• Real estate tax laws determine which expenses landlords may deduct.two keys image by Horticulture from Fotolia.com
  
  The federal tax laws for rental property profits are provided by the Internal Revenue Service (IRS). The IRS considers all rental property profits to be income. The investment property owner may deduct incidental costs incurred from renting the investment property. Deductible expenses are generally deducted within the year of payment.
  
  

Depreciation Rule for Property Improvements or Property Repairs

• Landlords may deduct the expenses for repair costs spent on necessary repairs. These repairs do not have to be capitalized or depreciated, since they do not add to real estate value and may be deducted immediately.
  
  Property improvements, such as installing new hardwood floors will need to be depreciated since the installation presumably adds to the resale value of the home. The depreciation period covers the entire period the home is used as an investment, until the taxpayer has exhausted deductible amounts or sells the home.
  
  In order to properly document the depreciation, the owner should document the payments and record the process used to capitalize the improvement for the property's useful life.
  
  

Deduction Rule for Investment Expenses

• The tax laws allow owners to deduct costs for legal fees, tax fees, advertising fees and mortgage interest from gross income. The IRS allows other costs to be deducted if the costs were expended to generate rental income.
  
  

Rule for Monthly Rent Checks

• The monthly rental checks the landlord receives are considered income. If deposit checks are not returned, then the amount of the check also is considered income. If repair services are used to make up the rent payment, then the value of the repair services or other services provided are counted as income.
  
  

Rule for Semi-Personal Use

• Rental homes used for both personal and investment purposes are subject to different profit rules. Homeowners will have to report rental income if the rental period covered more than 15 days per year. Although the profits generated during the brief investment period might not be regarded as income, the taxpayer will not be able to benefit from the itemized deductions for rental expenses.
  
  

Rule for Two-Year Capital Gains Profit

• If the owner is able to convert the investment home into a main home or primary residence at least two years prior to the sale of the property, then the owner may be able to take the entire profit made upon the sale of the former investment property tax-free. The IRS allows $250,000 to be written-off from capital gains, if the owner is able to use it as non-investment property for this time period. Otherwise, proceeds made upon the sale are treated as capital gains profits and taxed at a different rate.
  
  

Rule for 1031 Like-Kind Real Estate Exchanges

• To avoid capital gains taxes, the owner may consider locating like-kind property and a tax intermediary to perform a 1031 exchange. The exchange allows the owner to avoid recognizing any gain for tax purposes. Note that if the owner subsequently sells the home, the IRS may assess capital gains at that time.