Rental income is money you receive from letting someone else use your property
Rental income is any payment you get in exchange for letting a tenant live in or use a property you own. This includes monthly rent payments, but also security deposits that you keep (rather than return), payments for breaking a lease early, and money tenants pay for utilities or services you provide. The key distinction: if a tenant pays it to you because they occupy the space, it counts as rental income for tax purposes.
Rental income appears on your tax return whether you receive it in cash, check, bank transfer, or any other form. The IRS requires you to report all rental income, even if a tenant pays late or you never actually collect the full amount owed. If you own a rental property, understanding what counts as income — and what does not — affects how much you owe in taxes and which deductions you can claim.
Key Takeaways
- Rental income includes monthly rent, security deposits you keep, lease-breaking fees, and payments for utilities or services you provide to tenants.
- You must report all rental income on your tax return, including amounts you have not yet collected, on Schedule E (Form 1040).
- Security deposits held temporarily are not income until you keep them; if you return the full deposit, it was never income.
- Rental expenses like mortgage interest, property taxes, repairs, and insurance reduce your taxable rental income.
- Different property types — residential, commercial, vacation rentals — follow the same income reporting rules but may have different deduction limits.
What counts as rental income beyond the monthly rent payment
Monthly rent is the obvious piece, but rental income includes several other payments. If a tenant breaks their lease and pays a penalty to exit early, that money is rental income. If you charge a tenant for damage beyond normal wear and tear and keep part or all of their security deposit, the amount you keep is rental income. Payments for late rent, returned check fees, or lease violations also count.
If you provide services or utilities directly to the tenant — such as heat, water, trash collection, parking, or furnished furniture — and charge separately for these, those payments are rental income. If you own a furnished rental and charge more because of the furniture, the entire rent amount is income (you then deduct the cost and depreciation of the furniture as an expense). Payments from a tenant to cover their share of property taxes or homeowners association fees that you paid on their behalf also count as income.
What does not count as rental income
A security deposit held in a separate account and returned to the tenant in full is not income. You are holding the money temporarily on behalf of the tenant. Only the portion you keep — because of damage, unpaid rent, or lease violations — becomes income in the year you keep it.
Advance rent paid for a future period is income in the year you receive it, not the year the tenant occupies the space. If a tenant pays three months' rent upfront in January, all three months count as income in January on your tax return. Payments from a tenant for their own property taxes or insurance that you straightforward pass through to the government or their lender are not income if you do not actually receive the money yourself — only payments you receive and keep count.
How rental income appears on your tax return
You report rental income on Schedule E (Form 1040), the IRS form for supplemental income and loss. You list the property address, the total rental income received during the year, and then subtract your rental expenses to arrive at your net profit or loss. If you own multiple rental properties, you file a separate Schedule E for each one (or group related properties together, depending on the structure).
The income you report is gross rental income before any expenses. You do not reduce it by the mortgage payment, property taxes, or repairs before reporting it. Instead, you report the full amount received, then list each expense category separately. The IRS then calculates your net rental income, which is what you owe tax on.
Rental expenses that reduce your taxable income
Once you have reported your rental income, you subtract expenses directly tied to earning that income. These include mortgage interest (not the principal payment), property taxes, insurance, repairs and maintenance, utilities you pay, property management fees, advertising for tenants, and legal fees related to the rental. Depreciation — the annual deduction for the building wearing out over time — is also deductible, though it has special rules when you sell the property.
You cannot deduct the full mortgage payment, only the interest portion. You cannot deduct capital improvements (major upgrades like a new roof or foundation) in the year you make them; instead, you depreciate them over many years. Expenses must be ordinary and necessary — meaning they are common in the rental business and directly related to your property. Personal expenses, even if you use the property part of the year, are not deductible.
Rental income from different property types
Residential rentals (single-family homes, apartments, condos) follow the standard rental income rules. Commercial properties (office buildings, retail spaces, warehouses) report income the same way but may have different lease terms and expense patterns. Vacation rentals and short-term rentals (Airbnb, VRBO, nightly stays) are still rental income, though the IRS scrutinizes them more closely because the line between a rental business and a personal-use property can blur.
If you rent out a room in your home or a portion of a property you also live in, you still report the rental income from the tenant's portion. You then deduct only the expenses that explore to that rented space — a portion of utilities, property tax, insurance, and depreciation based on the square footage rented versus the total. You cannot deduct mortgage interest or property tax for the part of the home you occupy yourself.
When you receive rental income but have not collected the money
The IRS requires you to report rental income using the accrual method or the cash method, depending on your situation. Most individual landlords use the cash method, which means you report income only when you actually receive it. If a tenant owes you rent but has not paid, you do not report it as income until the money arrives (or until you give up collecting and write it off as a bad debt).
If you use the accrual method — more common for larger rental businesses — you report income when it is earned, whether or not you have collected it. Once you choose a method, you must stick with it consistently. If you switch methods, you need IRS permission. Most landlords with one or two properties use the cash method because it is simpler and aligns with when money actually enters their bank account.
Frequently Asked Questions
Is a security deposit I return to the tenant considered rental income?
No. A security deposit you return in full is never income — you are straightforward holding the tenant's money temporarily. Only the portion you keep (for damage, unpaid rent, or lease violations) becomes income in the year you keep it. You must report the amount kept on Schedule E in that tax year.
Do I report rental income if I have not collected the full amount from my tenant?
It depends on your accounting method. If you use the cash method (most common for individual landlords), you report income only when you receive it. If you use the accrual method, you report it when it is earned, even if unpaid. Once you choose a method, you must use it consistently.
What if I let a family member live in my rental property for free?
If you do not charge rent, there is no rental income to report. However, you can still deduct certain expenses like mortgage interest and property taxes. If you later charge rent, that amount becomes income from that point forward. The prior years with no rent have no income to report.
Can I deduct my mortgage payment from rental income?
You can deduct only the interest portion of your mortgage payment, not the principal. The principal is a return of your own money, not an expense of earning rental income. Mortgage interest appears as a deduction on Schedule E, separate from the rental income line.
Do I report rental income if I own the property with another person?
Yes. Each owner reports their share of the rental income and expenses on their own tax return. If you own 50 percent of the property, you report 50 percent of the income and 50 percent of the expenses. The property deed and ownership structure determine how the income is split.