How to Pay No Taxes on Rental Income: Tips

Owning rental property can be an admirable way to generate passive income, but like all forms of income, it often comes with a tax bill. However, what if we told you there are completely legal ways to pay little to no taxes on rental income? 

That's right by leveraging tax laws and smart strategies, landlords can significantly reduce or even eliminate their tax liability.  

This comprehensive guide explores how to avoid being taxed on rental income, shares practical tips to reduce your tax burden, and breaks down the best strategies for landlords. 

Whether you're a new investor or a seasoned landlord, these tips will help you maximize your rental income while staying on the right side of the IRS (Internal Revenue Service).

Why Rental Income Taxes Matter—And How to Keep More of Your Money

Taxes seem necessary, but they don't have to take much of your rental income. The U.S. tax code is designed with deductions, credits, and strategies that can help landlords reduce tax on their rental income. However, many property owners fail to take full advantage of these opportunities simply because they're unaware of them.

In 2023, the IRS reported that over 10.6 million U.S. taxpayers owned rental properties, yet a significant percentage overpaid on taxes. Don't let this be you! You will keep more of your hard-earned rental income with the proper knowledge and preparation.

Sounds good? Read on to learn more about taxes for rental property!

Top Strategies to Pay No Taxes on Rental Income

Discover powerful tax-saving techniques that savvy landlords use to minimize or even eliminate their tax burden on rental income. 

1. Leverage Depreciation

One of the most powerful tools landlords have is depreciation. The IRS allows you to deduct the cost of wear and tear on your rental property over time, even if its value is appreciating. 

How it works: The IRS assumes that a rental residential property's useful life is around 27.5 years. This means you can deduct a portion of your property's value (excluding land) each year, reducing your taxable income.  

Example: If your rental property is worth $275,000 (excluding land value), you can deduct $10,000 annually for depreciation.  

Pro Tip: Even if you didn't claim depreciation in prior years, you can file for a "catch-up depreciation" adjustment using IRS Form 3115.

2. Deduct Property Expenses

Rental property expenses are 100% deductible, directly reducing your taxable income. Make sure to claim all eligible expenses, including:

• Mortgage interest

• Property taxes

• Repairs and maintenance

• Utilities (if paid by you)

• Insurance premiums

• Property management fees

• Advertising costs for finding tenants

Bonus Tip: Keep detailed records of these expenses. Tools like QuickBooks or property management software can make tracking costs easier and ensure you don't miss out on deductions.

3. Use the 20% Pass-Through Deduction

Suppose you're operating your rental property as a business (e.g., you report income under a sole proprietorship, LLC, or S-corp). In that case, you may qualify for the Qualified Business Income (QBI) Deduction. This allows landlords to subtract up to 20% of their total rental income from their taxes. 

Eligibility Tip: To qualify, your rental activity must meet the IRS definition of a business or trade, which generally requires regular, continuous, and substantial involvement in property management.

4. Offset Rental Income with Tax-Loss Harvesting

If you've sold any investments at a loss, you can utilize those losses to offset your rental income gains. Known as tax-loss harvesting, this strategy can help you lower your overall tax liability.

Example: If you sold stocks at a $10,000 loss and earned $10,000 in rental income, your net taxable income from both sources could be zero.

5. Take Advantage of the 1031 Exchange

If you plan to sell your rental property, a 1031 exchange is a savvy way to defer taxes. This rule allows you to sell one property and reinvest the proceeds into another "like-kind" property without paying capital gains tax.

Key Rules to Remember:

The replacement property must be of equal or greater value. You must recognize the replacement property within 45 days and close within 180 days of selling the original property.

6. Claim Travel Expenses

If you travel to manage or maintain your rental properties, you can knock off these expenses from your taxable earnings. Eligible travel expenses include:

• Mileage (use the IRS standard mileage rate)

• Airfare, lodging, and meals (if managing out-of-state properties)

• Vehicle maintenance if used for property-related purposes

Pro Tip: Keep a log of your trips, including dates, mileage, and purpose, to back up your claims in case of an audit.

7. Turn Your Property Into a Short-Term Rental

Short-term rentals (e.g., Airbnb or Vrbo) can come with unique tax advantages. If you rent your property for less than 14 days per year, the IRS allows you to keep all income tax-free. This is known as the 14-day rule, an excellent way for landlords to pocket extra cash without a tax hit. 

8. Set Up a Self-Directed IRA

For those looking to take a long-term approach, purchasing rental properties through a self-directed IRA can be a game-changer. With this strategy, all rental income and capital gains grow tax-deferred (or tax-free if using a Roth IRA). 

Important Note: You cannot use the property for personal use, and all expenses must be paid directly from the IRA account.

Common Mistakes Landlords Make With Rental Property Taxes

Even the best strategies won't work if you make these common mistakes:  

Failing to track expenses: Many landlords miss deductions simply because they don't keep proper records.  

Misclassifying repairs as improvements: Repairs are deductible in the year they are incurred, whereas improvements must be depreciated over time.  

Not consulting a tax professional: Rental property and taxes can be complex. A tax advisor can help you navigate the rules and maximize deductions.

Conclusion: Keep More of Your Rental Income

So, we’ve just shared some tax advice for landlords. While paying property taxes seems to be a never-ending process, investing in rental properties is still one of the best ways to build wealth. But taxes can quickly eat into your profits if you don't take caution. By leveraging strategies like depreciation, the 1031 exchange, and expense deductions, you can significantly reduce your tax liability, if not entirely eliminate it.  

Ready to take control of your rental income and minimize your taxes? Our tax experts will work with you to develop a tailored strategy that keeps more money in your pocket. Don't wait—schedule your consultation now and start saving!