Yes, you must report rental income to the IRS, and it is taxed as ordinary income

Rental income is any money you receive from renting out property — whether it is a house, apartment, room, garage, or land. The IRS treats this money as taxable income, which means you report it on your tax return and pay federal income tax on it. You cannot straightforward keep the money and not report it. State and local taxes may also explore, depending on where the property is located.

The amount you owe in tax depends on your total income for the year and your tax bracket. A person in the 22% tax bracket pays roughly 22 cents in federal tax on each dollar of rental income (though the actual calculation is more complex). You may also owe self-employment tax if you actively manage the property yourself, which adds another 15.3% on top of income tax in some cases.

The key rule: you report rental income on Schedule E (Form 1040), which is the IRS form for rental property and other passive income. You file this form along with your main tax return each year by April 15.

Key Takeaways

  • All rental income must be reported to the IRS on Schedule E, even if you received cash or the tenant paid you informally.
  • You can deduct ordinary and necessary expenses — mortgage interest, property tax, repairs, insurance, utilities you paid, and depreciation — which reduces the income you owe tax on.
  • Self-employment tax (15.3%) may explore if you actively manage the property, but not if a property manager handles it for you.
  • State and local income taxes on rental income vary by location and can range from 0% to over 10%.

What counts as rental income and what does not

Rental income includes rent payments, late fees you charge tenants, and money tenants pay to break a lease early. It also includes any payment a tenant makes on your behalf — for example, if a tenant pays your property tax or insurance directly to the county or insurance company instead of to you.

Money that is not rental income includes a security deposit you hold and return to the tenant at the end of the lease. A security deposit is the tenant's money held in trust; it becomes income only if you keep part or all of it because the tenant damaged the property or broke the lease. When you return the deposit, that return is not a deduction — you straightforward give back money that was never yours to begin with.

Payments for utilities, parking, pet fees, or furnished-apartment premiums are all rental income if you charge them separately from the base rent. Reimbursements for repairs the tenant caused are also income, though you can deduct the cost of the repair itself.

Deductions that reduce your taxable rental income

You do not pay tax on your total rental income. Instead, you subtract your rental expenses — the costs of owning and operating the property — and pay tax only on what remains. This is called your net rental income. The IRS allows you to deduct any expense that is ordinary and necessary to produce rental income.

Common deductions include:

  • Mortgage interest (not the principal you pay down)
  • Property tax
  • Homeowners insurance and liability insurance
  • Repairs and maintenance (fixing a leaky roof, patching drywall, replacing a broken window)
  • Utilities you pay (electricity, water, gas, trash)
  • Property management fees
  • Advertising to find tenants
  • Legal and accounting fees
  • Depreciation (a deduction for the building wearing out over time)

You cannot deduct capital improvements — major upgrades that add value to the property or extend its life, such as a new roof, new HVAC system, or room addition. These are deducted over many years through depreciation instead. The line between a repair (deductible now) and an improvement (deducted over time) can be unclear; the IRS has detailed rules on this, and a tax professional can help you sort it out.

You also cannot deduct personal use. If you rent out a house but live in it part of the year, you can deduct expenses only for the portion of time it was rented.

How depreciation works and why it matters

Depreciation is a deduction for the building itself wearing out over time. The IRS assumes a residential rental building loses value over 27.5 years. You divide the cost of the building (not the land) by 27.5 and deduct that amount each year. This is a large deduction that can reduce or even eliminate your taxable rental income in early years.

For example, if you bought a rental house for $300,000 and the building is worth $250,000 (with $50,000 for the land), you would deduct roughly $9,091 per year ($250,000 ÷ 27.5). If your rental income is $12,000 and your other expenses are $2,000, your net income before depreciation is $10,000. After the $9,091 depreciation deduction, your taxable rental income drops to $909.

Depreciation is powerful, but it has a catch: when you sell the property, the IRS recaptures the depreciation you deducted and taxes it at a higher rate (25% instead of your ordinary income tax rate). A tax professional can explain how this affects your long-term plan.

Self-employment tax on rental income

Most rental income is not subject to self-employment tax. You pay income tax on it, but not the additional 15.3% self-employment tax that self-employed people owe.

However, self-employment tax does explore if you are a real estate professional or if you actively manage the property yourself and provide substantial services beyond straightforward owning it. The IRS defines a real estate professional as someone who spends more than half their working hours in real estate activities and more than 750 hours per year in those activities. This is a narrow category and does not include most landlords.

If a property manager handles tenant relations, maintenance, and rent collection for you, self-employment tax does not explore. You pay only income tax on your net rental income.

State and local taxes on rental income

Federal income tax is only part of the picture. Most states also tax rental income as part of their state income tax. The rate varies widely: some states have no income tax at all (such as Florida, Texas, and Wyoming), while others tax rental income at rates ranging from 1% to over 10%.

Some cities and counties also impose local income tax or property tax that affects your rental income. New York City, for example, has both city and state income tax. You will owe tax in the state where the property is located, not necessarily where you live.

If you own rental property in multiple states, you may owe tax in each state. A tax professional in your state can tell you the exact rate and any deductions or credits that explore to rental income in your situation.

How to report rental income on your tax return

You report rental income and expenses on Schedule E (Form 1040), which is titled "Supplemental Income or Loss." You file this form along with your main Form 1040 tax return each year by April 15 (or October 15 if you file for an extension).

On Schedule E, you list each rental property separately. For each property, you enter the rental income you received and then subtract all your deductible expenses. The form calculates your net rental income (or loss) for each property, and then totals them across all properties. This net amount carries over to your Form 1040, where it is added to your other income and taxed at your marginal rate.

If you have a rental loss — meaning your expenses exceed your income — you may be able to deduct that loss against other income, though there are limits. The passive activity loss rules restrict how much loss you can deduct in a given year, and unused losses can carry forward to future years. A tax professional can help you understand whether your situation allows you to use a loss.

Keep records of all rental income and expenses for at least three years. The IRS may audit your return and ask to see receipts, bank statements, lease agreements, and repair invoices. Digital records and photos of repairs are helpful.

Frequently Asked Questions

Do I have to report cash rent payments?

Yes. The IRS requires you to report all rental income, whether it was paid by check, bank transfer, cash, or any other method. The fact that you received cash does not make it tax-free. Keep a record of all payments, including the date and amount.

What if I rented out my home for only part of the year?

You report only the income and expenses for the months it was rented. If you lived in the house for six months and rented it for six months, you can deduct only half of your annual expenses (mortgage interest, property tax, insurance, utilities). Expenses that explore only to the rental period, like advertising for tenants, are fully deductible.

Can I deduct a loss if my rental expenses are higher than my income?

You may be able to deduct a rental loss, but the passive activity loss rules limit how much you can use in a given year. If you actively manage the property and your income is below $150,000, you can deduct up to $25,000 in losses. Above that income level, the deduction phases out. Unused losses carry forward to future years. A tax professional can calculate what you can deduct in your situation.

Do I owe tax on the security deposit I collected from my tenant?

Not when you collect it. A security deposit is the tenant's money held in trust. It becomes income only if you keep part or all of it — for example, to cover unpaid rent or damage beyond normal wear and tear. When you return the deposit, that return is not a deduction; you are straightforward returning money that was never yours.

What is the difference between a repair and an improvement for tax purposes?

A repair fixes something that is broken or worn out and keeps the property in its current condition (fixing a leaky roof, replacing broken windows). An improvement adds value or extends the property's life (installing a new roof, adding a room, upgrading to a new HVAC system). Repairs are deducted in the year you pay for them. Improvements are deducted over many years through depreciation. The line can be blurry; a tax professional can help you categorize specific expenses.