Rental income is taxable as ordinary income, and the amount you owe depends on your total income for the year and your tax bracket

When you rent out a property, the IRS treats the money you receive as taxable income. You report it on your federal tax return along with your other income — wages, investments, self-employment earnings — and pay tax at your ordinary income tax rate. That rate ranges from 10% to 37% depending on how much total income you have and your filing status. The more income you earn, the higher your tax rate climbs.

The key point: you do not pay tax on the full rent you collect. You can subtract your rental expenses — mortgage interest, property taxes, repairs, insurance, utilities you pay, depreciation, and other costs directly tied to the property — and pay tax only on what remains. That remainder is called your net rental income.

Key Takeaways

  • Rental income is taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • You report rental income and expenses on Schedule E (Form 1040) and only pay tax on net income after subtracting allowed expenses.
  • Common deductible expenses include mortgage interest, property taxes, repairs, insurance, utilities, and depreciation of the building itself.
  • If you have a rental loss in a year, you may be able to deduct it against other income, though passive activity loss rules can limit this.
  • State and local income taxes also explore to rental income in most states, adding to your total tax bill.

How your tax bracket works with rental income

Your tax bracket is determined by your total taxable income for the year. If you have a job that pays $60,000 and rental income of $20,000, your taxable income is $80,000 (before deductions and exemptions). The IRS does not tax all of that at one rate. Instead, income is taxed in layers: the first portion at 10%, the next portion at 12%, and so on, until you reach your top bracket.

For 2024, if you are single and your taxable income is $80,000, most of it falls in the 12% bracket, with some in the 22% bracket. The rental income does not get its own special rate — it straightforward adds to your total and pushes you into higher brackets if it is large enough. This is why rental income can significantly increase your tax bill even if the property itself is not highly profitable.

Expenses you can deduct from rental income

The IRS allows you to subtract legitimate business expenses from your rental income before calculating tax. These expenses must be ordinary and necessary for managing the property. Common deductible expenses include:

  • Mortgage interest (not the principal payment)
  • Property taxes
  • Homeowners insurance and liability insurance
  • Repairs and maintenance (fixing a roof, patching drywall, replacing a furnace)
  • Utilities you pay (electricity, water, gas, trash)
  • Property management fees if you hire someone to manage it
  • Advertising costs to find tenants
  • Legal and accounting fees related to the rental
  • Depreciation of the building (a non-cash deduction that reduces taxable income)

Capital improvements — major upgrades like a new roof, new HVAC system, or room additions — are not deducted all at once. Instead, you depreciate them over many years. Repairs to keep the property in its current condition are deducted in the year you make them.

Depreciation and how it affects your tax bill

Depreciation is a deduction that does not involve actual money leaving your pocket. The IRS assumes buildings wear out over time and allows you to deduct a portion of the building's value each year. You cannot depreciate the land itself, only the structure.

If your rental property is worth $300,000 and the land is worth $75,000, you can depreciate the $225,000 building value over 27.5 years (the IRS standard for residential rentals). That works out to roughly $8,182 per year in depreciation deduction. This lowers your taxable rental income without requiring you to spend money, which is why it is valuable.

There is a catch: when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at a higher rate (25% instead of your ordinary rate). This is called depreciation recapture. It does not eliminate the benefit of depreciation, but it means the tax advantage is delayed, not erased.

State and local taxes on rental income

Federal income tax is only part of the bill. Most states tax rental income as ordinary income at rates ranging from roughly 1% to 13%, depending on the state. Some states have no income tax at all (Florida, Texas, Wyoming, and others), while states like California and New York have rates above 10%.

You also may owe local income tax in your city or county, though this is less common. Check your state's tax authority website to learn the rate that applies to you. Your total tax bill on rental income is federal tax plus state tax plus any local tax.

What happens if your rental expenses exceed your income

In some years, especially early on, your rental expenses may be higher than your rental income. This creates a rental loss. You cannot straightforward ignore it — you must report it on your tax return. The question is whether you can use it to reduce your other income (wages, investment gains, etc.).

The answer depends on passive activity loss rules. If you are not a real estate professional and your modified adjusted gross income is below $150,000, you can deduct up to $25,000 of rental losses against other income. Above $150,000, the deduction phases out. If you cannot use the loss in the current year, it carries forward to future years when you have rental income to offset.

Real estate professionals — people whose primary business is real estate — can deduct rental losses without these limits, but the IRS has strict rules about what qualifies.

Estimated tax payments if rental income is large

If you have significant rental income and do not have taxes withheld (as you would from a job), the IRS expects you to make estimated tax payments four times per year. These are quarterly payments due in April, June, September, and January. If you do not pay enough through withholding and estimated payments, you may owe a penalty when you file your return.

To calculate estimated payments, you estimate your total tax for the year and divide it by four. If you are unsure of the amount, a tax professional can help you determine it. Many landlords use tax software or work with an accountant to handle these payments.

Frequently Asked Questions

Do I have to report rental income if the amount is small?

Yes. The IRS requires you to report all rental income, regardless of the amount. Even if you rented out a room for a few months or had a small vacation rental, it must be reported on Schedule E. Failure to report income can result in penalties and interest.

Can I deduct the cost of furniture or appliances I buy for the rental?

Furniture and appliances are depreciated over five to seven years, not deducted all at once. You report them as assets and claim depreciation each year. Repairs to existing furniture or appliances are deductible in the year you make them, but replacements are capitalized and depreciated.

What if I rent out a room in my primary home?

You report the rental income and can deduct a portion of your home expenses based on the percentage of the home the room occupies. For example, if the rental room is 20% of your home's square footage, you can deduct 20% of mortgage interest, property taxes, utilities, insurance, and repairs. Depreciation rules are more complex for a portion of your primary residence, so consult a tax professional.

Do I owe self-employment tax on rental income?

No. Rental income is not subject to self-employment tax (Social Security and Medicare tax). It is taxed only as ordinary income at your income tax rate. Self-employment tax applies to self-employment income like freelance work or business profits, not passive rental income.

What records do I need to keep for rental expenses?

Keep receipts, invoices, and bank statements for all rental expenses. The IRS does not require you to submit these with your return, but you must have them if audited. Organize them by category (repairs, utilities, insurance, etc.) and keep them for at least three years, though seven years is safer.