How rental income is taxed
Skip the mathWork out your depreciation deductionRent is taxable income, but you pay tax only on what is left after your rental expenses and depreciation. For many small landlords that is little or nothing in the first years.
Where it goes: Schedule E
Individual landlords report rental income and expenses on Schedule E (Form 1040), Part I. Each property gets its own column. The net result flows to your Form 1040 and is taxed at your normal income tax rates.
What counts as rental income
- Rent received in the year, including advance rent for future months.
- Fees a tenant pays you, such as late fees or a lease cancellation fee.
- Expenses the tenant pays for you, such as a repair bill they pay and deduct from rent.
- The part of a security deposit you keep.
Deductible expenses
| Expense | Notes |
|---|---|
| Mortgage interest | Interest only; principal is not deductible |
| Property tax | |
| Insurance | Landlord policy premiums |
| Repairs and maintenance | Repairs, not improvements |
| Property management | Fees and commissions |
| Utilities you pay | |
| HOA dues | |
| Advertising, screening, legal and accounting | Including tax preparation for the rental |
| Travel to the property | Mileage for rental business trips |
| Depreciation | The building and improvements, over 27.5 years |
Depreciation is often the biggest line. The depreciation calculator works it out, and rental property depreciation explained covers the rules.
Repairs or improvements?
Repairs are deducted in the year you pay them. Improvements, which make the property better, restore it or adapt it to a new use, are depreciated over years. A new roof is an improvement; fixing a few shingles is a repair. Keep invoices that describe the work, because the label matters.
Passive loss rules and the $25,000 allowance
Rental activity is generally passive. A passive loss can normally offset only passive income. The main exception for small landlords:
- If you actively participate (you own at least 10 % and make management decisions such as approving tenants and setting rent), you can deduct up to $25,000 of rental losses against other income.
- The allowance shrinks by $1 for every $2 of modified adjusted gross income above $100,000, and is gone at $150,000 ($50,000 to $75,000 if married filing separately and living apart all year).
- Losses you cannot use are not lost: they carry forward and can offset future rental income or be used when you sell the property.
Real estate professionals who meet the IRS hour tests are treated differently; that status has strict rules and is often checked in audits.
Paying the tax during the year
No tax is withheld from rent. If your rental profit, together with other income, will leave you owing at least $1,000 when you file, you may need to make quarterly estimated payments or raise the withholding on a paycheck.
Before you file
This page covers federal tax in general terms. State income tax, short-term rentals, homes you also use yourself and the sale of a rental all have more rules. For a first year with a rental, a tax professional or good tax software is money well spent.
Questions
Do I pay self-employment tax on rental income?
Usually not. Rent from a long-term rental is generally reported on Schedule E and is not subject to self-employment tax. It can be different if you provide substantial services to guests, as some short-term rentals do.
Is a security deposit taxable income?
Not when you get it, if you plan to return it. It becomes income if you keep part of it, for example for damage or unpaid rent. A deposit that is really the last month's rent is income when you receive it.
Can I deduct a rental loss from my salary?
Sometimes. If you actively participate, you may deduct up to $25,000 of rental losses a year against other income, but that amount phases out as your modified adjusted gross income goes from $100,000 to $150,000. Losses you cannot use carry forward to later years.
What if I rent out my home for only a few days?
If you rent out a home you also live in for fewer than 15 days in the year, you generally do not report that rent, and you do not deduct rental expenses for it.