The basic formula for rental income

Rental income is the money a tenant pays you each month, minus any expenses you incur to earn that money. The simplest version: take what the tenant pays, subtract what you spend on the property, and what remains is your taxable rental income.

The IRS requires you to report all rental income on your tax return, even if you receive it in cash. You report this on Schedule E (Form 1040), which is where landlords and property owners list rental activity. The income side includes rent payments, but also parking fees, pet fees, or any other money tenants pay you for use of the property.

Most landlords think of rental income as just the monthly rent amount, but the tax definition is broader. If a tenant pays you $1,500 for rent plus $50 for a pet fee, your rental income is $1,550 that month. If you collect a security deposit, that is not income — it belongs to the tenant and you only report it as income if you keep part of it for damages.

Key Takeaways

  • Rental income includes the monthly rent payment plus any fees tenants pay you, such as pet fees, parking fees, or late fees you actually collect.
  • You subtract legitimate property expenses — mortgage interest, property tax, insurance, repairs, utilities you pay, and depreciation — to find your taxable income.
  • Security deposits are not income unless you keep part of them; the full amount must be returned or itemized deductions explained to the tenant.
  • Keeping records of all rent received and all expenses paid is required by the IRS and protects you if your return is audited.
  • A property manager or accountant familiar with rental real estate can help you track income and expenses correctly, which often saves more than their fee.

What counts as rental income

Rental income is any payment a tenant makes to you for the right to occupy or use your property. This includes the base monthly rent, but also late fees you collect, pet fees, parking fees, utility reimbursements if the tenant pays you back, and fees for breaking a lease early. If you charge a non-refundable fee — such as a pet deposit that you keep regardless of damage — that is income in the year you keep it.

Security deposits and damage deposits are different. A security deposit is money held in trust; you must return it in full unless you document specific damages and deduct only the cost of repairs. If you keep $200 of a $500 security deposit for carpet damage, you report $200 as income and return $300. If you return the full amount, nothing is reported as income.

Rent paid late is still rental income in the year you receive it. If a tenant pays January rent in February, you report it in February on a cash-basis return (which most individual landlords use). If you use accrual-basis accounting, you report it when it was due, not when you received it — but most small landlords do not use accrual basis without a tax professional's guidance.

Expenses you can subtract from rental income

Once you have your total rental income, you subtract expenses to find your taxable profit. The IRS allows you to deduct ordinary and necessary expenses — costs that are common in rental property management and that directly relate to earning the rental income.

Common deductible expenses include mortgage interest (not the principal payment), property tax, homeowners insurance, liability insurance, repairs and maintenance, utilities you pay (if the lease makes you responsible), property management fees, advertising to find tenants, legal and accounting fees related to the rental, and depreciation of the building itself. Depreciation is a non-cash deduction that spreads the cost of the building over 27.5 years; a tax professional calculates this for you.

Expenses you cannot deduct include the principal portion of your mortgage payment (that is a return of your own capital), capital improvements that add value to the property (a new roof or new kitchen), personal expenses, or costs related to buying the property (closing costs go into your basis, not deducted annually). The line between repair and improvement can be unclear — fixing a roof leak is a repair; replacing the entire roof is an improvement. When in doubt, ask a tax professional.

Tracking income and expenses throughout the year

The IRS does not require a specific format, but you must keep records that show your income and expenses. Many landlords use a simple spreadsheet with columns for the date, tenant name, amount received, and what it was for. For expenses, record the date, vendor, amount, and category (repair, insurance, tax, etc.). Keep receipts, invoices, and bank statements as backup.

A separate bank account for the rental property makes tracking much easier. Deposit all rent into that account and pay all rental expenses from it. Your bank statements then become your record of income and expenses. If you mix personal and rental money in one account, you have to manually separate them at tax time, which is error-prone and raises red flags in an audit.

Many landlords use accounting software like QuickBooks Self-Employed or Wave (which is free) to log income and expenses as they happen. These programs categorize expenses automatically and generate reports that feed directly into your tax return. A spreadsheet works too, but software reduces mistakes and saves time when you file.

How to calculate net rental income

Net rental income is the number that matters for taxes and for understanding whether your property is actually profitable. The formula is straightforward:

Gross Rental Income (all rent and fees collected) minus Total Rental Expenses (mortgage interest, tax, insurance, repairs, utilities, depreciation, etc.) equals Net Rental Income (your taxable profit or loss).

Example: You own a rental house. Gross income for the year is $18,000 (12 months × $1,500 rent). Your expenses are: mortgage interest $4,200, property tax $2,400, insurance $1,200, repairs $800, utilities $1,200, and depreciation $3,600. Total expenses are $13,400. Your net rental income is $18,000 − $13,400 = $4,600. You report $4,600 on Schedule E.

If expenses exceed income, you have a rental loss. Rental losses can offset other income on your tax return, but there are limits — the passive activity loss rules restrict how much loss you can deduct in a given year if your income is above certain thresholds. A tax professional can explain whether your situation allows you to use the full loss.

When to use a tax professional

Calculating rental income is straightforward if you have one property with a simple situation — a single tenant, no major repairs, and standard expenses. But rental real estate has many rules, and mistakes can cost you money or trigger an audit.

A tax professional who works with landlords can help you set up your record-keeping system, identify expenses you might miss, determine whether an expense is a repair or an improvement, calculate depreciation correctly, and file Schedule E accurately. They can also advise on whether you should form an LLC or S-corp, which can reduce your tax burden depending on your income level and the number of properties you own.

The cost of a tax professional — typically $300 to $1,000 per year for a simple rental property — often pays for itself by finding deductions you would miss or by structuring your ownership to reduce taxes. If you own multiple properties, have significant repairs, or have a complex situation, a professional is worth the expense.

Frequently Asked Questions

Do I report rental income if I only rented out my house for part of the year?

Yes. Report all rental income for the months you rented it out. If you rented it from June through December, report six months of rent and six months of expenses. If you lived in it part of the year and rented it part of the year, you can only deduct expenses for the months it was rented; you cannot deduct property tax or insurance for months you lived there.

What if a tenant pays rent in cash and I don't have a receipt?

You still must report it as income. The IRS expects you to keep a record even if you don't have a formal receipt. Write down the date, tenant name, and amount in your ledger or spreadsheet. Going forward, ask tenants to pay by check or electronic transfer so you have a bank record. If you are audited and cannot document cash payments, the IRS may disallow your expense deductions or assess penalties.

Can I deduct the cost of buying furniture or appliances for the rental?

Appliances that are part of the rental (stove, refrigerator, washer, dryer) are capital improvements and depreciated over time, not deducted in full the year you buy them. Furniture is similar. A tax professional will add these to your property basis and calculate the annual depreciation. Small items under $2,500 may may have access to for immediate deduction under Section 179, but the rules are specific — ask before you buy.

If I have a loss on my rental property, can I deduct it from my salary?

Possibly, but there are limits. Passive activity loss rules restrict how much rental loss you can deduct against other income if your modified adjusted gross income exceeds $150,000 (the threshold changes yearly). If you actively manage the property and your income is below the threshold, you can deduct the full loss. Above the threshold, losses are limited or suspended. A tax professional can determine your situation.

Should I report rental income differently if I use a property manager?

No. You report the same way regardless of who collects the rent. The property manager fee is a deductible expense. You report gross rental income (what tenants pay) and then subtract the property manager fee along with your other expenses. The property manager should provide you with a monthly statement showing rent collected and fees charged.