You pay income tax on rental income at your ordinary tax rate, plus self-employment tax if you're a sole proprietor, plus potentially state and local taxes

Rental income is taxed as ordinary income by the IRS, meaning it's added to your other income and taxed at whatever federal bracket you fall into — 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your total earnings. If you own the rental property as a sole proprietor or through a partnership, you also owe self-employment tax of 15.3% (12.4% for Social Security, 2.9% for Medicare) on your net profit. Many states and some cities add their own income tax on top of federal tax. The actual amount you owe depends on how much profit you make after deducting allowable expenses, not on the gross rent you collect.

The IRS doesn't tax the rent itself — it taxes your profit. That means you subtract mortgage interest, property taxes, insurance, repairs, maintenance, utilities you pay, property management fees, depreciation, and other legitimate business expenses from your rental income. Only what's left counts as taxable income. This is why keeping detailed records of every expense matters: the more you can document, the lower your taxable profit.

Key Takeaways

  • Rental income is taxed at your ordinary federal income tax rate, which ranges from 10% to 37% depending on your total income.
  • Self-employment tax of 15.3% applies to your net rental profit if you own the property as a sole proprietor or in a partnership.
  • You only pay tax on profit after deducting legitimate expenses like mortgage interest, property taxes, insurance, repairs, and depreciation.
  • State and local income taxes may apply on top of federal tax, and the rate varies by where you live and where the property is located.
  • You must report rental income and expenses on Schedule E (Form 1040) when you file your federal tax return.

How the IRS treats rental income versus other earnings

Rental income is considered passive income by the IRS, but it's taxed as ordinary income, not at a special capital gains rate. This means it's stacked on top of your wages, business income, or other earnings, and the combined total determines your tax bracket. If you earn $80,000 in wages and have $30,000 in rental profit, you're taxed as if you earned $110,000 total.

The one exception is if you sell the property itself at a profit — that gain is taxed as a capital gain, which may may have access to for a lower rate. But the year-to-year rent you collect is ordinary income. This is why rental income can push you into a higher tax bracket even if the actual profit is modest.

Deductions that reduce your taxable rental profit

The IRS allows you to deduct any ordinary and necessary expense of operating the rental property. This includes mortgage interest (but not principal), property taxes, homeowners insurance, liability insurance, repairs and maintenance, utilities you pay, property management fees, advertising for tenants, legal and accounting fees, and HOA fees if applicable. You can also deduct travel to the property for repairs or management, office supplies for record-keeping, and phone or internet used for the rental business.

Depreciation is a major deduction many landlords overlook. You can deduct a portion of the building's value (not the land) over 27.5 years, which reduces your taxable income even though you don't write a check. This is calculated on Schedule E and can significantly lower what you owe in federal tax. However, depreciation recapture — a 25% tax on the depreciation you claimed — applies when you sell the property, so it's not a permanent tax break, just a deferral.

You cannot deduct capital improvements that add value or extend the property's life — those must be depreciated over time instead. The line between a repair (deductible) and an improvement (depreciated) is often unclear, which is why many landlords consult a tax professional before claiming large expenses.

Self-employment tax for individual landlords

If you own the rental property as a sole proprietor (in your own name) or in a partnership, you owe self-employment tax on your net profit. This is 15.3% total: 12.4% for Social Security and 2.9% for Medicare. You calculate it on Schedule SE (Form 1040) and pay it when you file your tax return or through quarterly estimated tax payments.

Self-employment tax is separate from income tax. So if your rental profit is $30,000 and you're in the 22% federal bracket, you owe roughly $6,600 in income tax plus $4,590 in self-employment tax — about $11,190 total, before state taxes. If you own the property through an S-corporation or C-corporation, the rules are different and may result in lower self-employment tax, which is why some landlords incorporate, though it adds complexity and accounting costs.

State and local taxes on rental income

Most states tax rental income as ordinary income at rates ranging from 0% to over 13%, depending on where you live. Some states with no income tax — like Florida, Texas, and Wyoming — don't tax rental income at all. Others, like California and New York, have high state income tax rates that apply to rental profit just as they do to wages.

The state that taxes your rental income is usually the state where the property is located, not where you live. If you own a rental property in another state, you may owe tax to both your home state and the property's state, though most states offer a credit to avoid double taxation. Some cities also impose local income tax on rental income, which is added on top of state tax. Check your state and local tax rules or consult a tax professional to understand your full liability.

How to report rental income on your tax return

You report rental income and expenses on Schedule E (Form 1040), which is part of your federal tax return. You list the property address, the gross rent received, and then subtract all allowable expenses to arrive at your net profit or loss. If you have multiple rental properties, you file a separate Schedule E for each one, though they all roll into one total on your return.

Schedule E also includes lines for depreciation (calculated on Form 4562), which you enter to reduce your taxable income. If you have a loss — expenses exceed income — you can usually deduct up to $25,000 of that loss against other income, though this phases out for higher earners and has other limits. Losses beyond that can be carried forward to future years.

You must file Schedule E even if you have a loss, because the IRS needs to see the details. If you hire a property manager or have complex expenses, a tax professional can help ensure you're claiming everything you're may have access to to and reporting it correctly.

Quarterly estimated tax payments

If you expect to owe more than $1,000 in federal tax from rental income (after accounting for withholding from other jobs), you should make quarterly estimated tax payments to the IRS. These are due on April 15, June 15, September 15, and January 15 of the following year. You calculate them on Form 1040-ES and pay them online through the IRS website or by mail.

Many landlords skip quarterly payments and pay everything when they file their return in April, but this can result in penalties and interest if you owe a large amount. The safer approach is to set aside 25% to 30% of your net rental profit each quarter and pay it in, then adjust when you file your return if you over- or underpaid. Some landlords hire an accountant to calculate their quarterly liability, which costs money but reduces the risk of penalties.

Frequently Asked Questions

Do I have to pay taxes on rental income if I have a loss?

No, you don't owe income tax on a loss. However, you must still file Schedule E to report it. Losses can offset other income, up to $25,000 per year for most taxpayers, which may reduce your overall tax bill. Losses beyond that can be carried forward to future years.

What if I rent out a room in my primary home?

Rental income from a room in your home is taxed the same way as income from a separate property — it's ordinary income, and you can deduct a proportional share of expenses like mortgage interest, property taxes, utilities, and repairs. You report it on Schedule E. However, you cannot depreciate your primary residence, which is different from a rental property.

Can I deduct a loss on my rental property against my salary?

Yes, up to $25,000 per year if your modified adjusted gross income is $100,000 or less. The limit phases out for higher earners and disappears entirely above $150,000. Losses beyond the annual limit can be carried forward to future years. This is called the passive activity loss limitation.

Do I owe taxes on security deposits I collect from tenants?

No. Security deposits are not income — they're held in trust and returned to the tenant (or used to cover damages). Only the portion you keep for unpaid rent or damage is taxable income, and you report it in the year you actually keep it, not when you collect it.

What happens to depreciation when I sell the rental property?

You owe depreciation recapture tax of 25% on all the depreciation you claimed over the years you owned the property. This is in addition to capital gains tax on any profit from the sale price itself. So depreciation reduces your tax while you own the property but increases your tax when you sell it.