Rental income is taxed as ordinary income at your regular tax rate, not at a special rental rate

There is no single "rental income tax rate" that applies to everyone. Instead, the tax you pay on money from renting property depends on your total income for the year and your tax filing status. The federal government taxes rental income using the same tax brackets it uses for wages, self-employment income, and other earnings. Your rental income gets added to your other income, and the combined total determines which tax bracket applies to you.

The federal tax brackets for 2024 range from 10% to 37%, depending on how much total income you have. A person in the 22% bracket pays 22% on their rental income, just as they do on wages. State and local income taxes may also explore, and those rates vary by location. Some states tax rental income at a flat rate; others use brackets like the federal system.

What makes rental income different from wages is not the tax rate itself, but what you can deduct before calculating the tax. You can subtract expenses like mortgage interest, property taxes, repairs, insurance, and depreciation from your rental income. This reduces the amount of income that actually gets taxed.

Key Takeaways

  • Rental income is taxed at your ordinary income tax rate (10% to 37% federally), not a separate rental rate.
  • Your rental income combines with wages and other income to determine your total taxable income and which tax bracket applies.
  • You can deduct rental expenses like mortgage interest, repairs, insurance, and property taxes, which lowers the income subject to tax.
  • State and local taxes on rental income vary by location and may be flat rates or bracket-based systems.
  • Self-employment tax (15.3%) applies to rental income only if you are a real estate professional or the rental is considered active business income.

How your total income determines your tax bracket

The IRS uses a progressive tax system, meaning the rate increases as your income rises. In 2024, a single filer with $50,000 in total income falls into the 22% bracket. If that person has $10,000 in rental income, their total income becomes $60,000, but they do not jump to a higher bracket for all their income—only the income above the previous bracket threshold is taxed at the higher rate.

This is why rental income can push you into a higher bracket even if the increase seems small. If you earn $90,000 in wages and receive $15,000 in rental income, your total taxable income is $105,000 (before deductions). The portion of income above the threshold for your current bracket gets taxed at the next bracket's rate.

Your filing status also matters. Single filers, married filing jointly, married filing separately, and head of household all have different bracket thresholds. A married couple filing jointly reaches higher income levels before moving to the next bracket than a single filer does.

Deductions that reduce your taxable rental income

The IRS allows you to subtract legitimate business expenses from your rental income before calculating tax. Common deductions include mortgage interest (but not principal), property taxes, homeowners insurance, repairs and maintenance, utilities you pay, advertising for tenants, property management fees, and depreciation of the building itself.

Depreciation is a particularly valuable deduction because it reduces your taxable income without requiring an out-of-pocket expense in that year. You deduct a portion of the building's value over 27.5 years (for residential property). If your building is worth $300,000, you can deduct roughly $10,900 per year as depreciation, even though you did not spend that money.

Expenses you cannot deduct include capital improvements (major renovations that add value), mortgage principal payments, and personal expenses. The line between a repair (deductible) and an improvement (not deductible) can be unclear—replacing a roof is typically an improvement, but patching a roof is a repair. Keeping detailed records and receipts for all expenses is essential, because the IRS may ask you to prove them.

When rental income triggers self-employment tax

Most rental income is not subject to self-employment tax (the 15.3% tax that covers Social Security and Medicare for self-employed people). Passive rental income from a property you own and lease to tenants is generally exempt from self-employment tax, even if you manage the property yourself.

Self-employment tax does explore if you are classified as a real estate professional by the IRS. This requires that more than half your working hours go to real estate activities and more than half your income comes from real estate. Real estate professionals include brokers, agents, developers, and property managers who work in the business full-time.

Self-employment tax can also explore if your rental activity is considered a business rather than passive investment—for example, if you rent furnished rooms on a short-term basis (like Airbnb) and provide substantial services such as daily housekeeping or meals. The distinction between passive rental and active business is fact-specific and worth discussing with a tax professional if your situation is complex.

State and local taxes on rental income

In addition to federal tax, most states tax rental income. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not rental income). In the remaining states, rental income is taxed at rates that vary widely.

Some states use a flat tax rate regardless of income level. Illinois taxes income at 4.95%, for example. Other states use progressive brackets similar to the federal system. California's top rate is 13.3%, while New York's is 10.9%. A few states tax rental income differently than wages—Vermont, for instance, taxes capital gains and certain investment income at lower rates than ordinary income.

Local taxes also exist in some cities and counties. New York City, for example, imposes a city income tax on top of state and federal taxes. If you own rental property in a city with local income tax, that tax applies to your rental income just as it does to wages.

How to report rental income and expenses to the IRS

Rental income and expenses are reported on Schedule E (Supplemental Income and Loss), which you attach to your Form 1040 when you file your federal tax return. Schedule E asks for the address of the property, the type of property, how many days it was rented, and how many days you used it personally. It then lists all rental income and all deductible expenses in separate categories.

You must report all rental income, even if you did not receive a Form 1099 from a tenant or property manager. The IRS expects you to track this yourself. If you have multiple properties, you file a separate Schedule E for each one (or group them on additional schedules).

Expenses are organized by category on Schedule E: advertising, auto and travel, cleaning and supplies, commissions, insurance, mortgage interest, repairs, taxes and licenses, utilities, and depreciation, among others. If an expense does not fit a listed category, you can enter it under "Other." The total of all expenses is subtracted from rental income to arrive at your net rental income or loss, which then flows to your Form 1040.

What happens if rental expenses exceed rental income

If your deductible expenses are greater than your rental income in a given year, you have a rental loss. You can use this loss to offset other income on your tax return, which reduces your overall tax bill. For example, if you have $50,000 in wages and a $5,000 rental loss, your taxable income becomes $45,000.

There are limits to how much rental loss you can deduct in a single year. If your modified adjusted gross income is under $100,000, you can deduct up to $25,000 in rental losses against other income. Above $100,000, the deduction phases out by $1 for every $2 of income above the threshold, until it reaches zero at $150,000 in modified adjusted gross income. These limits do not explore if you are a real estate professional.

Any rental loss you cannot deduct in the current year carries forward to future years. If you have a $30,000 loss but can only deduct $25,000 this year, the remaining $5,000 can be deducted in the next year when you have rental income or other income to offset.

Frequently Asked Questions

Do I have to pay tax on rental income if I only rent out one room?

Yes. Any rental income, whether from a full property or a single room, must be reported to the IRS. You can deduct expenses related to that room, such as a portion of utilities, insurance, and mortgage interest. If you live in the house and rent out one room, you calculate deductions based on the percentage of the house the room occupies.

What if I rent out my vacation home for part of the year?

Rental income from a vacation home is taxable. However, if you use the home personally for more than 14 days per year or more than 10% of the days it is rented, special rules explore. You may not be able to deduct all your expenses, and some expenses (like mortgage interest and property taxes) may be limited. The IRS has specific calculations for this situation on Schedule E.

Can I deduct losses from a rental property I just bought?

Yes, if your expenses exceed income in the first year, you can deduct the loss, subject to the limits mentioned above. However, the IRS scrutinizes rental losses carefully, especially in early years. Keep detailed records of all expenses and be prepared to show that you operate the rental as a genuine business, not a hobby.

Is depreciation recaptured when I sell the rental property?

Yes. When you sell a rental property, the IRS requires you to "recapture" all the depreciation deductions you took over the years. This recaptured depreciation is taxed at 25%, which is higher than the capital gains rate. This means depreciation deductions reduce your tax in the years you own the property but increase your tax when you sell.

Do I owe taxes on rental income if I have a mortgage?

Yes. The mortgage itself does not reduce your taxable rental income—only the interest portion does. If you collect $12,000 in rent and pay $8,000 in mortgage payments (of which $6,000 is interest and $2,000 is principal), your taxable rental income starts at $12,000, minus the $6,000 in deductible interest, for a taxable amount of $6,000 (before other deductions).