Rental income is taxed as ordinary income at your federal tax rate, plus self-employment tax if you're a sole proprietor, plus your state income tax if your state has one

The tax you pay on rental income depends on three things: your federal tax bracket, whether you owe self-employment tax, and your state's income tax rate. There is no single "rental income tax rate" — the IRS taxes what you earn from rent the same way it taxes wages or business profit. If you earn $50,000 in rental income and you're in the 22% federal bracket, you pay roughly 22% federal tax on that income, plus 15.3% self-employment tax (if you're self-employed), plus whatever your state charges.

The actual amount you owe also depends on your deductions. You can subtract mortgage interest, property taxes, repairs, insurance, utilities, and depreciation from your rental income before calculating tax. Many landlords owe less tax than they expect because deductions shrink their taxable income.

Key Takeaways

  • Rental income is taxed at your ordinary federal income tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your total income), not a special rental rate.
  • You also owe self-employment tax of 15.3% on net rental profit if you actively manage the property or own it as a sole proprietor.
  • Deductions for mortgage interest, property taxes, repairs, insurance, utilities, and depreciation reduce your taxable rental income dollar-for-dollar.
  • Your state may also tax rental income, and the rate varies by state — some states have no income tax at all.
  • You report rental income and expenses on Schedule E (Form 1040) for federal tax, and your state's equivalent form if required.

Federal income tax on rental income

The IRS taxes rental income at your marginal tax rate — the percentage that applies to your highest dollars of income. For 2024, federal rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your rate depends on your total income (wages, rental income, investment income, and other sources combined) and your filing status.

If you earn $60,000 in wages and $30,000 in rental income, you don't pay one rate on wages and another on rent. Instead, the IRS stacks your income: the first dollars are taxed at 10%, then 12%, then 22%, and so on, until all $90,000 is accounted for. Your rental income fills the top portion of that stack. If your total income puts you in the 22% bracket, your rental income is taxed at 22% (before self-employment tax).

The brackets change each year for inflation. The IRS publishes new brackets in October for the following tax year. You can find current brackets on IRS.gov or in the instructions to Form 1040.

Self-employment tax on rental income

If you actively manage your rental property — you make decisions about repairs, tenant screening, rent collection, or lease terms — you likely owe self-employment tax of 15.3% on top of income tax. This tax covers Social Security and Medicare for self-employed people. You calculate it on Schedule SE (Form 1040) and pay it with your federal return.

If you own the property but hire a property manager to handle everything, you may not owe self-employment tax. The IRS distinguishes between active participation (you manage it) and passive investment (someone else does). The rules are complex, and the difference can save you thousands of dollars. A tax professional can tell you whether your situation qualifies as passive.

Self-employment tax is calculated on your net rental income — the amount left after you subtract deductions. If you earn $40,000 in rent but have $15,000 in deductions, you owe self-employment tax on $25,000, not $40,000.

State income tax on rental income

Forty-one states and Washington, D.C. tax rental income. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages or rental income).

In states that do tax rental income, the rate varies widely. Some states use a flat rate — Illinois charges 4.95% on all income. Others use brackets similar to federal tax — New York's top rate is 10.9%, California's is 13.3%. A few states tax rental income differently than wages, though this is rare.

You report state rental income on your state's equivalent of Schedule E or a state rental income form. If you own property in multiple states, you may owe tax in each state where the property is located, even if you don't live there. Some states offer credits to prevent double taxation.

How deductions reduce your tax bill

Deductions are expenses you can subtract from rental income before calculating tax. The more you deduct, the lower your taxable income, and the less tax you owe. Common deductions include mortgage interest (but not principal), property taxes, homeowners insurance, repairs and maintenance, utilities, property management fees, advertising for tenants, and depreciation.

Depreciation is a deduction that doesn't involve spending money. The IRS lets you deduct a portion of the building's value each year (usually over 27.5 years for residential property) as if it were wearing out. This can be a large deduction. If your building cost $300,000, you might deduct roughly $10,900 per year in depreciation, even though you didn't spend that money in the current year.

You cannot deduct capital improvements — major upgrades like a new roof or foundation repair. These must be added to your property's cost basis and depreciated over time. The line between repair (deductible) and improvement (capitalized) is often unclear, and the IRS scrutinizes this distinction. Keep receipts and document what work was done.

Reporting rental income on your tax return

You report rental income and expenses on Schedule E (Form 1040), which is part of your federal tax return. Schedule E has a section for each property. You list the address, the rental income received, and each category of expense. The form calculates your net rental income (income minus expenses), which flows to your main Form 1040.

If you own multiple properties, you complete a separate Schedule E section for each one, then add them together. If you own rental property as part of a partnership, S-corporation, or LLC, the entity files its own return and passes the income and deductions to you on a K-1 form, which you then report on Schedule E.

You must file Schedule E even if you have no rental income in a given year — for example, if the property was vacant or you sold it partway through the year. The form documents your ownership and any losses, which may carry forward to future years.

What happens if you have a rental loss

If your expenses exceed your rental income in a year, you have a rental loss. You can use this loss to reduce your other income (wages, investment income) on your tax return, which lowers your overall tax bill. However, the IRS limits how much loss you can claim in a single year if you have high income.

The passive activity loss limit allows you to deduct up to $25,000 in rental losses per year if your modified adjusted gross income is $100,000 or less. The limit phases out as your income rises, and it disappears entirely at $150,000 of income. If you exceed the limit, unused losses carry forward to future years.

There are exceptions. If you're a real estate professional — you spend more than half your working hours in real estate and more than 750 hours per year in real estate activities — you may be able to deduct all your losses without the limit. This requires careful documentation and usually professional tax help to establish.

Frequently Asked Questions

Do I owe tax on rental income if I don't receive it yet?

You owe tax on rental income in the year you receive it or have the right to receive it, not when a tenant pays. If a tenant owes you rent for December but doesn't pay until January, you report it in January (when you receive it) unless you use accrual accounting. Most small landlords use cash accounting, which is simpler.

Can I deduct the cost of buying the property?

No. The purchase price is not deductible. Instead, you depreciate the building's value over 27.5 years. The land itself cannot be depreciated. If you bought the property for $400,000 and the land is worth $100,000, you depreciate $300,000 over 27.5 years, or roughly $10,900 per year.

What if I rent out part of my home?

You report the rental portion on Schedule E. You can deduct the rental percentage of expenses like mortgage interest, property taxes, insurance, and utilities. You cannot deduct the portion of the home you use personally. If you rent out one bedroom of a four-bedroom house, you might deduct 25% of these expenses.

Do I owe tax on security deposits?

No. A security deposit is not income — it's money held in trust that you return to the tenant. You only owe tax on the deposit if you keep part of it to cover damage or unpaid rent. When you keep a portion, that amount becomes income in the year you keep it.

How do I know if I owe estimated tax payments?

If you expect to owe $1,000 or more in federal tax from rental income (after accounting for withholding from other jobs), you should make quarterly estimated tax payments. You pay on April 15, June 15, September 15, and January 15. Form 1040-ES helps you calculate the amount. Underpayment can result in penalties, even if you pay the full amount when you file your return.