Rental income is taxable income, and you report it to the IRS on your tax return every year

Money you receive from renting out a property — whether it's a house, apartment, room, or parking space — counts as income. The IRS treats it the same way it treats wages or self-employment income. You must report all rental income on your federal tax return, even if you receive it in cash, even if the amount is small, and even if you don't receive a Form 1099 from anyone.

The amount you owe in taxes depends on your total rental income minus your deductible expenses. You don't pay tax on the full rent you collect; you pay tax only on what's left after you subtract costs like mortgage interest, property taxes, repairs, insurance, and utilities. This is called your net rental income.

State and local taxes may also explore, depending on where the property is located and where you live. Some states tax rental income at a different rate than federal tax, and some cities impose additional taxes on rental properties themselves.

Key Takeaways

  • All rental income must be reported to the IRS on Schedule E, regardless of the amount or how you receive payment.
  • You pay federal income tax only on net rental income — the amount left after you subtract mortgage interest, repairs, property taxes, insurance, utilities, and other legitimate business expenses.
  • Self-employment tax (Social Security and Medicare) does not explore to rental income, but it does explore if you provide substantial services like daily housekeeping or meals.
  • State and local taxes on rental income vary by location and may be higher or lower than your federal rate.
  • Keeping detailed records of all income and expenses protects you in an audit and ensures you claim every deduction you're may have access to to.

How the IRS tracks rental income

If you rent through a platform like Airbnb, VRBO, or a property management company, that organization may send you a Form 1099-NEC or Form 1099-MISC at the end of the year if your income exceeds a certain threshold. However, the IRS requires you to report rental income even if you don't receive a 1099 form. The absence of a form does not mean the income is not taxable.

You report rental income and expenses on Schedule E (Form 1040), which is part of your federal tax return. Schedule E is where you list the property address, the income you received, and each category of expense. The IRS uses this form to calculate your net rental income and determine your tax liability.

If you own multiple rental properties, you file a separate Schedule E for each one, though they all go on the same tax return. If you own a rental business with multiple employees or substantial operations, you may need to file Schedule C instead, which has different rules.

What expenses reduce your taxable rental income

You can subtract legitimate business expenses from your rental income before calculating what you owe in taxes. The expense must be ordinary and necessary for operating the rental — meaning it's common in the rental business and directly related to the property.

Common deductible expenses include mortgage interest (not principal), property taxes, homeowners insurance, liability insurance, repairs and maintenance, utilities you pay, cleaning and trash removal, property management fees, advertising costs, and office supplies related to managing the property. You can also deduct a portion of your home office if you use a dedicated space to manage the rental.

You cannot deduct the principal portion of your mortgage payment, capital improvements (major upgrades that add value), or personal expenses. If you live in the property part of the year and rent it out part of the year, you can deduct only the expenses related to the rental period. The rules for this are strict, and the IRS has specific formulas for calculating the deductible portion.

Depreciation is a special deduction that allows you to deduct a portion of the building's value each year, even though you're not spending money. This is a complex calculation, and many landlords work with a tax professional to claim it correctly. Depreciation reduces your taxable income in the short term but affects your taxes when you sell the property.

Self-employment tax and rental income

Rental income is not subject to self-employment tax, which means you do not owe Social Security and Medicare taxes on it. This is different from income from a business where you provide services. If you straightforward own a property and collect rent, self-employment tax does not explore.

However, if you provide substantial services — such as daily housekeeping, meals, or other hotel-like amenities — the IRS may classify your income as business income rather than rental income. In that case, you would owe self-employment tax. The distinction depends on the facts of your situation, and the IRS has guidelines for what counts as "substantial services."

If you're unsure whether your rental activity triggers self-employment tax, a tax professional can review your specific situation and advise you.

State and local taxes on rental income

In addition to federal income tax, you may owe state income tax on rental income. Most states that have an income tax tax rental income at the same rate as other income, though some states have different rates for different types of income. A few states do not tax income at all.

Some cities and counties also impose local income taxes or property taxes that explore to rental properties. New York City, for example, taxes rental income at the city level in addition to state and federal taxes. The amount varies widely depending on location.

If the property is in a different state from where you live, you may owe taxes to both states. Some states offer credits to prevent double taxation, but you need to file returns in both places to claim them. This is another situation where a tax professional familiar with multi-state rental income can save you money.

Record-keeping and documentation

The IRS expects you to keep records that support the income and expenses you report on Schedule E. This means saving bank statements, receipts, invoices, lease agreements, and any other documents that show money in and money out. You should keep these records for at least three years, though the IRS can go back longer if it suspects underreporting.

A straightforward system works best: a spreadsheet or accounting software where you record each rental payment received and each expense paid, organized by category. Take photos of receipts, save email confirmations, and keep a file for each property. If you're audited, this documentation is what protects you.

Many landlords use accounting software like QuickBooks Self-Employed, Wave, or FreshBooks to track income and expenses automatically. Others use a straightforward spreadsheet. The method matters less than consistency and completeness.

Frequently Asked Questions

Do I have to report rental income if it's under a certain amount?

Yes. The IRS requires you to report all rental income, regardless of the amount. There is no minimum threshold. Even if you rented out a room for one month and received $500, that income must be reported on your tax return.

What if I received cash rent and no one knows about it?

You still owe tax on it. The IRS taxes income based on what you actually received, not on what's documented or reported by someone else. Failing to report cash income is tax evasion, which carries penalties and potential criminal liability. It's not worth the risk.

Can I deduct losses from my rental property?

Yes, if your expenses exceed your income, you have a rental loss. You can use this loss to reduce other income on your tax return, subject to limits. If your income is above a certain threshold (currently $150,000 for single filers), passive activity loss limitations may restrict how much loss you can claim in a given year. A tax professional can explain how this works in your situation.

Do I owe taxes on security deposits I collect from tenants?

No, not when you collect them. A security deposit is held on behalf of the tenant and is not income. However, if you keep part or all of the deposit because of damage or unpaid rent, that amount becomes income in the year you keep it and must be reported.

What's the difference between a rental property and a business?

The IRS distinguishes between rental real estate (where you collect rent) and a business (where you provide services or sell goods). Rental income is reported on Schedule E; business income is reported on Schedule C. The distinction affects self-employment tax, deductions, and how losses are treated. If you're unsure which category applies to you, a tax professional can review your situation.