Report all rental income on Schedule E, and deduct ordinary expenses to find your taxable profit
Rental income goes on Schedule E (Form 1040), a supplemental form you attach to your main tax return. You report the total rent you received during the year, then subtract the expenses you paid to earn that income — mortgage interest, property tax, repairs, insurance, utilities, and others. The difference between income and expenses is your taxable rental profit, which flows to your main return and gets taxed at your ordinary income rate.
The IRS requires you to report rental income even if you did not receive a 1099 form and even if you were paid in cash. You must file Schedule E if you own rental property, whether you made money or lost money that year. If you have more than three rental properties, you may need to file additional forms or use a different reporting method.
The key to lowering your tax bill is understanding which expenses you can deduct. An expense is deductible if it is ordinary (common in rental businesses) and necessary (helpful to earning rental income). You cannot deduct capital improvements that add value to the property, but you can deduct repairs that keep it in working condition.
Key Takeaways
- Report all rental income on Schedule E, including cash payments and rent you did not receive a 1099 for.
- Deductible expenses include mortgage interest (not principal), property tax, repairs, insurance, utilities, advertising, and property management fees.
- Capital improvements that add value to the property cannot be deducted in one year but can be depreciated over many years.
- Keep receipts and records for every expense you claim, because the IRS can ask you to prove them for up to three years after you file.
- If your rental expenses exceed your income, you may be able to deduct the loss, subject to limits based on your income level.
What counts as rental income you must report
Rental income includes the monthly rent your tenant pays, but also other money you receive from the property. Security deposits do not count as income if you return them — they are held in trust. However, if you keep part of a security deposit to cover damage or unpaid rent, that amount becomes income in the year you keep it.
Payments for utilities, parking, pet fees, or late fees are all rental income and must be reported. If a tenant pays you to break a lease early, that payment is income. If you receive a payment for granting an option to renew the lease, that is also income. The rule is straightforward: any money you receive related to the rental property goes on Schedule E as income.
If you rented the property for only part of the year, you report only the income from the months you rented it. If you rented it to a family member at below-market rates, you still report what you actually received, not what you could have charged.
Expenses you can deduct on Schedule E
Common deductible expenses include mortgage interest (the interest portion only, not principal), property tax, homeowners insurance, liability insurance, and rental income insurance. Utilities you pay on behalf of the tenant are deductible. Repairs — fixing a leaky roof, patching drywall, replacing a broken window — are deductible in the year you pay for them.
Advertising to find tenants, credit checks and background checks, property management fees, and HOA fees are all deductible. Cleaning and maintenance costs, pest control, lawn care, and snow removal are deductible. If you hire a contractor to fix something, the labor and materials are deductible. If you pay a real estate agent to manage the property or collect rent, that fee is deductible.
Office expenses related to the rental — a portion of your internet bill if you use it to manage the property, office supplies, accounting software — can be deducted. Travel to the property for repairs or inspections may be deductible. Depreciation of the building itself (not the land) is deductible and can be a large deduction, though it has tax consequences when you sell.
| Deductible | Not Deductible |
|---|---|
| Mortgage interest | Mortgage principal |
| Repairs (fixing existing things) | Capital improvements (adding value) |
| Property tax | Income tax or self-employment tax |
| Insurance premiums | Fines or penalties |
| Utilities you pay | Utilities tenant pays |
| Depreciation of building | Depreciation of land |
The difference between repairs and capital improvements
A repair fixes something that is broken or worn out and restores it to its previous condition. You deduct the full cost in the year you pay for it. Replacing a broken window, fixing a leaky faucet, patching a hole in the roof, and repainting a room are repairs.
A capital improvement adds value to the property, prolongs its life, or adapts it to a new use. You cannot deduct the full cost in one year. Instead, you add the cost to the property's basis and depreciate it over many years (usually 27.5 years for a rental building). Replacing the entire roof, installing new flooring, adding a room, and upgrading the HVAC system are capital improvements.
The line between the two can be unclear. Replacing one section of roof is a repair; replacing the entire roof is an improvement. Repainting a room is a repair; adding new siding to the whole building is an improvement. If you are unsure, look at whether the work restores the property to its previous condition (repair) or makes it better than before (improvement). When in doubt, consult a tax professional or the IRS Publication 527, which covers rental property.
How to handle depreciation and recapture
Depreciation is a deduction that lets you recover the cost of the building over time, even though you are not spending money each year. The building itself (not the land) depreciates over 27.5 years for residential rental property. You calculate depreciation by taking the cost of the building, subtracting the land value, and dividing by 27.5.
Depreciation is reported on Form 4562 and then transferred to Schedule E. It is one of the largest deductions available to rental property owners, but it has a cost: when you sell the property, you must pay tax on the depreciation you claimed, even if the property lost value. This is called depreciation recapture, and it is taxed at a 25 percent rate (higher than your ordinary income rate in most cases).
If you claimed depreciation for several years and then sold the property at a profit, you owe recapture tax on all the depreciation you deducted. This is why some property owners choose not to claim depreciation, though it means paying more tax in the years they own the property. The decision depends on your tax situation and how long you plan to hold the property.
Passive activity loss limits and when you cannot deduct losses
If your rental expenses exceed your rental income, you have a loss. In most cases, you can deduct that loss against your other income (wages, investment income, and so on). However, the IRS limits how much rental loss you can deduct each year if your income is above a certain threshold.
If your modified adjusted gross income is $150,000 or less, you can deduct up to $25,000 in rental losses against your other income. If your income is between $150,000 and $200,000, the limit phases out by $1 for every $2 of income above $150,000. If your income is $200,000 or more, you cannot deduct rental losses against your other income in that year — the losses carry forward to future years when you have rental income to offset them.
These limits do not explore if you are a real estate professional (you spend more than half your working hours in real estate and more than 750 hours per year). Real estate professionals can deduct all rental losses without limit. The definition of real estate professional is narrow, and you must keep detailed records to prove you meet it.
Record-keeping and documentation you need
Keep receipts, invoices, and bank statements for every expense you claim. The IRS can request documentation for up to three years after you file (or longer if you underreported income by 25 percent or more). If you cannot produce a receipt, the IRS will disallow the deduction.
For mortgage interest and property tax, your lender and local tax assessor send you statements (Form 1098 for mortgage interest) that you can use to verify amounts. For other expenses, keep the original receipt or a clear photo of it. If you pay by credit card or check, your bank statement serves as backup documentation.
Create a spreadsheet or use accounting software to track income and expenses by category throughout the year. This makes it easier to fill out Schedule E accurately and to find documentation if the IRS asks. Many landlords use apps designed for rental property management that track expenses automatically.
Frequently Asked Questions
Do I have to report rental income if I only rented the property for a few months?
Yes. You report the income for the months you rented it, even if it was only one month. You also deduct the expenses for those months. If you held the property but did not rent it, you do not report income, but you can still deduct expenses like property tax and insurance.
Can I deduct the cost of furniture or appliances I provided to the tenant?
Yes, but the treatment depends on whether they are permanent fixtures. Built-in appliances and permanent fixtures are part of the building and depreciate over 27.5 years. Movable furniture and appliances can be depreciated over five to seven years (a shorter period), which gives you a larger deduction in early years. Keep receipts showing the purchase date and cost.
What if I have a loss on my rental property — can I deduct it?
You can deduct up to $25,000 in rental losses if your income is $150,000 or less. If your income is higher, the deduction phases out. Losses above the limit carry forward to future years. If you are a real estate professional, you can deduct all losses without limit, but you must document that you meet the definition.
Do I report rental income differently if I use a property management company?
No. You still report all rental income on Schedule E, and you deduct the property management fee as an expense. The property management company may send you a statement showing the rent collected and fees charged, which helps you complete Schedule E accurately.
Can I deduct a loss on a property I rented for only part of the year?
Yes. If your expenses for the months you rented it exceeded the income, you have a loss. You report the income and expenses for only those months, and the loss is subject to the same limits as any other rental loss.