Yes, rental income is taxed as ordinary income at your regular tax rate

The rent you collect from tenants counts as ordinary income, which means it is taxed at the same rate as wages from a job. If you are in the 22% tax bracket, rental income is taxed at 22%. If you are in the 32% bracket, it is taxed at 32%. This applies whether you rent out a single room, a house, or multiple properties.

The key point: rental income is not taxed as capital gains (the lower rate you pay when you sell the property itself). You pay ordinary income tax on the money that comes in each month or year, separate from what happens if you eventually sell the building.

This is true whether you rent through a formal lease, rent rooms in your home, or use a platform like Airbnb. The IRS treats all of it the same way on your tax return.

Key Takeaways

  • Rental income is taxed at your ordinary income tax rate, not at the lower capital gains rate.
  • You report rental income on Schedule E (Form 1040), and you can deduct expenses like mortgage interest, property taxes, repairs, and insurance to reduce what you owe.
  • Short-term rentals (like Airbnb) and long-term rentals are both taxed as ordinary income, though the deduction rules differ slightly.
  • If you sell the rental property later, the profit from the sale is taxed separately as a capital gain, which is a different calculation from the yearly rental income tax.

Where rental income appears on your tax return

You report rental income on Schedule E (Supplemental Income and Loss), which attaches to your Form 1040. Schedule E is where you list all the rent you received during the year, then subtract your expenses, and report the net profit or loss.

If you rent out a property you own, you fill out one Schedule E for that property. If you own multiple rental properties, you fill out a separate Schedule E for each one (or group them on the same form if the IRS form allows). The net income or loss from each property flows to your main tax return and is added to your other income.

If you are self-employed and also have rental income, both types of income are added together and taxed at your ordinary rate. There is no separate, lower tax bracket for rental income.

Expenses you can deduct to lower your rental income tax

Although rental income is taxed as ordinary income, you do not pay tax on the full amount you collect. You can deduct ordinary and necessary expenses of running the rental, which reduces the income the IRS taxes you on.

Common deductible expenses include:

  • Mortgage interest (not the principal payment)
  • Property taxes
  • Insurance premiums
  • Repairs and maintenance
  • Utilities you pay
  • Advertising to find tenants
  • Property management fees
  • Depreciation of the building (a non-cash deduction)
  • HOA fees
  • Cleaning and trash removal

You cannot deduct the principal portion of your mortgage payment, capital improvements (major upgrades like a new roof), or personal expenses. The line between a repair (deductible) and an improvement (not deductible in the year you pay for it) can be fuzzy — the IRS generally says a repair keeps the property in good condition, while an improvement adds value or extends its life significantly.

How depreciation works and why it matters

Depreciation is a deduction that lets you reduce your taxable rental income even though you do not actually spend the money. The IRS assumes the building itself loses value over time (though in reality, real estate often appreciates). You deduct a portion of the building's cost each year for 27.5 years if it is residential rental property.

For example, if you bought a rental house for $300,000 and the building itself (not the land) is worth $250,000, you can deduct roughly $9,091 per year ($250,000 ÷ 27.5 years) as depreciation. This lowers your taxable income even if the tenant paid all the rent on time and you had no other expenses.

Depreciation is powerful because it can turn a property that actually made money into a paper loss for tax purposes. However, there is a catch: when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at 25%, even if the property appreciated in value. This is called depreciation recapture.

Short-term rentals (Airbnb, VRBO) versus long-term rentals

Both short-term and long-term rentals are taxed as ordinary income. The difference is in how you report them and which expenses you can deduct.

For long-term rentals (typically 30 days or more), you use Schedule E and deduct the expenses listed above. You also claim depreciation.

For short-term rentals (Airbnb, vacation rentals, typically under 30 days), you still report income on Schedule E, but the deduction rules are stricter if you also use the property yourself. If you rent out a room in your home part of the year and live there the rest of the year, you can only deduct expenses that are not personal — mortgage interest and property taxes, yes; utilities and insurance, only the percentage that applies to the rental portion. Depreciation is also limited. If you rent out a separate property that you do not live in, the rules are the same as long-term rentals.

The IRS also watches short-term rentals more closely. If you rent out a property for fewer than 15 days per year, it may not be treated as a rental business at all, and different rules explore.

Self-employment tax and rental income

Rental income is not subject to self-employment tax (Social Security and Medicare tax). This is one of the few tax breaks for landlords. You pay ordinary income tax on it, but you do not pay the additional 15.3% self-employment tax that a self-employed person would pay on business income.

The exception: if you provide substantial services to tenants (for example, you run a hotel or a furnished short-term rental where you clean between guests, provide linens, and offer concierge services), the IRS may classify it as a business rather than a rental, and self-employment tax could explore. For most landlords who straightforward collect rent and handle maintenance, self-employment tax does not explore.

What happens when you sell the rental property

When you sell a rental property, the profit is taxed separately as a long-term capital gain (if you owned it more than one year, which is almost always the case). Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income — much lower than ordinary income rates.

However, the depreciation you deducted over the years is recaptured and taxed at 25%. So if you deducted $100,000 in depreciation, you owe 25% of that ($25,000) as tax when you sell, even if the property appreciated and you have a capital gain.

The sale price minus what you paid (your basis, adjusted for improvements and depreciation) equals your capital gain. That gain is taxed at the capital gains rate. The depreciation recapture is taxed separately at 25%.

Frequently Asked Questions

Do I have to report rental income if I only rented out the property for part of the year?

Yes. Any rental income you received during the year must be reported, even if you rented it out for only a few months. You report the income and deduct the expenses for the months it was rented. If the property was vacant or you lived in it yourself, you do not deduct expenses for those months.

What if my rental expenses are more than the rent I collected?

You report a loss on Schedule E. This loss can offset other income on your tax return, reducing what you owe overall. However, there are limits: if your income is above a certain threshold (currently $150,000 for single filers), you may not be able to deduct the full loss in the year it occurs. Unused losses can be carried forward to future years.

Is the security deposit I collected from a tenant considered rental income?

No. A security deposit is not income because you are holding it on behalf of the tenant and will return it (or part of it) when they move out. You only report it as income if you keep part of it to cover damage or unpaid rent. The amount you keep is reported as income in the year you keep it.

Do I need to file Schedule E if I only rent out a room in my home?

Yes, if you charge rent for a room or part of your home, you report the income on Schedule E. You can deduct the percentage of expenses (mortgage interest, property taxes, utilities, insurance, repairs) that applies to the rented portion. You cannot deduct personal expenses or the portion of the home you use yourself.

Can I deduct a loss from my rental property against my W-2 wages?

Possibly, but it depends on your income level and whether you are considered a real estate professional. If your income is below $150,000 (single) or $200,000 (married filing jointly), you can deduct up to $25,000 in rental losses against other income. Above those thresholds, losses are limited or suspended until you sell the property. If you are a real estate professional (real estate is your primary business and you spend more than half your work time on it), higher loss limits may explore.