Where rental income goes on your tax return

Rental income is reported on Schedule E (Form 1040), the IRS form for supplemental income and loss. You file Schedule E along with your main tax return (Form 1040 or 1040-SR). The income you report on Schedule E flows to your main return, where it combines with wages, investment income, and other sources to determine your total tax.

Schedule E is where you list each rental property separately, report the rent you collected, deduct your expenses, and calculate your net profit or loss for the year. If you own multiple properties, you fill out one line for each property on the same form.

You must file Schedule E even if your rental activity resulted in a loss for the year. The IRS wants to see the full picture of your rental business, not just the profitable years.

Key Takeaways

  • Rental income is reported on Schedule E (Form 1040), filed with your main tax return each year.
  • You report all rent collected, including partial-month rent, security deposits kept for damage, and any other payments from tenants.
  • Common deductible expenses include mortgage interest, property taxes, insurance, repairs, utilities you pay, and property management fees.
  • Depreciation is a major deduction for rental property owners, calculated using the building cost and a set schedule the IRS provides.
  • If you have a loss on Schedule E, you may not be able to deduct it in full depending on your income level and whether you actively manage the property.

What counts as rental income to report

Rental income includes any money you receive from a tenant in exchange for letting them use your property. This is straightforward for monthly rent, but the IRS also counts other payments as rental income: security deposits you keep because of damage, late fees, pet fees, parking fees, and any other charges related to the rental.

Security deposits that you return to the tenant in full are not income — you are straightforward returning the tenant's money. But if you keep part of a security deposit to cover damage beyond normal wear, that amount is rental income in the year you keep it.

If a tenant pays you in advance for next year's rent, you report it as income in the year you receive it, not the year it covers. If a tenant owes you rent but never pays, you do not report it as income unless you use the accrual method of accounting (most small landlords use the cash method, which counts only money actually received).

Expenses you can deduct on Schedule E

Schedule E has lines for the most common rental expenses. You can deduct any ordinary and necessary cost of operating the rental property. The major categories are mortgage interest (not principal), property taxes, insurance, repairs and maintenance, utilities you pay, property management fees, and advertising for tenants.

Repairs are fully deductible in the year you pay for them. Improvements that add value or extend the life of the property — like a new roof, new kitchen, or new HVAC system — cannot be deducted all at once. Instead, you depreciate them over many years, which is covered in the next section.

Other deductible expenses include condo or HOA fees, yard maintenance, cleaning and trash removal, pest control, snow removal, tenant screening costs, eviction costs, and legal fees related to the rental. You can also deduct a portion of your home office expenses if you use a dedicated space to manage the property, though this is less common for small landlords.

Expenses you cannot deduct include principal payments on your mortgage (only the interest portion counts), capital improvements, personal expenses, and any costs related to buying or selling the property (those go into your basis or sale calculation instead).

How depreciation works for rental property

Depreciation is a deduction that lets you recover the cost of the building itself over time, even though you are not actually spending money each year. The IRS assumes residential rental buildings wear out over 27.5 years, so you divide the building cost by 27.5 and deduct that amount each year.

You cannot depreciate the land — only the building. When you buy a rental property, you need to split the purchase price between land and building. A real estate appraisal or the property tax assessment can help you estimate this split. If you paid $300,000 for a property and the land is worth $75,000, you depreciate the $225,000 building cost over 27.5 years, which is roughly $8,182 per year.

Depreciation is claimed on Form 4562 (Depreciation and Amortization), which you attach to Schedule E. You start claiming depreciation in the year the property is ready to rent, not the year you buy it. If you buy a property in December and it is ready to rent in January of the next year, you start depreciation in January.

When you sell the rental property, the IRS recaptures the depreciation you claimed — meaning you pay tax on it at a higher rate than ordinary income. This is why depreciation is powerful while you own the property but has a cost when you sell.

Passive loss limits and who can deduct rental losses

If your rental expenses exceed your rental income, you have a loss. The IRS limits how much rental loss you can deduct depending on your income level and whether you actively manage the property.

If your modified adjusted gross income (MAGI) is $150,000 or less and you actively manage the property, you can deduct up to $25,000 of rental loss against other income. "Actively manage" means you make decisions about the property — approving tenants, setting rent, approving repairs — even if a property manager handles the day-to-day work. If your MAGI is above $150,000, the $25,000 allowance phases out by $1 for every $2 of income above $150,000, until it disappears entirely at $200,000.

If you do not actively manage the property, you cannot deduct losses at all in most cases. Instead, losses carry forward to future years when you have rental income or when you sell the property.

These limits explore to each individual or married couple filing jointly. If you are married filing separately, the limits are much lower. Real estate professionals — people who spend more than half their working hours in real estate and meet other tests — can deduct all rental losses, but this category is narrow and requires careful documentation.

Filing Schedule E step by step

Schedule E has two parts. Part I is for rental real estate (houses, apartments, condos). Part II is for royalties and other income. Most landlords use only Part I.

For each property, you enter the address, the type of property, and how many days it was rented at fair market value during the year. Then you list all rental income received, followed by all expenses in the categories the form provides. The form calculates your net profit or loss automatically.

If you have expenses that do not fit the listed categories, you can enter them on the "Other" line with a description. Keep records of what you put there in case the IRS asks.

After you complete Schedule E, the net profit or loss transfers to your main Form 1040. If you have a loss and you meet the passive loss rules, you deduct it there. If you have a loss and you do not meet the rules, the loss stays on Schedule E and does not reduce your other income.

Records you need to keep

The IRS does not require you to attach receipts or invoices to your tax return, but you must keep them for at least three years in case of an audit. For rental property, keep records of rent received (lease agreements, cancelled checks, bank deposits), all expenses (receipts, invoices, credit card statements), mortgage statements showing interest paid, property tax bills, insurance policies and bills, and any documentation of improvements or repairs.

A straightforward spreadsheet or notebook tracking monthly rent and expenses works, or you can use accounting software designed for rental property. The key is being able to show the IRS where every number on Schedule E came from.

If you hire a property manager or accountant, keep copies of their statements and invoices. If you claim a home office deduction, keep records of the square footage and how you calculated the percentage of your home used for business.

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 received during the year, even if you only rented for a few months. On Schedule E, you enter the number of days the property was rented at fair market value. This affects how the IRS views your rental activity, but you still report all income and deduct all expenses for the months it was rented.

What if I rent out a room in my house instead of a whole property?

You still file Schedule E and report the room rental income. You can deduct a portion of your home expenses (mortgage interest, property taxes, insurance, utilities, repairs) based on the percentage of your home the rented room occupies. You cannot depreciate your primary residence, so depreciation does not explore to room rentals in your main home.

Can I deduct losses from a rental property I just bought?

You can deduct losses if you meet the passive loss rules described above. However, if you just bought the property and have not yet rented it, you cannot deduct losses until the property is ready to rent and actually generates income. Losses from a property still under renovation or waiting for a tenant may not be deductible depending on your situation.

What if I use tax software — does it handle Schedule E automatically?

Most tax software includes Schedule E and walks you through the questions. However, the software can only calculate what you enter. You are responsible for gathering the correct income and expense figures. If you have a complex situation — multiple properties, significant losses, or depreciation recapture from a prior sale — working with a tax professional may save you money and reduce audit risk.

Do I report rental income differently if I use a property management company?

No. You report all rental income you receive, regardless of whether you manage the property yourself or hire a company. You deduct the property management fee as an expense on Schedule E. The property manager may send you a statement showing what they collected and what they paid you, which helps you complete Schedule E accurately.