overall investment return! However, appreciation is completely separate from the tax deduction benefits we're discussing. Higher-value properties (which often have higher property taxes) may appreciate more in absolute dollar terms, but not necessarily at a higher percentage rate. You could have a $300K property that appreciates 5% annually ($15K) while a $500K property might only appreciate 3% annually ($15K). The appreciation rate depends more on location, neighborhood development, and local market conditions than on the property tax amount.

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