Rental income is taxable income, and you report it on your federal tax return every year

If you rent out a property — whether it's a house, apartment, condo, or even a single room — the IRS requires you to report all the money you receive as rent. This is true whether you rent the property for the full year, part of the year, or only occasionally. You cannot straightforward keep rental income off your tax return because you think it's too small, you were paid in cash, or the tenant didn't report it.

The IRS tracks rental income through multiple channels: tenants may report it on their own returns, mortgage lenders report interest paid, property managers file their own records, and the IRS matches these against what landlords report. Unreported rental income is one of the most commonly audited discrepancies on individual returns.

You report rental income on Schedule E (Form 1040), which is the form for rental real estate, royalties, and other passive income. This form goes with your main tax return (Form 1040 or 1040-SR). The income you report on Schedule E then flows to your main return, where it is added to your other income and taxed at your ordinary income tax rate.

Key Takeaways

  • All rental income must be reported on Schedule E, even if you received it in cash or the amount seems small.
  • You can deduct legitimate rental expenses — mortgage interest, property taxes, repairs, insurance, utilities — which reduces the taxable income you owe tax on.
  • If your rental expenses exceed your rental income, you may be able to deduct the loss on your return, though passive loss rules limit this for higher-income landlords.
  • Rental income is subject to federal income tax, and in most states, state income tax as well.
  • If you have a mortgage on the rental property, you may also owe self-employment tax on the net rental income.

What counts as rental income that you must report

Rental income includes the monthly rent payment, but it also includes other money you receive from the tenant or the property. Security deposits do not count as income in the year you receive them — they are held in trust and become income only if you keep them (for unpaid rent or damage). However, any other payments from tenants do count: pet fees, parking fees, utility reimbursements, late fees, and payments for damage beyond normal wear and tear all go on Schedule E as rental income.

If you provide services to the tenant as part of the rental arrangement — for example, you include housekeeping or meals as part of the rent — the fair market value of those services counts as rental income. If you forgive rent as a gift, that forgiven amount is still income to you in the year you forgive it.

Payments for the use of furniture or appliances you own and rent separately from the property itself also count as rental income. If you rent out a parking space, storage unit, or land, those amounts are rental income too.

How rental expenses reduce what you owe tax on

The IRS allows you to deduct ordinary and necessary expenses of operating the rental property. These expenses reduce your taxable rental income dollar-for-dollar. If you collected $20,000 in rent but spent $8,000 on deductible expenses, your taxable rental income is $12,000, not $20,000.

Common deductible rental expenses include mortgage interest (not the principal payment), property taxes, homeowners insurance, repairs and maintenance, utilities you pay, property management fees, advertising for tenants, cleaning and trash removal, and HOA fees. You can also deduct depreciation — a tax deduction that spreads the cost of the building itself over many years, even though you are not actually spending money that year.

Expenses you cannot deduct include the principal portion of your mortgage payment (that is paying down your own equity, not an operating cost), capital improvements that add value to the property (like a new roof or kitchen renovation — these are depreciated instead), and personal expenses like your own meals or vehicle use unless they are directly tied to the rental business.

You must keep records of all expenses: receipts, invoices, bank statements, and credit card statements. The IRS can ask to see these records if your return is audited, and without documentation, you lose the deduction.

Passive loss rules limit deductions if you have high income

If your rental expenses exceed your rental income, you have a rental loss. In many cases, you can deduct this loss against other income on your return — wages, investment income, or income from a business you actively run. However, the IRS has passive activity loss rules that limit this deduction if your modified adjusted gross income (MAGI) exceeds a certain threshold.

For 2024, if your MAGI is $150,000 or less and you actively participate in managing the rental property (meaning you make decisions about repairs, tenant selection, and rent amounts), you can deduct up to $25,000 in rental losses against your other income. If your MAGI exceeds $150,000, the deduction phases out by $1 for every $2 of income above that threshold, and at $200,000 MAGI, you cannot deduct rental losses at all in that year.

If you cannot deduct a loss because of these rules, the loss does not disappear — it carries forward to future years. If you eventually sell the property or your income drops below the threshold, you can use the carried-forward losses then.

Self-employment tax on rental income

Rental income from a property you own is generally not subject to self-employment tax (Social Security and Medicare tax). However, if you are a real estate professional — meaning you spent more than half your working hours in real estate activities and real estate was your principal business — the rules change, and you may owe self-employment tax.

Additionally, if you operate a rental business that involves significant services beyond straightforward renting out a property — for example, you run a furnished short-term rental with daily housekeeping, or you operate a boarding house with meals included — the IRS may classify some or all of your income as business income subject to self-employment tax rather than passive rental income.

Most landlords who rent out a single property or a few properties without providing services do not owe self-employment tax on the rental income. If you are uncertain whether your situation qualifies, a tax professional can review your specific circumstances.

State income tax on rental income

In addition to federal income tax, most states tax rental income at your ordinary state income tax rate. Nine states have no state income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages or rental income). If you own rental property in any other state, that state likely taxes your rental income.

Some states allow you to deduct the same rental expenses you deduct on your federal return. Others have different rules or limits. If you rent property in a state different from where you live, you may owe tax to both states, though you can usually claim a credit on your home state return for taxes paid to the other state to avoid double taxation.

How to report rental income on your tax return

Schedule E has separate sections for each rental property you own. You list the address, the type of property, and the dates you rented it. Then you enter all rental income in the top section and all deductible expenses in the middle section. The form calculates your net rental income or loss, which flows to your main Form 1040.

If you have only one rental property and straightforward income and expenses, Schedule E is straightforward. If you have multiple properties, significant depreciation, or losses that may be limited by passive activity rules, the form becomes more complex. Many landlords use tax software that walks through Schedule E line by line, or they work with a tax professional.

You file Schedule E with your Form 1040 or 1040-SR (the main individual income tax return) by the same important date: April 15 of the following year, or October 15 if you file an extension. If you have a business entity like an LLC or S-corporation that owns the rental property, the reporting is different — the entity files its own return, and you report your share of the income and losses on your personal return.

Frequently Asked Questions

Do I have to report rental income if I only rented the property for part of the year?

Yes. You report all rental income for the months the property was rented, and you can deduct expenses for those same months. If you rented it for six months and left it vacant for six months, you still report the six months of income and the six months of expenses.

What if a tenant paid me in cash and I have no receipt?

You still must report it as income. The IRS does not require a receipt to prove you received money — your own records, bank deposits, or even your own testimony can establish income. However, without documentation, you cannot deduct expenses as easily, and if audited, you may have difficulty proving what you actually spent. Always keep records of cash transactions.

Can I deduct the cost of buying the property or paying down the mortgage?

No. The cost of buying the property is a capital asset, not an operating expense. You recover that cost through depreciation over many years. Mortgage principal payments are not deductible — only the interest portion is. However, you can deduct repairs and maintenance to keep the property in good condition.

What if my rental income is less than my expenses — do I have to report it?

Yes, you must report both the income and the expenses on Schedule E. The form will show a loss. Depending on your income level and whether you actively manage the property, you may be able to deduct that loss on your return, or it may carry forward to future years.

Do I owe taxes on a security deposit I collected from a tenant?

Not in the year you collect it. A security deposit is held in trust and is not income until you actually use it — for example, to cover unpaid rent or damage. In the year you use or return it, you report the amount you kept as income and the amount you returned as a return of the deposit (not an expense).