Rental income is taxed as ordinary income at your regular tax rate, and you report it on your federal tax return along with deductions for expenses you paid to earn it

The IRS treats money you collect from tenants as taxable income in the year you receive it. You do not pay a separate "rental tax" — instead, your rental income gets added to your other income (wages, interest, self-employment earnings) and taxed at whatever rate applies to your total. The key difference from a regular job is that you can subtract the costs of running the rental property, which lowers the amount you actually owe tax on.

How much tax you owe depends on your total income for the year, your filing status, and which deductions and expenses you claim. A property that brings in $15,000 in rent but costs $12,000 to maintain is taxed on $3,000, not $15,000. Understanding what counts as an expense and how to report it correctly can significantly reduce what you owe.

Key Takeaways

  • Rental income is reported on Schedule E (Form 1040) and taxed at your ordinary income tax rate, not a special rental rate.
  • You can deduct ordinary and necessary expenses — mortgage interest, property taxes, repairs, insurance, utilities you pay, and depreciation — to reduce your taxable rental income.
  • Mortgage principal payments are not deductible, but the interest portion is, and you can claim depreciation on the building itself (not the land) over 27.5 years.
  • You must report rental income even if you did not receive a Form 1099 from a tenant, and you should keep receipts and records for all expenses you claim.
  • State and local taxes on rental property vary widely, and some states tax rental income differently than federal tax does.

Where you report rental income on your tax return

Rental income goes on Schedule E (Form 1040), which is the IRS form for reporting income from rental real estate, royalties, and partnerships. You attach Schedule E to your main tax return (Form 1040 or 1040-SR) when you file. If you own multiple properties, you list each one separately on Schedule E, though you can combine the totals on your main return.

Schedule E asks for the address of the property, the number of days it was rented during the year, and the number of days you or your family used it personally. It also has sections for listing all your rental income and all your rental expenses. The form then calculates your net rental income or loss, which flows to your main return and affects your total tax bill.

You file Schedule E whether or not you received a Form 1099-NEC or 1099-MISC from your tenant. Tenants are not required to issue these forms for rent payments, so you cannot rely on receiving one. You are responsible for reporting the income yourself.

Expenses you can deduct from rental income

An expense is deductible if it is ordinary and necessary for running the rental property. This means it is the kind of cost that landlords commonly pay, and it is reasonable and appropriate for maintaining or managing the property. You can deduct expenses in the year you pay them.

Common deductible expenses include:

  • Mortgage interest — the interest portion of your mortgage payment (not the principal)
  • Property taxes — real estate taxes you pay to your city or county
  • Insurance — landlord or rental property insurance premiums
  • Repairs — fixing broken items, patching walls, replacing a roof, fixing plumbing or electrical problems
  • Maintenance — lawn care, snow removal, cleaning gutters, pest control
  • Utilities — electricity, gas, water, or trash service you pay for (not the tenant's share)
  • Advertising — costs to list the property or find tenants
  • Property management — fees paid to a management company
  • Depreciation — a deduction for the building wearing out over time (explained below)
  • Home office — a portion of your home office expenses if you run the rental business from there

You cannot deduct the principal portion of your mortgage payment, capital improvements (major upgrades like a new roof or foundation work), or personal expenses. The line between a repair (deductible) and an improvement (not deductible in one year) can be blurry — generally, a repair fixes something broken, while an improvement adds value or extends the life of the property significantly.

Depreciation: deducting the building's wear and tear

Depreciation is a deduction that lets you spread the cost of the building itself over many years, even though you paid for it upfront. The IRS assumes a residential rental building loses value over time as it ages, and you can claim a portion of that loss each year as a deduction.

For residential rental property, you depreciate the building over 27.5 years. This means if your building cost $200,000, you can deduct roughly $7,273 per year ($200,000 ÷ 27.5). You cannot depreciate the land — only the structure. When you buy a property, you need to separate the building value from the land value; your purchase documents or a tax professional can help with this.

Depreciation is claimed on Schedule E and reduces your taxable rental income each year. However, when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at a higher rate (up to 25 percent) rather than your ordinary income rate. This is why depreciation is valuable during ownership but has a cost when you sell.

How your total income affects your rental tax rate

Rental income is added to all your other income — wages, interest, capital gains, self-employment income — and your total determines your tax bracket. If you earn $60,000 in wages and $20,000 in rental income, you are taxed on $80,000 total (minus deductions). Your rental income does not get its own tax rate; it uses the same brackets as your other income.

This means that if you are already in a higher tax bracket from your job, your rental income will be taxed at that higher rate. Conversely, if rental income is your only income and it is modest, you may owe little or no federal tax. Your filing status (single, married filing jointly, head of household) also affects which bracket applies.

Self-employment tax does not explore to rental income from a property you own directly. However, if you operate the rental as a business (for example, if you provide substantial services like daily housekeeping), the IRS might classify it differently, and you should consult a tax professional.

State and local taxes on rental property

In addition to federal income tax, you may owe state income tax on rental income. Most states that have an income tax tax rental income the same way the federal government does — as ordinary income. However, some states have different rules or rates.

You also pay property tax to your city or county, which is based on the assessed value of the property, not your income. Property tax rates vary widely by location — from less than 0.5 percent of property value in some states to over 2 percent in others. Property tax is deductible on your federal return if you itemize deductions, though there is a $10,000 annual cap on state and local taxes (SALT) you can deduct.

A few states have no income tax at all, which can make rental income in those states more attractive from a tax perspective. Check your state's tax authority website or consult a tax professional for the specific rules in your state.

Record-keeping and documentation

The IRS does not require you to send receipts with your tax return, but you must keep them for at least three years in case of an audit. Keep records of all rental income you receive — bank deposits, checks, cash payments — and all expenses you claim. For expenses, save receipts, invoices, credit card statements, or cancelled checks showing what you paid for.

A straightforward spreadsheet or ledger tracking income and expenses by category (repairs, utilities, insurance, etc.) makes tax time easier and helps you spot deductions you might otherwise miss. If you use accounting software or hire a bookkeeper, they can organize these records for you.

If a tenant pays you in cash, write down the date, amount, and property address. If you hire contractors or pay property managers, ask for invoices. Photographs of repairs or improvements can also support your deduction claims. The better your records, the easier it is to defend your deductions if the IRS questions them.

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 you received during the year, even if the property was only rented for a few months. On Schedule E, you list the number of days the property was rented and the number of days you used it personally, which helps the IRS understand the nature of the rental. Expenses are also deductible for the months you rented it out.

Can I deduct a loss if my expenses exceed my rental income?

You can report a rental loss on Schedule E, which reduces your overall taxable income. However, there are limits. If your modified adjusted gross income exceeds $150,000 (or $75,000 if married filing separately), you may not be able to deduct the full loss in that year; unused losses can carry forward to future years. A tax professional can help you understand these limits.

What is the difference between a repair and an improvement?

A repair fixes something broken or restores it to its original condition — replacing a broken window, patching drywall, or fixing a leaky faucet. An improvement adds value or extends the life of the property — installing a new roof, adding a room, or upgrading to new plumbing. Repairs are deductible in the year you pay for them; improvements must be depreciated over time. When in doubt, consult a tax professional.

Do I owe self-employment tax on rental income?

No. Rental income from a property you own directly is not subject to self-employment tax. Self-employment tax applies to income from a business where you provide services (like a consulting business or freelance work). If you actively manage the property and provide substantial services, the IRS might reclassify it, so consult a tax professional if your situation is unusual.

Can I deduct the cost of furniture or appliances I provide to tenants?

Furniture and appliances are typically depreciated over five to seven years (much faster than the building itself), not deducted all at once. You claim the depreciation on Schedule E. If you replace an appliance that wore out, you can deduct the repair cost. If you add new appliances as an upgrade, that is an improvement and must be depreciated.