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

The tax you owe on rental income depends on your total income for the year, not on the rental amount alone. The federal government taxes rental income using the same tax brackets it uses for wages and other income. If you earn $50,000 in rental income and $30,000 in wages, you pay federal tax on the combined $80,000. Your tax rate climbs as your total income rises — this is called a progressive tax system.

State and local taxes add on top of federal tax. Some states tax rental income at a flat rate (the same percentage for everyone), while others use progressive brackets like the federal system. A few states do not tax income at all. Your city or county may also charge a local income tax, though this is less common. The total tax burden varies dramatically by location: a landlord in Florida pays only federal tax, while one in New York City pays federal, state, and city taxes combined.

Key Takeaways

  • Rental income is taxed at your marginal federal tax rate — the rate that applies to your highest dollars of income — which ranges from 10% to 37% depending on your total income and filing status.
  • You must report all rental income on your federal tax return, even if you receive it in cash or the tenant pays you informally.
  • State income tax on rental income ranges from 0% (in states with no income tax) to over 13% in high-tax states, and some cities add local income tax on top.
  • You can deduct rental expenses — mortgage interest, property taxes, repairs, insurance, utilities, and depreciation — which reduces the income amount you actually pay tax on.
  • Self-employment tax does not apply to rental income, but it does apply if you provide substantial services (like a hotel or furnished short-term rental).

Federal tax brackets for rental income in 2024

The federal government uses tax brackets that change each year. For 2024, if you are single and your total income (including rental income) falls between $11,600 and $47,150, you pay 12% federal tax on income in that bracket. If your total income is between $47,150 and $100,525, the rate jumps to 22%. The brackets are higher for married couples filing jointly and lower for heads of household.

Your marginal tax rate is the percentage you pay on your last dollar of income. If you earn $60,000 total as a single filer, your marginal rate is 22% — that is the rate applied to your rental income. This is different from your average tax rate across all your income, which is lower. Many people confuse these two rates and overestimate their tax burden.

The federal brackets for 2025 will be slightly different because they adjust annually for inflation. You can find the current brackets on the IRS website or from a tax preparer. The key point: your rental income is taxed at whatever bracket your total income pushes you into, not at a special rental-income rate.

State income tax on rental income

State tax rates vary widely. 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). If you own rental property in one of these states, you owe no state tax on the rental income.

States with income tax use different structures. Some, like Colorado and Illinois, tax all income at a flat rate — 4.63% and 4.95% respectively in 2024. Others, like California and New York, use progressive brackets similar to the federal system. California's top rate is 13.3%, and New York's is 10.9%. These rates apply to rental income the same way they apply to wages.

A few states tax rental income differently than other income. Some exclude certain types of income or offer deductions specific to landlords. Check your state's tax agency website or speak with a tax preparer who knows your state's rules. The difference between a 5% state rate and a 13% state rate is substantial on a $50,000 rental income — that is $4,000 versus $6,500 in state tax alone.

Local income tax and property taxes

Some cities and counties charge a local income tax on top of state and federal taxes. This is less common than state tax but significant where it exists. Cities in Ohio, Pennsylvania, Kentucky, and a few other states impose local income taxes ranging from 1% to 2.5%. New York City charges 3.876% on top of state and federal tax for residents.

Do not confuse local income tax with property tax. Property tax is a separate annual tax based on your property's assessed value, not on your income. You pay property tax to your county or municipality regardless of whether you earn rental income. However, property tax is deductible from your rental income when you calculate your taxable rental profit, which reduces the income tax you owe.

How deductions reduce your taxable rental income

You do not pay tax on your total rental income. You pay tax on your net rental income — the amount left after you subtract allowed expenses. If you collect $24,000 in rent but spend $8,000 on repairs, insurance, and maintenance, you pay tax on $16,000, not $24,000.

Common deductible expenses include mortgage interest (not principal), property taxes, homeowner's insurance, repairs and maintenance, utilities you pay, property management fees, advertising for tenants, and depreciation. Depreciation is a non-cash deduction that lets you deduct a portion of the building's value each year, even though you did not spend money that year. Depreciation is one of the largest deductions available to landlords.

Expenses you cannot deduct include mortgage principal (that is a loan repayment, not an expense), capital improvements that add value to the property (though you can depreciate them over time), and personal expenses unrelated to the rental. Keep receipts and records for all expenses. The IRS requires documentation, and deductions without proof are often disallowed in an audit.

Self-employment tax does not apply to most rental income

Rental income from a traditional lease is not subject to self-employment tax (Social Security and Medicare tax). If you own an apartment building and collect rent, you pay income tax on the net rental profit, but not the additional 15.3% self-employment tax that self-employed people pay.

However, if you provide substantial services — such as operating a furnished short-term rental (like an Airbnb), a hotel, or a bed-and-breakfast where you clean rooms and provide meals — the IRS may classify this as a business rather than a rental activity. In that case, you owe self-employment tax on top of income tax. The distinction depends on the level of service and how the IRS interprets your specific situation. A tax preparer can advise whether your rental activity crosses this line.

Reporting rental income on your tax return

You report rental income and expenses on Schedule E (Supplemental Income and Loss), which attaches to your Form 1040 federal tax return. Schedule E asks for the address of the rental property, the rental income received, and each category of expense. You calculate your net rental income (income minus expenses) and report that figure on your main tax return.

If you own multiple rental properties, you file a separate Schedule E for each one. If you own a rental business with employees or significant operations, you may need to file Schedule C (Profit or Loss from Business) instead of Schedule E, which has different rules and requirements.

You must report all rental income, whether you receive it in cash, check, or electronic transfer. The IRS expects landlords to report income consistently. If a tenant pays you $500 per month in cash and you report only $4,000 of the $6,000 you actually received, that discrepancy can trigger an audit. Keep a record of all payments received, even informal ones.

Frequently Asked Questions

Do I owe federal tax if I only have a small rental income?

Yes, you owe federal tax on all rental income above zero, with no minimum threshold. However, if your total income (including the rental income) falls below the standard deduction for your filing status, you owe no federal tax. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your rental income plus other income does not exceed these amounts, you owe no federal tax.

What if I have a loss on my rental property?

If your expenses exceed your rental income in a year, you have a rental loss. You can deduct this loss against other income (wages, investment income) to reduce your overall tax. However, there are limits: if your income exceeds certain thresholds, you may not be able to deduct the full loss in that year. Unused losses can be carried forward to future years. A tax preparer can explain how passive loss rules apply to your situation.

Do I have to pay estimated taxes on rental income?

If you expect to owe more than $1,000 in federal tax for the year and you do not have enough tax withheld from other income (like wages), you should pay estimated taxes quarterly. Estimated taxes are due April 15, June 15, September 15, and January 15. Underpayment can result in penalties. Many landlords pay estimated taxes to avoid a large bill at tax time.

Can I deduct losses from a rental property I am trying to sell?

Yes, you can deduct rental losses while you own the property and are actively renting it. Once you stop renting the property and hold it for sale, the rules change — you can no longer deduct operating losses. Expenses related to selling (realtor fees, closing costs) reduce your capital gain when you sell, but they do not offset other income.

What happens if I do not report rental income?

Unreported income is tax evasion, which carries penalties, interest, and potential criminal charges. The IRS uses data matching and audits to find unreported income. If a tenant or property management company reports payments to the IRS, your records should match. The penalty for underpaying taxes is typically 20% of the unpaid tax, plus interest calculated daily. Criminal prosecution is rare but possible for large, intentional evasion.