Understanding Rental Property Expenses: Fixed Assets vs. Ordinary Expenses

If you own rental property, understanding how to categorize and deduct your expenses can make a big difference at tax time. Some costs can be deducted right away, while others must be capitalized and depreciated over time. Knowing the difference between ordinary expenses and fixed assets, and how depreciation fits in, is key to maximizing your deductions and staying compliant.

Ordinary (Current) Expenses

Ordinary expenses are the everyday costs of operating and maintaining your rental property. They’re typically deductible in the year they’re paid. These expenses are considered necessary for the upkeep and management of your rental activity.

Common examples include:

• Property management fees

• Advertising for tenants

• Repairs and maintenance (like fixing a leaky faucet or replacing a broken window)

• Utilities (if paid by the landlord)

• Insurance premiums

• Property taxes

• Supplies and cleaning services

The key here is that these costs do not add long-term value to the property or extend its useful life, they simply keep things running.

Fixed Assets (Capital Expenses)

Fixed assets, on the other hand, are long-term improvements or purchases that provide benefit beyond the current year. You can’t deduct the full cost in one year. Instead, you capitalize the expense and recover the cost through depreciation.

Examples of fixed assets include:

• The building itself

• Major renovations (like adding a new roof, remodeling a kitchen, or replacing HVAC systems)

• Large appliances or furniture used in rental units

• Fences, driveways, and landscaping improvements

These items are treated as capital expenditures, which means their cost is spread out over their useful life through depreciation.

Depreciation: Spreading Out the Cost

Depreciation allows you to deduct a portion of your property’s cost each year over time, rather than all at once. For residential rental property, the IRS requires you to depreciate the building over 27.5 years using the straight-line method.

Here’s how it breaks down:

• Land is not depreciable.

• The building and certain improvements are depreciable.

When you buy a property, you’ll need to allocate the purchase price between the land and the building. Only the portion related to the building is eligible for depreciation.

Example: If you purchase a rental property for $300,000 and the land is valued at $60,000, you can depreciate $240,000 (the building portion) over 27.5 years. That’s about $8,727 in annual depreciation you can deduct each year.

Why This Matters

Depreciation can significantly reduce your taxable rental income, even though it’s a non-cash expense. It’s one of the biggest tax advantages of owning rental property. However, when you sell the property, you may have to recapture that depreciation, so it’s important to track it carefully.

In Summary

• Ordinary expenses are day-to-day costs that can be deducted immediately.

• Fixed assets are long-term improvements that must be capitalized and depreciated.

• Depreciation spreads the cost of the building and improvements over time, lowering your taxable income each year.

Understanding these distinctions helps ensure your rental business is not only compliant but also taking full advantage of available deductions.