Rental income is taxed as ordinary income at your regular federal tax rate, plus self-employment tax if you operate as a sole proprietor, plus state and local taxes where you live

The federal tax rate on rental income depends on your total income for the year and your filing status. The IRS treats rental income the same way it treats wages or salary — it falls into tax brackets that range from 10% to 37% at the federal level. If you earn $50,000 in rental income and your other income puts you in the 24% bracket, that rental income is taxed at 24%, not at a flat rate.

On top of federal income tax, you also owe self-employment tax (Social Security and Medicare) if you report rental income on Schedule C as a sole proprietor or single-member LLC. That adds 15.3% to your bill, though you can deduct half of it. If you own rental property as a corporation or partnership, the rules differ — the entity itself may pay tax, or income may pass through to your personal return. State and local income taxes vary by location and can range from 0% to over 13% depending on where you live and where the property is located.

Key Takeaways

  • Federal tax on rental income uses the same brackets as regular income (10% to 37%), determined by your total earnings and filing status for the year.
  • Self-employment tax of 15.3% applies if you report rental income on Schedule C, though you can deduct half of this amount from your income.
  • State and local income taxes on rental income vary by where you live and where the property is located, ranging from 0% to over 13%.
  • You can reduce taxable rental income by deducting mortgage interest, property taxes, repairs, maintenance, insurance, and depreciation on the building itself.
  • Passive activity loss rules may limit how much rental losses you can deduct against other income in a given year.

Federal tax brackets for rental income

Rental income is added to your other income (wages, interest, capital gains) to determine which federal tax bracket you fall into. For 2024, the brackets range from 10% on the first portion of income to 37% on income above a certain threshold. The threshold depends on whether you file as single, married filing jointly, head of household, or another status. A single filer in the 22% bracket pays 22% on rental income, not a separate rate.

The brackets adjust each year for inflation, so the dollar amounts change annually. The IRS publishes updated brackets in late fall for the following year. Your rental income is combined with all other income you received that year — wages, self-employment income, investment income, and so on — to calculate your total tax liability. This means rental income can push you into a higher bracket if your other income is already substantial.

Self-employment tax on rental income

If you operate your rental business as a sole proprietor or single-member LLC and actively manage the property, you owe self-employment tax in addition to income tax. Self-employment tax covers Social Security and Medicare and totals 15.3% of your net rental income (after deductions). You report this on Schedule SE and pay it when you file your tax return or make quarterly estimated tax payments.

You can deduct half of your self-employment tax from your gross income, which reduces your taxable income slightly. If your rental income is passive — meaning you hire a property manager and do not actively participate in operations — you may not owe self-employment tax, though you still owe income tax. The distinction between active and passive rental income matters for both self-employment tax and for passive activity loss limits.

State and local taxes on rental income

Most states tax rental income as part of your state income tax return. State rates vary widely: some states have no income tax at all (Florida, Texas, Wyoming, and others), while others tax income at rates up to 13% or higher. Your state tax is calculated separately from federal tax and is based on your state's own brackets and rules. If you own rental property in a state different from where you live, you may owe tax to both states.

Some cities and counties also impose local income taxes on rental income. New York City, for example, taxes residents on rental income at rates up to 3.9% in addition to state tax. You report local tax obligations on your state return or on a separate local return, depending on where the property is located. The total state and local tax burden can significantly increase your overall tax liability, so it is worth understanding the rules in your specific location.

Deductions that reduce your taxable rental income

You do not pay tax on your gross rental income — you pay tax on your net rental income after deductions. Common deductions include mortgage interest (but not principal), property taxes, homeowners or landlord insurance, repairs and maintenance, utilities you pay, advertising for tenants, property management fees, and depreciation on the building itself. Depreciation is a non-cash deduction that allows you to deduct a portion of the building's value each year, even though you did not spend money that year.

You cannot deduct capital improvements (major upgrades that add value or extend the life of the property) in the year you make them — instead, you depreciate them over time. Repairs (fixing what is broken) are deductible when ready. The line between repair and improvement can be unclear, so keep detailed records and receipts. If your deductions exceed your rental income in a given year, you have a rental loss, which may be deductible against other income depending on passive activity loss rules.

Passive activity loss limits

If your rental income is passive (you do not actively manage the property), the IRS limits how much rental loss you can deduct against other income like wages or investment gains. In 2024, you can deduct up to $25,000 in passive losses against other income if your modified adjusted gross income is below $100,000 and you actively participate in the rental activity. This limit phases out as your income rises, reaching zero at $150,000 of modified adjusted gross income.

If you exceed these thresholds, you cannot deduct excess passive losses in that year — instead, they carry forward to future years when you have passive income to offset them or when you sell the property. Real estate professionals (those who spend more than half their working hours in real estate) may be exempt from passive activity loss limits. Understanding whether your rental activity qualifies as passive or active is important for tax planning, as it affects both your self-employment tax and your ability to deduct losses.

Quarterly estimated tax payments

If you expect to owe $1,000 or more in federal income tax and self-employment tax for the year, the IRS requires you to make quarterly estimated tax payments. These are due on April 15, June 15, September 15, and January 15 of the following year. You calculate your estimated tax based on your expected rental income for the year and pay one-quarter of that amount each quarter. If you do not make these payments, you may owe penalties and interest when you file your return.

You can use IRS Form 1040-ES to calculate your estimated payments, or you can pay based on your prior year's tax liability. Many people who own rental property use tax software or work with a tax professional to determine the correct quarterly amount. If your rental income varies significantly from quarter to quarter, you can adjust your payments to match actual income rather than paying equal amounts each quarter.

Frequently Asked Questions

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

Yes, you owe income tax on rental income regardless of whether you have a mortgage. However, you can deduct the interest portion of your mortgage payment, which reduces your taxable income. You cannot deduct the principal portion. If your mortgage interest and other deductions exceed your rental income, you may have a loss that can offset other income, subject to passive activity loss limits.

What is the difference between ordinary income tax and capital gains tax on rental property?

Rental income (the money tenants pay you each month) is taxed as ordinary income at your regular tax rate. Capital gains tax applies when you sell the property for a profit. Long-term capital gains (property held over one year) are taxed at lower rates (0%, 15%, or 20%) than ordinary income. These are two separate taxes on two different types of income from the same property.

Can I deduct losses from my rental property against my job income?

You can deduct up to $25,000 in rental losses against other income if you actively participate in the rental activity and your modified adjusted gross income is below $100,000. This limit phases out as your income rises. If you exceed the income threshold or do not actively participate, excess losses carry forward to future years or until you sell the property. A tax professional can help determine whether your situation qualifies.

Do I owe self-employment tax on rental income if I hire a property manager?

If you hire a property manager and do not actively participate in managing the property, your rental income is considered passive, and you do not owe self-employment tax on it. You still owe regular income tax. If you actively participate (making decisions about repairs, tenant selection, or rent amounts), you may owe self-employment tax even with a property manager. The IRS looks at the level of your involvement, not just whether you hired help.

How do I report rental income if I own property in multiple states?

You report all rental income on your federal return (Schedule E), and you owe federal tax on the total. You also file state tax returns in each state where you own property and owe that state's income tax on rental income from property in that state. Some states offer credits for taxes paid to other states to avoid double taxation. A tax professional familiar with multi-state rental ownership can help may support you file correctly in each jurisdiction.