Rental income is taxed as ordinary income by the IRS, and you report it on your federal tax return along with deductions for expenses tied to the property

The IRS treats money you receive from renting out a property — whether a house, apartment, or room — as taxable income. You report this income on Form 1040 (your main tax return) using Schedule E (Supplemental Income and Loss). The income itself is taxed at your regular income tax rate, which depends on your total earnings that year and your filing status. Unlike capital gains from selling property, rental income has no special lower tax rate.

What makes rental income different from a salary is that you can subtract expenses. If you spend money to maintain, repair, or manage the property, those costs reduce the amount of income you actually owe tax on. This is called your net rental income — the money left after expenses. The IRS allows this because rental property generates income only if you spend money to keep it running.

Key Takeaways

  • Rental income is reported on Schedule E of your Form 1040 and taxed at your regular income tax rate, not a special rental rate.
  • You can deduct ordinary expenses like mortgage interest, property taxes, insurance, repairs, and utilities from your rental income to lower your taxable amount.
  • Capital improvements (major upgrades like a new roof) are depreciated over many years rather than deducted all at once.
  • If you have a loss after deducting expenses, you may be able to carry it forward to future years, but rules depend on your income level and how much time you spend managing the property.
  • Rental income from short-term rentals (like Airbnb) follows the same rules as long-term rentals, though record-keeping is often more detailed.

What counts as rental income and what does not

Rental income includes any money a tenant pays you for the right to occupy the property. This covers monthly rent, late fees paid by the tenant, and deposits the tenant forfeits because of damage or unpaid rent. It also includes payments for utilities if the tenant pays you directly rather than the utility company, and any other fees tied to occupancy — parking fees, pet fees, or storage fees.

Security deposits do not count as income when you receive them, because they are not yours to keep; they belong to the tenant unless you use them to cover damage or unpaid rent. When you return a deposit or use part of it, only the portion you keep is income. If a tenant pays you $1,500 in rent and a $1,000 security deposit, you report $1,500 as income that month, not $2,500.

Prepaid rent counts as income in the year you receive it, even if it covers months in the future. If a tenant pays you three months' rent in advance in December, you report all three months as income in December, not spread across January, February, and March.

Deductions you can subtract from rental income

The IRS allows you to deduct ordinary and necessary expenses — costs that are common in rental property management and directly tied to generating income. These include:

  • Mortgage interest (not the principal payment, only the interest portion)
  • Property taxes
  • Insurance (landlord or rental property insurance)
  • Repairs (fixing a leaky faucet, patching drywall, replacing a broken window)
  • Utilities you pay if the tenant does not
  • Maintenance (lawn care, snow removal, cleaning common areas)
  • Property management fees if you hire someone to collect rent or handle tenant issues
  • Advertising costs to find tenants
  • Legal and accounting fees related to the rental property
  • HOA fees or condo fees
  • Depreciation (a deduction for the building's wear over time, discussed below)

You cannot deduct personal expenses, even if they happen at the property. If you live in part of the building and rent out the rest, you can only deduct expenses for the rental portion. You also cannot deduct the principal portion of a mortgage payment — only the interest counts.

The difference between repairs and capital improvements

A repair fixes something that is broken or worn and restores it to its previous condition. Repairs are fully deductible in the year you make them. Fixing a roof leak, repainting a wall, or replacing a broken toilet are repairs.

A capital improvement adds value to the property, extends its life, or adapts it to a new use. Installing a brand-new roof, adding a second bathroom, or replacing all the windows are capital improvements. You cannot deduct the full cost in one year. Instead, you deduct the cost gradually over many years through depreciation. A new roof might be depreciated over 27.5 years for a residential rental, meaning you deduct roughly 1/27.5 of the cost each year.

The line between repair and improvement can be unclear. Replacing one shingle is a repair; replacing the entire roof is an improvement. Patching drywall is a repair; replacing all drywall in a room is an improvement. When in doubt, the IRS looks at whether the work restores the property to its condition before damage or wear, or whether it goes beyond that. Keeping receipts and photos helps document what you did.

How depreciation works and why it matters

Depreciation is a deduction that assumes your building loses value each year due to wear and age. You cannot deduct the land value — only the building itself. The IRS sets the useful life of a residential rental building at 27.5 years. This means you divide the building's cost by 27.5 and deduct that amount each year.

If you bought a rental house for $300,000 and the land is worth $75,000, the building value is $225,000. Your annual depreciation deduction is roughly $225,000 ÷ 27.5 = $8,182 per year. You claim this on Schedule E without spending any money that year — it is a "paper" deduction.

Depreciation has a catch: when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at a higher rate (25% instead of your regular rate). This is called depreciation recapture. If you claimed $82,000 in depreciation over ten years and then sell, you will owe tax on that $82,000 at the recapture rate when you file the sale. This does not mean you should avoid taking depreciation — the tax benefit now usually outweighs the recapture tax later — but you should know it is coming.

Rental losses and how they affect your taxes

If your deductions exceed your rental income in a given year, you have a rental loss. For example, if you collected $12,000 in rent but had $15,000 in expenses, you have a $3,000 loss. You cannot simply ignore this loss; you must report it on Schedule E.

Whether you can use a rental loss to reduce your other income (like wages from a job) depends on your income level and how involved you are in managing the property. If you are a passive investor — you own the property but do not actively manage it — you generally cannot use losses to offset other income. Instead, you carry the loss forward and can use it in future years when you have rental income, or when you sell the property.

If you actively participate in managing the property — you make decisions about repairs, tenant selection, and rent amounts — you may be able to deduct up to $25,000 in losses against your other income, but only if your modified adjusted gross income is below $100,000. This allowance phases out between $100,000 and $150,000 of income. Above $150,000, you cannot use losses to offset other income, even if you actively manage the property.

Self-employment tax and rental income

Rental income from a property you own is generally not subject to self-employment tax (Social Security and Medicare tax). You report it on Schedule E, and you owe regular income tax on it, but not the additional 15.3% self-employment tax that a self-employed person pays.

The exception is if you provide substantial services beyond typical landlord duties. If you run a hotel, bed-and-breakfast, or furnished short-term rental where you provide cleaning, linens, or daily services, the income may be subject to self-employment tax. The IRS looks at whether the services are incidental to renting the property or central to the business. A long-term rental with occasional maintenance is not subject to self-employment tax; a short-term furnished rental with daily housekeeping may be.

Record-keeping and documentation you need

The IRS does not require you to submit receipts with your tax return, but you must keep them for at least three years (six years if you underreport income by 25% or more). For rental property, keep:

  • Receipts and invoices for all repairs and improvements
  • Mortgage statements showing interest and principal paid
  • Property tax bills and insurance policies
  • Utility bills for the rental portion
  • Lease agreements and tenant payment records
  • Records of any money you spent advertising for tenants
  • Mileage logs if you drive to the property for repairs or management

A simple spreadsheet or notebook tracking income and expenses by month is enough. Many landlords use accounting software or hire a tax professional to organize these records. If you are audited, the IRS will ask to see documentation for the deductions you claimed, so organized records protect you.

Frequently Asked Questions

Do I have to report rental income if I only rent out a room in my house?

Yes. Any rental income, even from a single room, must be reported on your tax return. You can deduct expenses related to that room, such as a portion of utilities, property taxes, and insurance based on the percentage of the house the room occupies.

What if I rent out a property at a loss every year?

You must report the loss on Schedule E. If you actively manage the property and your income is below $100,000, you can deduct up to $25,000 of losses against other income. Otherwise, you carry losses forward to offset future rental income or gains when you sell. Persistent losses may trigger IRS scrutiny, so document that you are trying to run the property as a business.

How do I report income from Airbnb or short-term rentals?

Short-term rental income is reported the same way as long-term rental income — on Schedule E. You deduct the same expenses: utilities, repairs, insurance, and depreciation. Airbnb and similar platforms send you a summary of income, but you must still track expenses yourself and report the net income on your return.

Can I deduct the cost of furniture or appliances I provide to tenants?

Furniture and appliances are typically depreciated as capital improvements rather than deducted immediately. A refrigerator or stove has a useful life of several years, so you deduct its cost over that period. Keep receipts and note the purchase date. Some tax professionals use a shorter depreciation period for personal property like furniture, so consult a tax advisor about your specific situation.

What happens to depreciation if I stop renting out the property?

If you convert a rental property to personal use, you stop claiming depreciation going forward. However, if you later sell the property, you still owe depreciation recapture tax on all the depreciation you claimed while it was a rental, even if you no longer own it as a rental.