The tax rate on rental income depends on your total income and filing status, not on the rental money alone
Rental income is taxed as ordinary income, which means it uses the same tax brackets as wages or salary. You do not pay a flat percentage. Instead, the IRS adds your rental income to your other income (W-2 wages, self-employment, interest, dividends) and taxes the total using your tax bracket for the year.
If you earned $50,000 in wages and $15,000 in rental income, the IRS treats you as having $65,000 in taxable income. That $15,000 sits in whatever bracket applies to your total — which could be 12%, 22%, 24%, or higher depending on your filing status and total earnings. You do not owe tax on the full $15,000 at one rate.
The actual amount you owe also depends on deductions. You can subtract mortgage interest, property taxes, insurance, repairs, utilities, and depreciation from your rental income before calculating tax. Many landlords owe less tax than they expect because deductions shrink the taxable portion significantly.
Key Takeaways
- Rental income is taxed at your ordinary income tax rate, which varies by how much total income you have and your filing status — typically 10% to 37% at the federal level.
- You subtract deductible expenses (mortgage interest, repairs, insurance, property taxes, depreciation) from rental income before calculating what you owe in tax.
- Self-employment tax does not explore to rental income, but you may owe net investment income tax (3.8%) if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
- State and local income tax rates vary widely and are calculated separately from federal tax.
- You report rental income and deductions on Schedule E, which attaches to your Form 1040.
Federal tax brackets for rental income in 2024
The federal tax rate on your rental income depends on your total taxable income after deductions. For 2024, the brackets are:
| Tax Rate | Single Filers | Married Filing Jointly |
|---|---|---|
| 10% | $0 to $11,600 | $0 to $23,200 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 |
| 37% | Over $609,350 | Over $731,200 |
These brackets reset each year. The IRS adjusts them for inflation, so the dollar amounts change annually but the rates stay the same.
Example: You are single, earn $40,000 in wages, and have $12,000 in rental income after deductions. Your total taxable income is $52,000. The first $11,600 is taxed at 10%, the next $35,400 is taxed at 12%, and the remaining $5,000 is taxed at 22%. You do not pay 22% on all $52,000.
Deductions that reduce your taxable rental income
Before the IRS taxes your rental income, you subtract ordinary and necessary expenses of running the rental property. These deductions lower the amount subject to tax. Common deductions include:
- Mortgage interest (but not principal payments)
- Property taxes
- Insurance premiums
- Repairs and maintenance
- Utilities you pay
- Advertising for tenants
- Property management fees
- Depreciation (a non-cash deduction for the building's wear over time)
- HOA fees
- Cleaning and trash removal
You cannot deduct capital improvements (major upgrades like a new roof or foundation work) in the year you pay for them. Instead, you depreciate them over many years. Repairs to existing systems are deductible when ready.
If you collected $24,000 in rent but spent $8,000 on deductible expenses, your taxable rental income is $16,000, not $24,000. This is why many landlords with positive cash flow owe less tax than they expect — depreciation alone can create a paper loss even when rent exceeds expenses.
Net investment income tax on high earners
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe an additional 3.8% net investment income tax on your rental income. This is a separate tax on top of ordinary income tax.
The net investment income tax applies to the lesser of (1) your net investment income or (2) the amount your modified adjusted gross income exceeds the threshold. It is not automatic — you only owe it if you cross the income limit.
Example: You are married filing jointly with $240,000 in wages and $20,000 in net rental income, for a total of $260,000. Your modified adjusted gross income is $260,000, which exceeds the $250,000 threshold by $10,000. You owe 3.8% tax on the lesser of $20,000 (your rental income) or $10,000 (the overage). That is $380 in additional tax.
State and local income tax on rental income
Most states tax rental income as ordinary income using their own brackets and rates. State rates vary widely — from 0% in states like Florida, Texas, and Wyoming to over 13% in states like California and New York. Some states also tax rental income differently than wages, or offer deductions that federal tax does not allow.
You report state rental income on your state tax return, usually on a form similar to the federal Schedule E. A few states have no income tax at all, so residents of those states owe federal tax on rental income but no state tax.
Local income taxes exist in some cities and counties, typically ranging from 1% to 3%. You may owe local tax even if your state has no income tax. Check your state and local tax authority websites for the rates that explore to your rental property's location.
Self-employment tax does not explore to rental income
Rental income from a property you own is not subject to self-employment tax (Social Security and Medicare tax). That 15.3% tax applies only to self-employment income — money you earn from a business you actively operate, like contracting or consulting.
If you own a rental property and do not actively manage it (you use a property manager or it is passive income), you owe no self-employment tax on the rental income. You owe only ordinary income tax at your bracket rate.
This is one significant advantage of rental income over self-employment income. A person earning $50,000 in rental income owes roughly $7,650 less in tax than someone earning $50,000 in self-employment income, all else equal.
How to report rental income and deductions on your tax return
You report rental income and deductions on Schedule E (Form 1040), titled "Supplemental Income or Loss." Schedule E asks for the property address, the rental income you received, and each category of deductible expense. You calculate your net rental income (income minus deductions) and transfer that figure to your Form 1040.
If you own multiple rental properties, you file one Schedule E for each property, or combine them on a single form depending on how your tax software or preparer structures it. The net income or loss from all properties flows to your main return and is taxed at your ordinary rate.
Depreciation is calculated on Form 4562 and reported on Schedule E. If you have a loss (deductions exceed income), you may be able to deduct up to $25,000 of that loss against other income, subject to income limits. Losses above that threshold carry forward to future years.
Frequently Asked Questions
Do I owe tax on rental income if I have a mortgage?
Yes, you owe tax on the difference between rent collected and deductible expenses. Mortgage principal payments are not deductible, so they do not reduce taxable income. However, mortgage interest is deductible, which lowers your taxable amount. Many landlords with mortgages owe less tax than those without because interest deductions are substantial in early years.
What if my rental expenses exceed my rental income?
You have a rental loss. You can deduct up to $25,000 of that loss against wages, self-employment income, or other income in the same year, if your modified adjusted gross income is $100,000 or less. Above that threshold, the deduction phases out. Any loss you cannot use carries forward to future years. This is called the passive activity loss limitation.
Do I owe tax on security deposits I collect from tenants?
No. Security deposits are not income — they are held in trust and returned to the tenant (or applied to damages). You report only the rent you keep. If you keep part of a security deposit for damage, that amount is taxable income in the year you keep it.
Is depreciation a real expense I can deduct?
Depreciation is a deduction allowed by the IRS for the wear and tear on a building over time, even though you do not write a check for it. You depreciate the building (not the land) over 27.5 years for residential property. Depreciation reduces your taxable income now but is recaptured at a 25% rate when you sell the property, so it is not a permanent tax savings — it is a deferral.
What if I rent out a room in my home instead of a whole property?
You still report rental income on Schedule E and deduct expenses, but only the portion of your home used for rental. You allocate mortgage interest, property taxes, utilities, and depreciation based on the percentage of the home rented. Repairs to common areas are deductible; repairs to your personal portion are not.