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

When you rent out a property, the IRS treats the money you collect as taxable income. You report this on Schedule E (Supplemental Income and Loss), which attaches to your Form 1040. The tax you owe depends on your total income for the year and your tax bracket — there is no separate "rental income tax rate." What makes rental income different from a salary is that you can subtract nearly all the costs of maintaining and operating the property, which lowers the income the IRS actually taxes you on.

You must report rental income even if you did not receive it in cash, even if you let a tenant stay rent-free, and even if you are still waiting to collect overdue rent. The IRS counts it in the year it was owed, not the year you received it. If a tenant never pays and you write off the debt, you can deduct that bad debt loss on your return — but only if you previously reported the income.

Key Takeaways

  • Rental income is reported on Schedule E and taxed at your ordinary income tax rate, which varies based on your total yearly income and filing status.
  • You can deduct nearly all operating expenses — mortgage interest, property tax, repairs, utilities, insurance, and property management fees — which reduces the amount of income you actually owe tax on.
  • Depreciation is a deduction that lets you spread the cost of the building itself over 27.5 years, even though you own it outright, and it can significantly lower your taxable rental income.
  • If your rental expenses exceed your rental income in a year, you may be able to deduct the loss against other income, though passive activity loss rules can limit this depending on your income level and how involved you are in managing the property.
  • You must report rental income in the year it is owed, not when you collect it, and you need to keep records of all income and expenses for at least three years.

What counts as rental income and what does not

Rental income includes the monthly rent payment, but also security deposits that you keep (not deposits you return), payments for breaking a lease, and any other money a tenant pays you related to the rental. If a tenant pays for utilities or repairs that are your responsibility, that payment counts as rental income too. Parking fees, pet fees, and late fees all count.

Security deposits that you return to the tenant are not income — they are held in trust. If you keep part of a deposit because of damage, only the amount you keep is income. If you use a deposit to cover unpaid rent, that counts as income in the year you explore it.

If you provide furnished housing and the rent includes utilities, furniture, or other services, the entire payment is rental income. You then deduct the cost of those services as an operating expense.

Deductions you can subtract from rental income

The IRS allows you to deduct ordinary and necessary expenses of operating a rental property. These include mortgage interest (but not principal), property taxes, homeowners insurance, repairs, maintenance, utilities you pay, property management fees, advertising to find tenants, legal and accounting fees, and condo or HOA fees. You can also deduct the cost of supplies like paint, tools, and cleaning materials.

The line between a repair (deductible) and an improvement (not when ready deductible) matters. A repair fixes something that is broken — replacing a roof shingle, patching drywall, repainting a wall. An improvement adds value or extends the life of the property — replacing the entire roof, adding a room, installing new flooring throughout. Repairs are deductible in the year you pay for them. Improvements must be depreciated over many years.

You cannot deduct personal expenses, even if you use the property sometimes. You cannot deduct the cost of your own meals, travel to the property, or time you spend managing it. You can deduct the cost of hiring someone else to do those things.

How depreciation reduces your taxable rental income

Depreciation is a deduction that lets you deduct a portion of the building's cost each year, even if you own it outright and owe no mortgage. The IRS assumes a residential rental building loses value over time, and you can claim that loss as a deduction. For residential properties, you depreciate the building over 27.5 years. You cannot depreciate the land — only the structure.

To calculate depreciation, you take the cost basis of the building (the purchase price plus improvements, minus the land value) and divide it by 27.5. If you bought a rental house for $300,000 and the land was worth $75,000, your depreciable basis is $225,000. Divided by 27.5 years, that is roughly $8,182 per year in depreciation deduction.

Depreciation is powerful because it is a deduction that does not require you to spend money — you already spent it when you bought the property. This can turn a profitable rental into a loss on paper, which may let you deduct losses against other income. However, when you sell the property, the IRS recaptures depreciation you claimed and taxes it at a higher rate (25 percent) than your ordinary income rate. Keep records of all depreciation you claim.

When you can deduct a rental loss

If your deductions exceed your rental income in a year, you have a rental loss. Whether you can deduct that loss against your other income (like wages or investment income) depends on passive activity loss rules and your income level.

If you are not a real estate professional and your modified adjusted gross income is under $100,000, you can deduct up to $25,000 of rental losses against other income. Above $100,000, the deduction phases out — you lose $1 of the deduction for every $2 of income over $100,000. At $150,000 and above, you cannot deduct rental losses against other income at all. Instead, you carry the loss forward to future years when you have rental income to offset.

If you are a real estate professional (meaning real estate is your primary business and you spend more than half your working hours on it), you can deduct all rental losses against other income, with no income limit. This requires documentation that you meet the definition.

Self-employment tax and rental income

Rental income from a property you own is not subject to self-employment tax. You do not pay Social Security and Medicare taxes on it the way you would on income from a business you actively operate. This is one advantage of passive rental income over running a business as a sole proprietor.

However, if you provide substantial services beyond straightforward owning the property — for example, if you operate a hotel or short-term rental where you clean units, provide meals, or offer other hotel-like services — the IRS may classify some of that income as business income subject to self-employment tax. The distinction depends on how much personal service you provide.

Record-keeping and reporting requirements

You must keep records of all rental income and expenses for at least three years, though the IRS can go back six years if it suspects underreporting. Keep copies of the lease, rent payment records, receipts for repairs and maintenance, insurance policies, property tax statements, mortgage statements (to verify the interest portion), and any other documentation of expenses.

You report rental income and deductions on Schedule E, which you file with your Form 1040. If you own multiple properties, you list each one separately on Schedule E. If you have a loss, you still file Schedule E — do not skip it because you had a loss year.

If you pay someone to manage the property or perform services, and you pay them more than $600 in a year, you must issue them a Form 1099-NEC and file a copy with the IRS. Keep records of all payments.

State and local taxes on rental income

Most states tax rental income as part of your state income tax return. A few states have no income tax, but most require you to report rental income on your state return and pay tax at your state rate. Some states allow you to deduct the same expenses you deduct federally; others have different rules.

Many cities and counties also tax rental income or charge a rental licensing fee. Some jurisdictions tax short-term rentals (like Airbnb) at a higher rate than long-term rentals. Check your local tax authority's website or speak with a tax professional in your area to understand what you owe locally.

Frequently Asked Questions

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

Yes. You report the income for the months you rented it out. You can deduct expenses only for the months the property was held for rental income — not months when you lived in it yourself or when it was vacant and not listed for rent.

What if I let a family member live in the property rent-free?

If you do not charge rent, you do not report rental income. However, you also cannot deduct rental expenses. The IRS treats the property as personal property, not a rental. If you later charge rent, you can start deducting expenses from that point forward.

Can I deduct the cost of a new roof or new HVAC system?

If you are replacing an entire system, that is an improvement and must be depreciated over its useful life (usually 15 to 27.5 years depending on the component). If you are repairing part of an existing system, that is a repair and is deductible in the year you pay for it. The distinction can be unclear — keep receipts and consider consulting a tax professional.

What happens to depreciation when I sell the rental property?

The IRS recaptures all depreciation you claimed and taxes it at 25 percent, regardless of your ordinary tax bracket. If you claimed $100,000 in depreciation over the years, you owe 25 percent tax on that $100,000 when you sell, in addition to capital gains tax on any profit from the sale price increase.

Do I need to pay estimated taxes on rental income?

If your rental income is not withheld (and it usually is not), and you expect to owe more than $1,000 in taxes for the year, you should make quarterly estimated tax payments. The IRS charges penalties and interest if you underpay. Speak with a tax professional about whether you need to make these payments.