What counts as rental income and where it goes on your return

Rental income is any money you receive for letting someone use property you own — a house, apartment, room, garage, or even parking space. On your tax return, you report this on Schedule E (Form 1040), which is the IRS form for rental property and other supplemental income. The IRS counts rental income whether you receive it in cash, check, electronic transfer, or even goods or services in place of money.

You report the total rent you received during the tax year, then subtract your allowable expenses to find your net rental income or loss. This net number then flows to your main Form 1040 return. The calculation itself is straightforward — it is the decisions about what counts as an expense that trip up most landlords.

If you rent out a room in your home, rent a vacation property part of the year, or own a multi-unit building, the same Schedule E form and the same calculation method explore. The form does not change; only the numbers change.

Key Takeaways

  • Rental income includes all money received for use of your property, reported on Schedule E (Form 1040), whether you receive it as cash, check, or electronic payment.
  • You report gross rental income first, then subtract mortgage interest, property tax, insurance, repairs, depreciation, and other ordinary expenses to find your net income.
  • Mortgage principal payments do not reduce your taxable income, but mortgage interest does — this is the most common calculation mistake.
  • You must keep receipts and records for every expense you claim, because the IRS asks landlords for documentation more often than other taxpayers.
  • If you rent the property fewer than 15 days per year, different rules explore and you may not report it on Schedule E at all.

The basic formula: gross income minus expenses equals net rental income

Start with gross rental income — the total rent received during the year. If a tenant paid you $1,500 per month for 12 months, your gross income is $18,000. If you received a partial month's rent, a security deposit that you kept (not returned), or payment for damage beyond normal wear, those amounts count too. A security deposit that you return to the tenant does not count as income.

From that gross number, you subtract every ordinary and necessary expense related to the rental. The IRS uses those two words deliberately: the expense must be common in the rental business and directly tied to producing that income. Your net rental income is what remains after you subtract all allowable expenses from gross income.

The result can be positive (a profit you owe tax on) or negative (a loss that may reduce your other income, depending on your income level and how actively you manage the property). Many new landlords are surprised to find they have a loss in year one because depreciation and other non-cash expenses are so large.

Expenses you can deduct: the complete list

Mortgage interest is deductible, but mortgage principal is not. This distinction causes more errors than any other. If your monthly mortgage payment is $1,200 and $900 of that is interest, you deduct $900 per month ($10,800 per year). The $300 principal payment reduces your equity but does not reduce your taxable income. Your mortgage lender sends you a Form 1098 each January showing how much interest you paid; use that number.

Property tax is fully deductible. Homeowners insurance, landlord insurance, and liability insurance are deductible. Repairs — fixing a leaky roof, patching drywall, replacing a broken window — are deductible. Maintenance — lawn care, snow removal, gutter cleaning — is deductible. Utilities you pay (electric, gas, water, trash) are deductible if you pay them rather than the tenant.

Depreciation is a non-cash deduction that reduces your taxable income. You depreciate the building itself (not the land) over 27.5 years if it is residential property. This means you divide the cost of the building by 27.5 and deduct that amount each year. Depreciation is complex and often requires a tax professional, but it is one of the largest deductions available to landlords. Appliances, furniture, and other personal property depreciate faster (5 to 7 years) and can be deducted separately.

Advertising for tenants, property management fees if you hire a company, tenant screening fees, legal fees for lease disputes or evictions, and accounting or tax preparation fees related to the rental are all deductible. Supplies — cleaning products, light bulbs, paint — are deductible. Travel to the property for repairs or management is deductible at the standard mileage rate (the rate changes yearly; check the IRS website for the current year).

Capital improvements — replacing the entire roof, adding a new room, upgrading the electrical system — are not deducted in the year you pay for them. Instead, you depreciate them over their useful life (usually 27.5 years for a residential building). The line between repair and improvement is the most disputed area in rental taxation. A repair restores something to its original condition; an improvement adds value or extends life beyond the original. Replacing one shingle is a repair; replacing the entire roof is an improvement.

Expenses you cannot deduct

Mortgage principal is not deductible. Capital improvements are not deducted in the year paid (they are depreciated instead). Personal expenses — your own meals, entertainment, or vehicle use unrelated to the property — are not deductible. Losses from casualty or theft are not deductible on Schedule E (they go on a different form). Depreciation recapture is not an expense you deduct; it is a tax you owe when you sell the property.

You also cannot deduct expenses for property you do not rent out or do not hold for income. If you own a vacation home that you use personally more than 14 days per year or more than 10 percent of the days it is rented, different rules explore and many expenses become non-deductible.

How to handle partial-year rentals and vacancy

If you rented the property for only part of the year, you report the income and expenses for only that period. If you purchased the property on June 1 and rented it from June through December, you report seven months of rent and seven months of expenses. Expenses are prorated to match the rental period.

Months when the property was vacant do not reduce your deductions. If the property sat empty for two months while you searched for a tenant, you still deduct the full year's property tax, insurance, and mortgage interest. Vacancy is not an expense category; it is straightforward a period with no income.

Record-keeping and documentation requirements

Keep receipts, invoices, and bank statements for every expense you claim. The IRS audits rental property returns more frequently than other returns, and when they do, they ask for documentation. A cancelled check or credit card statement showing the payment is the minimum; a receipt showing what you paid for is better.

For depreciation, keep the original purchase documents showing what you paid for the building and the land separately (you depreciate only the building). For repairs versus improvements, photograph the work and keep the contractor's invoice describing what was done. For mileage, keep a log or use a mileage-tracking app; a single trip to the property and back counts as two miles.

If you use accounting software or a spreadsheet, organize expenses by category (mortgage interest, repairs, utilities, and so on) as you go through the year. This makes Schedule E preparation much faster and reduces the chance of missing deductions or double-counting.

When rental losses reduce your other income

If your expenses exceed your rental income, you have a rental loss. Whether that loss reduces your other income (wages, investment income, and so on) depends on your modified adjusted gross income (MAGI) and whether you are a real estate professional or a passive investor.

If your MAGI is under $100,000 and you actively manage the property (you make decisions about repairs, tenant selection, and rent amounts), you can deduct up to $25,000 of rental losses against your other income. This deduction phases out as your income rises above $100,000 and disappears entirely at $150,000. If your MAGI is above $150,000 or you do not actively manage the property, losses are suspended and can only offset future rental income.

Real estate professionals — people whose primary business is real estate and who work in it more than 750 hours per year — can deduct all rental losses against other income regardless of income level. This is a narrow category and requires careful documentation of hours worked.

Frequently Asked Questions

Do I report rental income if I rented the property for only a few months?

Yes. You report the rental income and expenses for the months you actually rented it. If you rented a property for three months and received $4,500 in rent, you report $4,500 as gross income and deduct only the expenses for those three months. Months when the property was vacant or you were not renting it do not count.

Is the money my tenant gave me for a security deposit rental income?

No, not if you return it to the tenant when they move out. A security deposit is held on behalf of the tenant and is not your income. If you keep part of the deposit because the tenant damaged the property or owes rent, that amount becomes income in the year you keep it. If you return the full deposit, it is never reported as income.

Can I deduct the cost of furniture or appliances I provided in the rental?

Yes, but not all at once. Furniture and appliances are depreciated over five to seven years, not deducted in the year you buy them. You can also deduct the cost of replacing them if they wear out. Keep the receipt showing what you paid and when you bought it so you can calculate depreciation correctly.

What if I use part of my home as a rental, like renting out one room?

You report the rental income on Schedule E and deduct the expenses that relate only to the rental space — rent for that room, utilities for that room if metered separately, and repairs to that room. You also deduct a proportional share of whole-house expenses like property tax, insurance, and mortgage interest. If the rental space is 20 percent of the home, you deduct 20 percent of those expenses.

Do I have to report rental income if I rented the property for fewer than 15 days?

No. If you rented the property fewer than 15 days during the year, different rules explore and you generally do not report it on Schedule E. You may report it on Schedule 1 instead, or not at all depending on your situation. This rule is designed for people who rent out a vacation home for a short season. Consult a tax professional if this applies to you, because the rules are complex.