Rental income is taxed as ordinary income at your federal tax rate, plus state and local taxes where you live, minus deductible expenses

The amount you owe depends on three things: your total income for the year, which state and city you own the property in, and what expenses you can deduct. The federal government taxes rental income at your marginal tax rate — the same rate applied to wages or business income. That rate ranges from 10% to 37% depending on your total income and filing status. On top of that, most states charge income tax (rates vary from 0% to 13.3%), and some cities add local tax as well.

The key difference from wages is that you pay tax only on net rental income — what's left after you subtract allowed expenses. Mortgage interest, property taxes, insurance, repairs, maintenance, utilities you pay, property management fees, and depreciation all reduce your taxable amount. A property that brings in $24,000 a year in rent but costs $18,000 to operate means you report only $6,000 to the IRS, not $24,000.

Key Takeaways

  • Federal tax on rental income ranges from 10% to 37% depending on your total income and filing status, applied to net income after expenses.
  • State income tax varies from 0% (in nine states) to 13.3%, and some cities add local tax on top of state and federal rates.
  • You can deduct mortgage interest, property taxes, insurance, repairs, utilities, property management fees, and depreciation to lower your taxable rental income.
  • Self-employment tax (15.3%) does not apply to rental income, but it does apply if you actively manage the property as a business.
  • You must report rental income and expenses on Schedule E (Form 1040) when you file your federal return each year.

Federal tax brackets and how they apply to rental income

The federal government uses a progressive tax system: your rental income is taxed at your marginal rate, which is the tax bracket that applies to your highest dollars of income. If you earn $60,000 in wages and $20,000 in rental income, that $20,000 is taxed at the rate for income between $60,000 and $80,000 in your bracket, not at the lowest rate.

For 2024, federal brackets for single filers range from 10% (on the first $11,600) to 37% (on income over $578,100). For married filing jointly, the brackets are wider: 10% on the first $23,200, up to 37% on income over $693,750. These numbers adjust each year for inflation. Your rental income pushes your total income higher, which can move you into a higher bracket and increase the tax rate on all your income, not just the rental portion.

You report rental income and expenses on Schedule E (Form 1040), which you attach to your main tax return. The IRS requires you to report all rental income, even if you received it in cash or if the tenant paid you informally.

State and local income taxes on rental property

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not wages or rental income). In every other state, you owe state income tax on rental income at rates that vary widely.

California charges 1% to 13.3% depending on income. New York ranges from 4% to 10.9%. Illinois charges a flat 4.95%. Some states tax rental income at a lower rate than wages — Louisiana, for example, offers a deduction on rental income. You must file a state return in the state where the property is located, even if you live elsewhere. If you own rental property in multiple states, you may owe tax to more than one state.

A smaller number of cities charge local income tax on top of state and federal tax. New York City, for example, adds 3.876% for residents. Columbus, Ohio adds 2.5%. Philadelphia adds 3.8%. If your rental property is in a city with local income tax, you owe that tax on the rental income from that property.

Deductions that reduce your taxable rental income

You can subtract ordinary and necessary expenses from your gross rental income. The IRS defines these as costs that are common in the rental business and helpful to producing income. Common deductions include:

  • Mortgage interest (not principal) on loans used to buy or improve the rental property
  • Property taxes paid to your county or municipality
  • Insurance premiums for landlord or rental property coverage
  • Repairs and maintenance — fixing a broken window, patching a roof, replacing a water heater
  • Utilities you pay if the lease does not require the tenant to pay them
  • Property management fees if you hire someone to collect rent and handle tenant issues
  • Advertising costs for finding tenants
  • Legal and accounting fees related to the rental property
  • Depreciation — a deduction for the building's decline in value over time (not the land)

You cannot deduct capital improvements — major upgrades that add value or extend the life of the property, like a new roof or a kitchen renovation. Those are added to your cost basis and depreciated over many years instead. The line between repair and improvement can be unclear; the IRS looks at whether the work restores the property to its prior condition (deductible) or improves it beyond that (not deductible in the year spent).

Self-employment tax and when it applies to rental income

Rental income from a property you own is not subject to self-employment tax (the 15.3% Social Security and Medicare tax that applies to business income). You pay only income tax. This is true even if you actively manage the property yourself and do not hire a property manager.

Self-employment tax does apply if you operate a rental business in a way that goes beyond owning and leasing property — for example, if you rent furnished rooms with maid service, or if you operate a short-term rental business (like Airbnb) where you provide substantial services. The distinction is whether you are a passive landlord or an active business operator. If you are unsure whether your situation triggers self-employment tax, a tax professional familiar with rental property can review your specific setup.

How depreciation works and why it matters

Depreciation is a deduction that lets you write off the cost of the building (not the land) over a set period. Residential rental property is depreciated over 27.5 years. Commercial property is depreciated over 39 years. You calculate the depreciable basis — the purchase price plus the cost of improvements, minus the value of the land — and divide it by the number of years.

If you bought a rental house for $300,000 and the land is worth $60,000, your depreciable basis is $240,000. Over 27.5 years, you can deduct $240,000 ÷ 27.5 = $8,727 per year. This deduction reduces your taxable income even though you did not spend that money in the current year. When you sell the property, the IRS recaptures the depreciation you claimed and taxes it at 25% (higher than your ordinary income rate), so depreciation is not a permanent tax break — it is a deferral.

Estimated tax payments if you owe more than $1,000

If your rental income (minus deductions) is large enough that you will owe more than $1,000 in federal income tax for the year, you are required to make estimated tax payments quarterly. These are payments made on April 15, June 15, September 15, and January 15 for the previous quarter's income. If you do not make these payments, the IRS charges a penalty even if you pay the full amount owed when you file your return.

You calculate estimated tax by projecting your total income for the year, applying your tax rate, and dividing by four. If your rental income is steady, you can base the calculation on the prior year. If it varies, you estimate based on what you expect to earn. Many landlords pay estimated tax through their property management company or set aside a portion of each rent payment to cover the liability.

Frequently Asked Questions

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

Yes. Any rental income, whether from a single room or an entire property, must be reported to the IRS on Schedule E. The amount does not matter — even $100 a month must be reported. You can deduct expenses related to that room proportionally (if the room is one-quarter of your house, you can deduct one-quarter of utilities, property tax, insurance, and mortgage interest).

What if I rent out my house for only part of the year?

You report the income for the months it was rented and deduct expenses for those months. If you rented it for six months, you report six months of rent and can deduct six months of mortgage interest, property tax, insurance, and utilities. If you lived in it for part of the year and rented it for part of the year, you must allocate expenses between personal use and rental use.

Can I deduct a loss if my expenses exceed my rental income?

You can report a loss on Schedule E, which reduces your overall taxable income. However, the IRS limits how much rental loss you can deduct in a year if your income is above certain thresholds ($150,000 for single filers, $75,000 for married filing separately). Unused losses can be carried forward to future years. A tax professional can explain how passive loss rules apply to your situation.

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

No. A security deposit is not income — it belongs to the tenant and must be returned (or applied to damages). You report it as income only if you keep part or all of it because the tenant caused damage or broke the lease. The portion you keep is taxable; the portion you return is not.

What records do I need to keep for the IRS?

Keep receipts, invoices, and bank statements for all rental income and expenses for at least three years (six years if the IRS suspects underreporting). Document rent received, mortgage statements showing interest paid, property tax bills, insurance policies, repair invoices, and utility bills. If you hire a property manager, keep their fee statements. The IRS can request these records during an audit.