Bipartisan House Bill Would Create a New First-Year Deduction for Residential Rental Construction

The rental housing deduction is not one single line on your return. It is the full set of deductions a landlord takes against rental income, reported on Schedule E of Form 1040. When people search for the rental housing deduction they usually mean two things at once. First, the ordinary deductions every landlord already gets for operating a rental property. Second, the proposed bipartisan rental housing bills now sitting in Congress that would add new incentives. We will cover both, but start with what already exists, because the existing rental housing deduction is where the real money is for most owners today.

Anyone who owns property and rents it out for profit can claim the rental housing deduction against that rental income. You report rents received as income and then subtract your ordinary and necessary expenses. The deduction belongs to the owner of record, whether you hold the property directly, through an LLC, or through a partnership that passes the income to you. The rental housing deduction is available whether you own one duplex or twenty units. What you cannot do is deduct expenses on a property you use as a personal residence for too much of the year, because the personal use rules claw back part of the rental housing deduction.

Here is a worked example. You own a single rental house that brings in 30,000 dollars of rent for the year. Your deductible expenses are 6,000 dollars of mortgage interest, 5,000 dollars of property tax, 2,500 dollars of insurance, 3,000 dollars of repairs, and 7,200 dollars of depreciation. Your total rental housing deduction is 23,700 dollars, leaving 6,300 dollars of taxable rental income. Depreciation alone, a non cash deduction, sheltered a big slice of the rent. That is the rental housing deduction doing its job.

We see this every year. A new landlord reports the rent but forgets to claim depreciation, overpaying tax on the rental housing deduction they were entitled to. Worse, when they eventually sell, the IRS recaptures depreciation they could have claimed, whether they claimed it or not. So skipping depreciation is the costliest mistake in the rental housing deduction world. Claim it from year one.

One more thing worth saying about the rental housing deduction is that it offsets only rental income unless you clear the passive activity hurdles. Rental real estate is passive by default under section 469, so a net loss from your rental housing deduction may be suspended rather than deducted against your wages. A special allowance lets some moderate income owners who actively participate deduct up to 25,000 dollars of rental loss against other income, phasing out as adjusted gross income rises. Knowing where you sit in that range tells you how much of the rental housing deduction you actually use this year.

Recordkeeping is the unglamorous backbone of the whole thing. Every dollar of the rental housing deduction needs a receipt, an invoice, or a statement behind it. We tell landlords to open a dedicated bank account for the rental so income and expenses never mingle with personal money. Clean books make the rental housing deduction defensible and make tax season fast instead of frantic.

An edge case is the part year or mixed use property. A vacation home rented part of the year and used personally the rest has its rental housing deduction split between rental and personal use, with the personal portion lost. The IRS Schedule E instructions and the rules in Publication 527 govern how that split works. For a full walkthrough of how the rental housing deduction fits your return, see the IRS page on Schedule E and our individual tax return service. If you want a second set of eyes on your rental return, reach out through our new client inquiry page.

Landlords can deduct almost every ordinary and necessary cost of operating a rental, and together these make up the rental housing deduction on Schedule E. The list is long. Mortgage interest, property taxes, insurance, repairs, maintenance, property management fees, advertising for tenants, utilities you pay, HOA dues, legal and accounting fees, travel to the property, and depreciation all reduce your rental income. If a cost keeps the property running and is reasonable, it almost certainly belongs in your rental housing deduction. The test the IRS uses is whether the expense is ordinary and necessary for the rental activity.

The mechanics are simple once you separate two buckets. Current expenses are deducted in full the year you pay them, and they form the bulk of the everyday rental housing deduction. Capital costs, by contrast, are not deducted all at once. Buying the building, replacing a roof, or adding a new HVAC system gets capitalized and recovered through depreciation over years. Knowing which bucket a cost falls into is the single biggest judgment call in the rental housing deduction, and getting it wrong either inflates this year deduction improperly or delays a deduction you could have taken sooner.

Here is a worked example. A landlord spends 1,200 dollars patching the roof after a storm and 9,000 dollars replacing the entire roof a year later. The 1,200 dollar patch is a repair, deducted in full this year as part of the rental housing deduction. The 9,000 dollar full replacement is an improvement, capitalized and depreciated. Same roof, two very different tax outcomes, because one restored the property and the other bettered it. That distinction drives a large part of the rental housing deduction every year.

We see this every year when landlords lump a big remodel in with ordinary repairs and try to write the whole thing off at once. The IRS treats a remodel that adds value or extends the life of the property as an improvement, not a repair, and it does not belong in the current year rental housing deduction. When a client hands us a year of receipts, sorting repairs from improvements is the first thing we do, because it protects the rental housing deduction from challenge.

Mortgage interest deserves a special note inside the rental housing deduction. Unlike the home mortgage interest on a personal residence, interest on a loan against a rental property is a business expense with no SALT cap and no acquisition debt limit in the personal sense. The full interest reduces your rental income. The same is true of property tax on a rental, which is fully deductible against rent rather than squeezed under the personal SALT cap that limits homeowners.

Travel and home office costs round out the rental housing deduction for active landlords. If you drive to your property to inspect, collect rent, or supervise repairs, the mileage is deductible. If you run the rental operation from a dedicated space at home, a home office deduction may apply. These smaller items are easy to overlook, but stacked across a year they add real value to the rental housing deduction, which is why we comb for them on every rental return.

An edge case is the de minimis safe harbor election, which lets you expense items costing up to a set dollar amount per invoice rather than capitalizing them. Used well, it pulls small purchases into the current rental housing deduction. The IRS topic on rental income and expenses spells out what qualifies. For the official list of deductible rental costs, see IRS Topic 414 on rental income and expenses and the detailed rules in Publication 527. To make sure your books capture every piece of the rental housing deduction, our bookkeeping service keeps the records clean.

Depreciation is the part of the rental housing deduction that lets you recover the cost of the building over time, and it is usually the largest single deduction a landlord gets. The idea is that a building wears out, so the tax code lets you deduct a slice of its cost each year even though you wrote no check for it. Residential rental property is depreciated over 27.5 years under the modified accelerated cost recovery system. You cannot depreciate land, only the building and certain improvements, so the first step in the rental housing deduction is splitting your purchase price between land and structure.

The mechanics start at the day the property is placed in service, meaning ready and available to rent. You take the building basis, divide by 27.5, and that annual figure becomes part of your rental housing deduction every year until the basis is recovered. Improvements added later, like a new roof or an addition, get their own depreciation schedule starting when they are placed in service. The 100 percent bonus depreciation restored for property placed in service after January 19, 2025 generally applies to shorter lived components, not the 27.5 year building itself, but a cost segregation study can carve out those faster components and accelerate the rental housing deduction.

Here is a worked example. You buy a rental house for 330,000 dollars, and an appraisal allocates 80,000 dollars to land and 250,000 dollars to the building. You divide the 250,000 dollar building basis by 27.5, giving roughly 9,090 dollars of depreciation each year. That 9,090 dollars is a pure paper deduction inside your rental housing deduction, sheltering rent without costing you cash. Over the holding period it adds up to a substantial reduction in taxable rental income.

We see this every year. Landlords either skip depreciation entirely or depreciate the whole purchase price including the land. Both are mistakes that distort the rental housing deduction. Land never depreciates, and skipping the building depreciation gives up a deduction the IRS will recapture at sale regardless. When we take on a rental client who has been filing without depreciation, fixing it often involves a change in accounting method to catch up the missed rental housing deduction.

Cost segregation deserves a closer look for owners chasing a bigger early rental housing deduction. A cost segregation study breaks the building into components, identifying items like appliances, carpeting, and certain fixtures that depreciate over 5, 7, or 15 years instead of 27.5. Those shorter lived pieces can qualify for bonus depreciation, front loading the rental housing deduction substantially in the first year of ownership. For a larger property the study often pays for itself many times over in accelerated deductions.

Basis adjustments are the other side of the depreciation coin. Every dollar of depreciation you claim reduces your basis in the property, which raises the gain when you sell. That is why depreciation inside the rental housing deduction is best understood as a timing benefit. You deduct now and settle up later through recapture and a higher gain. For most landlords the time value of money still makes claiming every dollar of depreciation the right call.

An edge case is depreciation recapture at sale. When you sell, the depreciation that fed your rental housing deduction over the years is recaptured and taxed, currently at a maximum 25 percent rate on the recaptured portion. A 1031 like kind exchange can defer that. The IRS publication on residential rental property walks through the depreciation tables. For the rules, see IRS Publication 527 on residential rental property. To plan depreciation and a possible exchange around your rental housing deduction, our tax strategy consulting team can run the numbers.

Sometimes. The 20 percent qualified business income deduction under section 199A can apply to rental income, but only when the rental activity rises to the level of a trade or business. This is the part of the rental housing deduction landlords most often miss, because rental income is normally passive while the QBI deduction is meant for businesses. The bridge between the two is whether your rental operation is run like a business. When it qualifies, the section 199A deduction lets you deduct up to 20 percent of the net rental income on top of all your other rental housing deduction items.

The mechanics turn on the trade or business question. The IRS created a safe harbor specifically for rental real estate so landlords have a clear path to the QBI piece of the rental housing deduction. Under the safe harbor you keep separate books and records for the rental enterprise, perform at least 250 hours of rental services during the year, and maintain contemporaneous logs of those hours, what was done, when, and by whom. Meet the safe harbor and the rental enterprise is treated as a business for QBI, opening the 20 percent deduction. Miss it and you can still qualify under the general facts and circumstances test, but you lose the certainty.

Here is a worked example. You own a small apartment building generating 40,000 dollars of net rental income after all other rental housing deduction items. You and your property manager log 300 hours of rental services across the year, keep separate books, and document everything. You meet the safe harbor, so the rental enterprise counts as a business and you take a 20 percent QBI deduction, an extra 8,000 dollars off the top. That 8,000 dollars is rental housing deduction value most casual landlords leave on the table.

We see this every year. Landlords who could qualify never track their 250 hours, so they cannot defend the QBI portion of the rental housing deduction if asked. The logs are not optional. Without contemporaneous records of the hours, the safe harbor evaporates and the 20 percent deduction is exposed. We build a simple time log into our rental clients routine so the QBI piece of the rental housing deduction is documented as the year goes.

Income level also shapes the QBI piece of the rental housing deduction. The section 199A deduction has thresholds, and above the upper limit certain businesses face wage and property based caps on the deduction. Rental real estate is generally not a specified service business, so it usually fares well under those caps, but the calculation gets more involved at higher incomes. A 2026 minimum QBI deduction floor also exists for eligible taxpayers, which can help smaller landlords capture at least a baseline benefit.

Grouping elections matter too. The safe harbor lets you treat similar rental properties as a single enterprise, combining hours toward the 250 hour test for the QBI portion of the rental housing deduction. Commercial and residential properties cannot be grouped together, though. We help clients decide whether to group, because the grouping choice affects both the hours test and how the QBI deduction is computed across a portfolio.

An edge case is the triple net lease and the property used as a residence, both of which are excluded from the safe harbor. A landlord with a single triple net leased building cannot use the safe harbor route to the QBI rental housing deduction, though other paths may exist. The IRS finalized this safe harbor in Revenue Procedure 2019-38. For the official QBI rules, see the IRS page on the qualified business income deduction. To test whether your rentals clear the section 199A bar and capture this rental housing deduction, talk to our tax strategy consulting team.

As of June 2026, the bipartisan rental housing bills aimed at the deduction have been introduced but not enacted. There is no new rental housing deduction signed into law from these specific bills yet, so plan around the rules that exist today. Two measures drive the conversation. In the House, the Rental Housing Investment Act, H.R. 8996, and in the Senate a companion measure, S. 4080, both propose bonus depreciation for long term residential rental housing. Their core idea is to expand the depreciation slice of the rental housing deduction to encourage building and holding rental units. Both remain in committee and have not passed.

The mechanics of what is proposed center on depreciation timing. Today, as covered above, a residential building is depreciated slowly over 27.5 years, and the 100 percent bonus depreciation restored for 2025 and after generally hits only shorter lived components, not the building shell. The proposed rental housing bills would let owners of qualifying long term residential rental housing claim accelerated or bonus depreciation on a broader basis, pulling that rental housing deduction forward into the early years of ownership. That timing shift is the heart of the proposal, because money deducted now is worth more than money deducted decades from now.

Here is a worked example of the potential effect, framed as a what if. Suppose a developer places 1,000,000 dollars of qualifying residential rental housing in service. Under current law the rental housing deduction from depreciation trickles in at roughly 36,000 dollars a year over 27.5 years. If a bill allowed substantial bonus depreciation on that basis, a large share of the deduction could land in year one instead. The lifetime rental housing deduction is similar either way, but the timing changes the economics dramatically. Again, this is what the bills propose, not current law.

We see this every year when clients read a headline about a housing bill and assume it already changed their return. It has not. The broader 21st Century ROAD to Housing Act moving through Congress in 2026 is largely a supply, zoning, and finance bill, not a rewrite of the rental housing deduction. Conflating the two leads owners to plan around a deduction that does not exist yet. We tell clients plainly. File under today rules, and we will adjust the moment any rental housing deduction change is actually signed.

It helps to separate the housing bills moving in 2026 into two lanes. One lane is tax, the introduced depreciation bills that would change the rental housing deduction directly but have not passed. The other lane is housing policy, the larger supply and finance package that affects zoning, construction, and investor purchases without touching the depreciation rules a landlord uses. Reading a tax change into a zoning bill is the error we correct most often when clients call about a headline.

Our standing advice is to plan for the law as written while staying ready to pivot. If an expanded bonus depreciation rental housing deduction does pass, the timing of acquisitions and placed in service dates near the effective date could swing your first year deduction by a wide margin. We track H.R. 8996, S. 4080, and any successor language so clients are positioned to act quickly. Until ink hits paper, though, the rental housing deduction on your return follows the 27.5 year schedule, the section 469 passive limits, and the 199A safe harbor described above.

An edge case is anticipatory planning. If a bonus depreciation expansion looks likely, the timing of when you place property in service could matter, since these rules usually apply to property placed in service after a stated date. Until a bill becomes law, that is speculation, and the passive activity loss rules under section 469 and Form 8582 still cap how much rental loss you can use against other income. For the passive loss limits that shape any rental housing deduction, see the IRS page on Form 8582 passive activity loss limitations. To position your portfolio for whatever Congress passes, our tax strategy consulting team tracks the bills, and you can start at our new client inquiry page.