Pursuant to Prop. Treas. Reg. § 1.280A-3, deductions are allowed in the following order and to the following extent:
Tier 1.
The taxpayer’s allocable deductions that are allowed without regard to rental use, such as the deductions for property taxes and mortgage interest, are deductible as rental expenses to the extent of the gross rental income from the unit.
Tier 2.
Allocable operating costs such as insurance, repairs, and utilities are deductible to the extent that they exceed gross rental income reduced by the first-tier expenses.
Tier 3.
Allocable depreciation and other amounts that result in an adjustment to basis are allowed to the extent that they exceed gross rental income reduced by the first- and second-tier expenses.
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