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 is added to your wages, investment gains, and other earnings, then taxed at your regular income tax rate. If you earn $50,000 in wages and $15,000 in rental income, the IRS treats you as earning $65,000 total. Your tax bracket — 10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024 — is determined by that combined total, not by the rental portion alone.

You also owe self-employment tax on rental income in most cases. This is 15.3% (12.4% for Social Security, 2.9% for Medicare) on net rental profit. If you actively manage the property yourself, you may owe this tax. If you hire a property manager or own a passive investment, the rules differ. The IRS Form 1040 Schedule E is where you report rental income and expenses to the IRS.

State and local income taxes explore on top of federal tax. The amount varies by where you live and where the property is located. Some states have no income tax; others tax rental income at rates between 3% and 13%. You may also owe property tax to the county where the rental sits, though that is separate from income tax.

Key Takeaways

  • Rental income is taxed at your ordinary income tax rate (10% to 37% federally in 2024), determined by your total income for the year, not the rental amount alone.
  • You owe self-employment tax of 15.3% on net rental profit if you actively manage the property, but not if you hire a property manager or own a passive investment.
  • Mortgage interest, property tax, repairs, insurance, utilities, and depreciation are deductible expenses that reduce your taxable rental income.
  • You report rental income and deductions on IRS Form 1040 Schedule E, and you must file this form even if you have no taxable profit after deductions.
  • State and local income tax rates on rental income vary from 0% to 13% depending on where you live and where the property is located.

What expenses reduce the rental income you owe tax on

The IRS allows you to deduct ordinary and necessary expenses for operating the rental. This means you only pay tax on profit, not on the gross rent collected. If you collect $24,000 in rent but spend $8,000 on expenses, your taxable rental income is $16,000, not $24,000.

Common deductible expenses include mortgage interest (not the principal payment), property tax, homeowners insurance, repairs and maintenance, utilities you pay, advertising for tenants, property management fees, and travel to the property for repairs or management. You can also deduct depreciation, which is a non-cash deduction that spreads the building's cost over 27.5 years. Depreciation can significantly lower your taxable income even in years when you collect rent but spend little on repairs.

Expenses you cannot deduct include mortgage principal payments, capital improvements that add value to the property (though these may be depreciated over time), personal use of the property, and expenses for a property you have not yet rented out. If you use part of your home as a rental (like renting out a room), you can deduct only the expenses tied to that portion.

You must keep receipts, invoices, and records of all deductible expenses. The IRS can ask for proof years after you file. Many landlords use accounting software or hire a tax professional to track expenses throughout the year rather than scrambling to reconstruct them at tax time.

How depreciation works and why it matters

Depreciation is a deduction that lets you deduct part of the building's cost each year, even though you are not actually spending money. The IRS assumes a residential rental building loses value over 27.5 years. If your building cost $300,000, you can deduct roughly $10,909 per year ($300,000 ÷ 27.5) as depreciation, whether or not you spent that money on repairs.

Depreciation applies only to the building itself, not the land. If you bought a property for $400,000 and the land is worth $100,000, only the $300,000 building value can be depreciated. You will need a professional appraisal or tax assessment to estimate the split between building and land.

Depreciation can create a situation where you have no taxable income or even a loss on paper, even though you collected rent and had positive cash flow. This is one reason rental properties can be tax-efficient: you reduce taxable income without reducing the cash in your pocket. However, when you sell the property, the IRS recaptures depreciation you claimed and taxes it at 25%, separate from your regular capital gains tax.

Self-employment tax on rental income

If you actively manage the rental property — finding tenants, collecting rent, handling repairs, or making decisions about the property — you owe self-employment tax on the net profit. Self-employment tax is 15.3% and covers Social Security and Medicare. This is in addition to your ordinary income tax.

If you hire a property manager to handle day-to-day operations, or if you own rental real estate as a passive investment (meaning you do not materially participate in running it), you typically do not owe self-employment tax. The IRS has specific rules about what counts as material participation. Owning a rental property and occasionally approving repairs does not usually may have access to; actively managing it does.

Self-employment tax is calculated on Schedule SE (Self-Employment Tax), which you file with your Form 1040. The tax is due even if your rental income is your only income source and even if you have no other business.

Capital gains tax when you sell the rental property

When you sell a rental property, you owe tax on the profit (the sale price minus what you paid for it, adjusted for improvements and depreciation). This is capital gains tax, separate from income tax on the rent you collected.

If you owned the property for more than one year, the gain is taxed as long-term capital gains at 0%, 15%, or 20% federally, depending on your total income. These rates are lower than ordinary income tax rates. If you owned it for one year or less, the gain is taxed as short-term capital gains at your ordinary income tax rate.

The IRS also recaptures depreciation you claimed while you owned the property. Depreciation recapture is taxed at 25%, regardless of your income level. If you claimed $100,000 in depreciation over the years you owned the property, you owe 25% of that ($25,000) as depreciation recapture tax when you sell, in addition to capital gains tax on the remaining profit.

How rental losses affect your taxes

If your deductible expenses exceed your rental income in a given year, you have a rental loss. This loss can offset other income on your tax return, reducing the total income you owe tax on. If you earn $60,000 in wages and have a $10,000 rental loss, your taxable income drops to $50,000.

However, the IRS limits how much rental loss you can deduct against other income. If you actively participate in managing the property, you can deduct up to $25,000 in losses per year against ordinary income, but only if your modified adjusted gross income is below $100,000. Above $100,000, the deduction phases out by $1 for every $2 of income over the limit. At $150,000 or higher, you cannot deduct rental losses against ordinary income in that year.

Losses you cannot deduct in the current year do not disappear. They carry forward to future years and can offset rental income or, if you eventually sell the property, reduce your capital gain. This is called a suspended loss.

State and local taxes on rental income

Federal income tax is only part of what you owe. Most states tax rental income as ordinary income at rates ranging from 0% to 13%. States with no income tax include Florida, Texas, Wyoming, and South Dakota. States with the highest rates include California (13.3%), Hawaii (11%), and New York (10.9%).

If the rental property is in a different state than where you live, you may owe tax to both states. Some states offer credits to prevent double taxation, but the rules vary. A property owner in New York with a rental in Florida, for example, would owe New York tax on the income but may receive a credit for taxes paid to Florida.

You also owe property tax to the county where the rental sits. Property tax is not an income tax; it is a tax on the value of the property itself. Property tax rates vary widely by county and state, from less than 0.5% of property value annually to over 2%. Property tax is deductible on your federal income tax return if you itemize deductions.

Frequently Asked Questions

Do I owe taxes on rental income if I have a mortgage?

Yes, you owe income tax on the rent you collect, regardless of whether you have a mortgage. However, the mortgage interest you pay is deductible, which lowers your taxable income. The mortgage principal payment is not deductible. If you collect $2,000 in rent and pay $1,200 in mortgage interest and $300 in principal, your taxable income is reduced by the $1,200 interest but not the $300 principal.

What if I rent out a room in my home?

You report the rent as income and can deduct expenses tied to that room, such as a portion of utilities, insurance, and depreciation. You cannot deduct expenses for the rest of the house. If your home costs $1,000 per month to heat and cool, and the rental room is 20% of the home, you can deduct $200. Keep records showing how you calculated the rental portion.

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

You can deduct up to $25,000 in rental losses against other income per year if you actively manage the property and your modified adjusted gross income is below $100,000. Above $100,000, the deduction phases out. Losses you cannot deduct carry forward to future years or can offset gains when you sell the property.

Do I owe self-employment tax on rental income if I hire a property manager?

Usually no. If you hire a property manager and do not materially participate in running the property, the income is passive and not subject to self-employment tax. You still owe ordinary income tax on the profit. The property manager fee is deductible as an expense.

What happens to depreciation when I sell the property?

The IRS recaptures all depreciation you claimed and taxes it at 25% when you sell. If you claimed $80,000 in depreciation over 10 years, you owe 25% of that ($20,000) as recapture tax, in addition to capital gains tax on the remaining profit from the sale.