Real estate tax guide

Repairs, deductions and how to structure your rentals

The line between a repair and an improvement decides whether you deduct now or depreciate over decades. Here is how to draw it, what else you can deduct, and the structure and records that hold up.

General information for 2026. Written by Prem Tax and Accounting Corp, a CPA firm. Real estate tax results depend on your facts, your income and your state, and this is not legal, tax or investment advice for your situation. Official sources are linked on each page. Talk to us before you buy, sell, restructure or take a large deduction.

Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 9, 2026.

Repairs vs improvements

	Repair (deduct now)	Improvement (depreciate)
Test	Keeps the property in ordinary working condition	Makes it better, restores it, or adapts it to a new use
Examples	Fixing a leak, repainting a room, replacing a broken window	New roof, remodeled kitchen, adding a bedroom
Tax result	Deducted in the year paid	Capitalized and depreciated, or in some cases eligible for bonus depreciation

De minimis safe harbor: deduct items or invoices of $2,500 or less (election on the return).
Small taxpayer safe harbor: for buildings with unadjusted basis of $1 million or less, certain repairs and improvements up to the lesser of $10,000 or 2% of basis (election required).
Keep invoices and describe the work. A clear paper trail wins arguments.

What else you can deduct

Mortgage interest, property taxes and insurance
Property management and leasing fees, advertising
Utilities you pay, HOA dues, landscaping, pest control
Professional fees (tax, legal), software, bank charges
Travel to the property (the 2026 business mileage rate is 76 cents a mile from July 1, 72.5 cents before)
Depreciation, which is required

The 20% QBI deduction for rentals

If your rental activity is a trade or business, you may deduct up to 20% of the qualified income. Rev. Proc. 2019-38 gives a safe harbor if you:

perform 250 or more hours of rental services a year (for newer enterprises, or in at least 3 of the last 5 years for others),
keep separate books for each rental enterprise,
keep contemporaneous records of hours, services, dates and who did the work, and
attach a statement to the return.

Structure: LLCs, partnerships and S corporations

Many owners hold rentals in an LLC for liability protection. A single-owner LLC usually does not change the income tax return.
Rentals owned by a partnership or multi-member LLC file Form 1065 with Form 8825 for rental income.
An S corporation is rarely a good fit for rentals.
Moving property into an entity can trigger transfer tax, a mortgage due-on-sale clause and title issues. Speak to your attorney and us first.

Illinois notes

Illinois requires an addback of federal bonus depreciation (Form IL-4562) with a subtraction in later years.
Property taxes on rentals are Schedule E expenses, not under the SALT cap.
Illinois taxes rental income and gains at its flat income tax rate. LLCs and S corporations may be able to elect the pass-through entity tax (see our Illinois guide).

Records that hold up

A separate bank account and credit card for each property or entity.
Closing statements, improvement invoices and a depreciation schedule.
A time log if you rely on the QBI safe harbor, material participation or real estate professional status.
Leases, tenant ledgers and security deposit records.

We set up the books, depreciation schedule and elections. Book a 20-minute call.

Common questions

What is the difference between a repair and an improvement?

A repair keeps the property in ordinary working condition and is deducted now. An improvement betters the property, restores it or adapts it to a new use, and must be capitalized and depreciated.

Is there a simple safe harbor for small purchases?

Yes. The de minimis safe harbor lets many owners deduct items or invoices costing $2,500 or less. There is also a safe harbor for small taxpayers with buildings of $1 million or less that allows deducting certain repairs and improvements up to a yearly limit. Both need to be elected on the return, so ask us.

Can I take the 20% QBI deduction on rentals?

If the rental is a trade or business, yes. The IRS safe harbor generally requires 250 or more hours of rental services a year, separate books, contemporaneous time records, and a statement attached to the return. A rental that does not meet the safe harbor may still qualify on its facts.

Are rental property taxes limited by the SALT cap?

No. Property taxes on a rental are a business expense on Schedule E and are not subject to the cap on the state and local tax deduction.

Should my rentals be in an S corporation?

Usually not. S corporations are rarely a good home for rental real estate. An LLC is more common. Moving property into any entity can trigger transfer taxes and due-on-sale issues, so get legal and tax advice first.

Official sources

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