How US Rental Income Is Taxed and What You Can Deduct

Is rental income taxable, and where do I report it?

For a US citizen or resident alien, rent from US property is generally taxable and normally reported with expenses for each property on Schedule E, Part I, even when a tenant pays in property or services instead of cash. Ordinary Schedule E rent generally is not subject to self-employment tax (IRS: Publication 527).

Outside the short home-rental exception below, rent received without a profit motive goes on Schedule 1. Operating rental expenses are not deductible, but qualifying mortgage interest, real estate taxes, and casualty losses may still be itemized on Schedule A (IRS: Publication 527).

Most individuals report rent when received. Advance rent counts when received, including a payment for the last month of a lease. A refundable security deposit is not rent until you keep it; a deposit designated as final rent is advance rent. If a tenant pays one of your bills, report the payment as rent and deduct the bill if it is an eligible rental expense (IRS: Publication 527).

What rental expenses can I deduct?

You can generally deduct costs tied to producing rent while the property is held for rental use. Mortgage principal and the property's purchase price are not current expenses (IRS: Publication 527).

These categories come from IRS Publication 527. Insurance paid for future coverage is spread over that coverage period. Mortgage points and some closing costs also need separate treatment; keep the loan and closing statements. Keep invoices and records of days rented, vacant, and personally used (IRS: Publication 527).

Ordinary upkeep costs are generally deductible once the property is available for rent, including during a vacancy while it remains held for rental use. Depreciation may continue, but missed rent is not a deduction (IRS: Publication 527).

Is the work a repair or an improvement?

A repair that keeps the rental operating normally is generally deductible now. An improvement that makes the property better, restores it, or adapts it to a new use is generally added to basis and depreciated (IRS: Publication 527).

The facts matter: work that fixes a defect existing when you bought the property may be an improvement. The IRS tangible property rules also offer a routine-maintenance safe harbor and two yearly elections, each made by a statement on your timely filed original return, including extensions. The de minimis election deducts items up to $2,500 per invoice or item that your books also expense. The small-taxpayer election, among other conditions, covers a building with unadjusted basis of $1 million or less if the year's repairs and improvements on it total no more than 2% of that basis or $10,000, whichever is less. Separate repair and improvement invoices so the basis and later sale gain can be computed accurately (IRS: Publication 527).

How does depreciation work on a rental property?

Depreciation spreads the cost of a rental building over its tax recovery period. Land cannot be depreciated, and depreciation starts when the property is ready and available for rent, even if the first tenant moves in later (IRS: Publication 527).

Under the usual federal method, a residential rental building and structural improvements are depreciated over 27.5 years using a mid-month convention. Appliances and furniture have different recovery periods. If a former home becomes a rental, its depreciation basis is generally the lower of its adjusted basis or fair market value on the conversion date, excluding land (IRS: Publication 527; IRS: Publication 946).

Certain eligible shorter-lived property acquired and placed in service after January 19, 2025, gets a 100% first-year federal deduction unless you elect out; the residential building itself does not qualify. Eligibility depends on the asset and acquisition date. An election out covers a whole property class, made by a statement on your timely filed return, including extensions, for the year the property is placed in service (IRS: Publication 946). Depreciation you claimed or could have claimed reduces your basis when you sell, so keep a year-by-year depreciation schedule (IRS: Publication 527).

Can a rental loss reduce my salary?

Usually, a rental loss is passive and cannot directly offset wages. An active landlord may qualify for a limited exception; otherwise, the loss carries forward for use against passive income or a qualifying sale (IRS: Publication 925; IRS: Form 8582 instructions).

Active participation generally requires you and your spouse to own at least 10% by value throughout the year and make significant management decisions, such as approving tenants or repairs. For the special allowance, the limit falls by 50% of modified adjusted gross income above the starting threshold (IRS: Publication 925).

Married individuals filing separately who lived with their spouse at any time during the year cannot use this special allowance. The at-risk rules apply before passive-loss rules, so borrowing and ownership details can further limit a loss. An excess business loss limit may also apply to a nonpassive rental trade or business (IRS: Publication 527; IRS: Publication 925).

What counts as real estate professional status?

Federal real estate professional status requires both more than half of your personal services in all trades or businesses to be in real property trades or businesses in which you materially participate, and more than 750 hours in those real property businesses during the year. Status alone does not free every rental loss: you must also materially participate in the rental activity, or elect to treat all your rental real estate as one activity and meet the test for it. You make that election with a statement attached to your original return; it binds later years in which you qualify unless your facts materially change, and late relief may be available. A qualifying real estate professional also completes Schedule E, line 43 (IRS: Publication 925; IRS: Schedule E instructions). Material participation is a separate work test; examples include more than 500 hours in the activity, or more than 100 hours and at least as much work as any other person. Other tests also apply (IRS: Publication 925).

On a joint return, one spouse must meet both status tests without combining hours with the other spouse. A spouse's work may count toward material participation in a rental, but not toward the other spouse's real estate professional hours. Employee work in a real property business counts toward the status tests only if you own, or are considered to own, more than 5% of the employer. Keep dated time records showing the work and property; investor time and grouping elections can also change the result (IRS: Publication 925).

What changes for a short-term rental?

An average guest stay of 7 days or less is not a rental activity under the passive-loss rules; an average stay of 30 days or less with significant personal services can also fall outside those rules. Whether a resulting loss offsets wages then depends on the material participation tests described above and other loss limits (IRS: Publication 925).

The passive-loss test does not by itself move income to Schedule C. Providing substantial services mainly for guests' convenience, such as regular cleaning or linen changes during a stay, generally makes Schedule C the reporting form and may bring self-employment tax. Basic utilities, trash collection, and cleaning common areas do not by themselves count as substantial services (IRS: Publication 527). Track each stay and the services provided. Local occupancy taxes are separate from this federal income-tax question.

What if I use the property myself or rent out part of my home?

Personal use changes the deduction calculation. Divide shared costs between rental and personal use; costs used only for the rented room or unit can generally be assigned to that rental portion (IRS: Publication 527).

Family use or below-market rent may count as personal use, unless a family member pays fair rent and uses the dwelling as a main home. The less-than-15-day rule applies only when the dwelling is used as a home, not to every short rental. For a room in your home, a reasonable floor-area or room-count method can allocate shared costs (IRS: Publication 527).

Do I owe net investment income tax on rent?

Net rental income can face an additional 3.8% net investment income tax when modified adjusted gross income exceeds the filing-status threshold. The tax applies to the lesser of net investment income or income above that threshold (IRS: NIIT questions and answers).

Qualifying as a real estate professional does not alone remove rent from this tax: the rental must also be a trade or business in which you materially participate. A safe harbor treats it that way if you also spend more than 500 hours a year in the rental activity, or did in any 5 of the prior 10 years. A rental sale gain may also count as net investment income (IRS: Form 8960 instructions).

Does rent qualify for the qualified business income deduction?

Rent may qualify for the qualified business income deduction when the rental is a trade or business. A rental to a commonly controlled business may also qualify. The usual calculation uses up to 20% of qualified business income, but a qualifying active business may receive a minimum deduction. Schedule E reporting or real estate professional status alone does not establish eligibility (IRS: Qualified business income deduction).

An IRS rental safe harbor can establish trade-or-business treatment for this deduction. It requires separate books, service records, and a statement attached to a timely filed original return for each year you rely on it. An enterprise younger than 4 years must have at least 250 hours of rental services each year; an older one needs those hours in 3 of the last 5 years. Work by owners or contractors can count, but investment review and travel do not (IRS: Revenue Procedure 2019-38).

A property you use as a home under the personal-use rule above, one rented under a triple-net lease, or one rented to a commonly controlled trade or business cannot use this safe harbor. The rental may still qualify under other QBI rules (IRS: Revenue Procedure 2019-38).

What tax applies when I sell a rental property?

A sale's gain generally starts with sale proceeds less selling costs and adjusted basis. Improvements raise basis; depreciation claimed or claimable lowers it, even if a prior return omitted the deduction. If a former home had fallen in value when converted to a rental, a deductible sale loss may instead use the lower fair market value at conversion, adjusted for later changes (IRS: Publication 527; IRS: Publication 544).

Part of a long-held building gain attributable to depreciation may be unrecaptured section 1250 gain taxed at a maximum 25%; other gain can have different treatment. A fully taxable sale of your entire rental activity to an unrelated buyer generally releases its suspended passive losses. A qualifying like-kind exchange of investment or business real property may defer gain instead; in a deferred exchange you must identify the replacement within 45 days and receive it within 180 days, or by your return due date including extensions if earlier (IRS: Topic 409; IRS: Form 8582 instructions; IRS: Like-kind exchanges; IRS: Publication 544). Keep purchase and sale closing statements, improvement receipts, and depreciation schedules before calculating the sale.

If the rental was once your main home, some gain may still qualify for the home-sale exclusion if you owned it and lived in it as your main home for at least 24 months of the 5 years before the sale. Rental depreciation allowed or allowable after May 6, 1997 cannot be excluded, and certain periods of nonqualified use can limit the exclusion (IRS: Publication 523).

Does my state tax rental income differently?

State rules can change the loss and depreciation calculation. California, for example, treats rental income and losses as passive even when a taxpayer qualifies as a federal real estate professional, and it does not follow federal bonus depreciation (California FTB: Rental; California FTB: Publication 1001).

Check the state where the property sits and your state of residence for return requirements and adjustments. Keep separate federal and state depreciation records when the rules differ.

Example

Illustrative US dollars only. A single landlord receives $30,000 of rent, pays $20,000 of deductible operating costs, and has $30,000 of properly calculated depreciation. The rental shows a $20,000 loss. Assume the landlord actively participates, has $120,000 of modified adjusted gross income, and has no other passive income or limits.

The special loss allowance starts at $25,000 and falls by half of the $20,000 income above $100,000, leaving $15,000. The landlord can deduct $15,000 against other income and carries the remaining $5,000 forward. If the same property were used as a home under the personal-use rule, that calculation would change (IRS: Publication 925; IRS: Publication 527).

Different for you?

Ownership, country of residence, and the kind of loss can change the filing path. Gather leases, rent records, receipts, closing statements, depreciation schedules, and a calendar of rental and personal-use days before preparing the return.

• You may put the property in an LLC: see Rental property in an LLC.
• You and your spouse own the rental through an LLC: see Spouse and family LLC filings.
• You are a Canadian resident with a US rental: see Canadians with US rental property.
• You are a nonresident alien with a US rental: different withholding, election, and Form 1040-NR rules may apply (IRS: Nonresident aliens and US real property).
• The property is outside the US: see Property abroad.
• The loss comes from a business instead of a rental: see Business losses.
• You have a large suspended loss, mixed personal use, or a sale: get tax preparation help with the records above.