185 Rental Property Tax Deductions You Cannot Take

By Jason Watson, CPA
Posted Saturday, September 28, 2024

There aren’t 185 rental property tax deductions that you cannot take. It’s just a dramatic headline. However, we want to start with the crazy things small business and rental property owners try to do since it is such a good springboard for discussion. Some of these expenses require a deeper discussion in a separate section, and we provide references to other pages.

100% Cell Phone

Most landlords, property managers and real estate investors operate on a cell phone. However, most people also use their cell phone as a personal phone. The minute you get the “Hey honey… we need milk and eggs” text message to your cell phone, it drops from 100% business use to something else.

If you attempt to deduct 100% of your cell phone as a tax deduction, the IRS will claim 0% and then force you to demonstrate why it should be something else. Conversely, if you approach this from a position of being reasonable it is extremely challenging for the IRS to argue otherwise. What is reasonable?

We usually start with a single phone line cost of about $150 per month in 2024 dollars. While it might only take $10 to add another line, you would still need to spend $150 for yourself. From there it becomes a preponderance of the facts and circumstances. Some people say there are 40 hours in a work week and there are 168 available hours (24 x 7).

However, this calculus assumes your personal use “density” is the same as your business use “density.” For most rental property owners, this is not true. You probably talk more often with tenants, guests, property managers and business associates, than you do with friends.

Moreover, this would assume your cell phone is being used 168 hours out of the week which is simply not true. As such, the calculation becomes business use divided by total use. Business minutes divided by total minutes used.

Huh? Are we complicating the uncomplicated? Perhaps. So, what can you do?

Anywhere from 5% to 80% is a good jumping off point. That’s quite the range, right? If you work a W-2 job and have one long-term rental, then 5% might be reasonable. If you take this same property but it is now a short-term rental, then 15% might be reasonable. What about a real estate professional? The key is to keep a good time log which is necessary for so many other things such as real estate professional status, short-term rental loophole and overall material participation.

Since this is a mixed-use expense between personal and business, the cell phone charges should be paid by you personally and then deducted as a rental property expense.

We discuss in a duplicative way in our common rental property deductions section on page xx.

Client Gifts Over $25

Yuck, more IRS publications stuff on the way. In IRS Publication 463 Travel, Gift and Car Expenses, here is the blurb on tenant or guest gifts-

You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. A gift to a business that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.

If you give a gift to a member of a customer’s family, the gift is generally considered to be an indirect gift to the customer. This rule does not apply if you have a bona fide, independent business connection with that family member and the gift is not intended for the customer’s eventual use.

If you and your spouse both give gifts, both of you are treated as one taxpayer. It does not matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.

$25 is the maximum per year per person. The second paragraph explains you cannot give $100 to a family of four (as an example), unless you have a separate bona fide relationship with each family member.

What does this mean for the rental property owner or short-term rental owner? That pretty bouquet of snacks and wine and whatnot might only be up to $25. Keep in mind that you might need to spend $100 because of the quality of tenants or guests, or the length of stay, or the premium rent that is being charged. Good business practices are not always tax deductible. Building wealth is your primary objective.

Some people might claim that the pretty bouquet of snacks and wine for that short-term rental guest is advertising and marketing, not necessarily a gift. However, this is not entirely accurate since there isn’t a transaction or an exchange of consideration. But wait! How is a basket of snacks and wine different than a basket of coffee pods? Perhaps it isn’t. Perhaps, instead of calling it a tenant gift, you call it supplies; no different than coffee, tea, creamer and sugar.

It’s a matter of perspective, right?

Keep this in mind as well- note that the IRS refers to individuals in their little pontification above. Gifts to another business are limitless. So, if your client or tenant is a business and you want to express your gratitude, theoretically there is no limit provided an individual is not the designated recipient.

Promotional items that are under $4 in unit cost and have your business name or logo on them are not considered gifts and do not contribute to the $25 maximum.

Commuting Expenses

It is unfortunate, but expenses associated with your commute to your rental properties are not deductible. Tolls and parking are the common ones rental property owners attempt to deduct. There is a subtle difference to be aware of- driving from one work location to another work location is not commuting. Commuting is generally driving from your home to your rental property. Having said this, travel expenses and rental properties is a hot topic that we discussed earlier in our rental property travel deductions section.

You can solve a lot of problems surrounding commuting expenses by qualifying for a home office. Then your commute is from the bedroom to the home office. If you shower, then the commute is from the bathroom to the home office.

All kidding aside, or least most of it, the tax benefit of the home office deduction is not too low, not too high. In our experience, about $250 or so of cash in your pocket benefit comes from the additional deductions associated with home office expenses. But! Where the big benefit comes from is the deduction of travel expenses; without a home office, your mileage or automobile expenses to your first client or local rental property is not tax deductible. However, with a home office, this drive is now considered travel between work locations. Huge difference!

We did a deep dive into the home office deduction earlier.

Home Office Improvements

You cannot spend $30,000, finish your basement, plop your desk in the middle of it and deduct the $30,000 for two reasons. First, the entire space must be regularly and exclusively used as a home office. This means the theater room must be a conference room, and the wet bar must be the office kitchen. Might be tough in the world of rental property tax deductions.

Second, even if the entire basement is designated business use, the $30,000 represents an improvement. Therefore, it must be capitalized as an asset and subsequently depreciated over 39.0 years. From there, only the business use portion of mortgage interest, property taxes, insurance, HOA dues and utilities are deductible.

Don’t worry, the 96” projection TV with the non-glare screen was still worth it.

Country Club Dues

Nope. The IRS does not care how many times or how much you entertain your tenants and business associates at your country club. Membership dues are not allowed. However, the specific out-of-pockets expenses associated with qualifying meals incurred at your country club are deductible as rental property expenses. There are some other devils in the details, but this is the general gist. Also, recall that since the Tax Cuts and Jobs Act of 2017, entertainment is no longer deductible.

Don’t confuse this with other types of dues such as Chamber of Commerce or other professional organizations such as BNI. Those dues are 100% deductible although there is some scuttle butt about BNI since a portion of the dues are likely for meals.

See our rental property meals section.

Professional Attire

The tax code is very clear on this. Anything that you can convert to everyday use is considered personal, and therefore not tax deductible. Many business owners want to deduct dry cleaning expenses or Men’s Warehouse purchases, but they usually cannot. We know you are rocking it in the double-breasted vest without a coat look, but the IRS doesn’t have fashion sense and therefore doesn’t care. However, there are some exceptions (of course there are).

WCG CPAs & Advisors prepares several tax returns for pilots, flight attendants, military personnel, nurses and firefighters. These uniforms are not suitable for everyday use and / or are protective in nature (such as steel-toed boots), and therefore are business tax deductions. We also have a handful of models and actors as clients, and their clothing is considered theatrical costumes not suitable for everyday use (this is a bit tricky).

How does this affect rental property owners? It doesn’t since most owners are not wearing suits to their tenant showings nor are they wearing protective clothing not suitable for everyday use. Certainly a high-powered real estate mogul meeting with lenders and other investors might need to look professional, but it is not tax deductible.