Federal income tax applies to all rental income, and the rate depends on your total income and tax bracket

Rental income is taxed as ordinary income by the federal government. That means the money you collect from tenants gets added to your other income — wages, self-employment earnings, investment gains — and taxed at your marginal rate. If you earn $60,000 in wages and collect $20,000 in rent, the IRS treats you as having $80,000 in taxable income for the year.

Your marginal tax rate in 2024 ranges from 10% to 37% depending on your total income and filing status. A single filer with $80,000 in combined income falls into the 22% bracket, meaning the last dollars of income — including some of your rental income — are taxed at 22%. This is not the same as paying 22% on all your rental income; it is the rate applied to income in that bracket.

You do not pay tax on the full rent you collect. You subtract your rental expenses first. Expenses include mortgage interest (not principal), property taxes, insurance, repairs, maintenance, utilities you pay, property management fees, advertising for tenants, and depreciation. The difference between rent collected and expenses is your taxable rental income.

Key Takeaways

  • Rental income is taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.
  • You subtract rental expenses — mortgage interest, property taxes, insurance, repairs, utilities, and depreciation — before calculating what you owe in federal tax.
  • Self-employment tax (Social Security and Medicare) does not apply to rental income, but it does apply if you provide substantial services like daily housekeeping or meal preparation.
  • Most states tax rental income as well, and rates vary from 0% to over 13% depending on where the property is located.
  • You must report rental income and expenses on Schedule E (Form 1040) when you file your federal return.

What expenses reduce your taxable rental income

The IRS allows you to deduct ordinary and necessary expenses of operating a rental property. Ordinary means common in your type of business; necessary means helpful and appropriate. You cannot deduct personal expenses or capital improvements (major upgrades that add value to the property), but nearly everything else counts.

Common deductible expenses include: mortgage interest paid to the lender; property taxes; homeowners or landlord insurance; repairs and maintenance (fixing a leaky roof, patching drywall, replacing a broken window); utilities you pay on behalf of tenants; property management company fees; advertising to find tenants; background check and credit report costs; legal fees for lease disputes or evictions; accounting and tax preparation fees; and depreciation (a deduction spread over 27.5 years for residential rental property).

You cannot deduct mortgage principal payments, capital improvements (new roof, new kitchen, new foundation), personal use of the property, or expenses for property you have not yet rented out. If you live in part of the building and rent out the rest, you can only deduct expenses for the rental portion.

How depreciation works and why it matters

Depreciation is a deduction that reduces your taxable rental income even though you do not spend cash on it. The IRS assumes residential rental property loses value over time and lets you deduct a portion of that loss each year for 27.5 years. If your rental property cost $300,000 and the building (not the land) is worth $250,000, you depreciate the $250,000 over 27.5 years, or roughly $9,091 per year.

Depreciation is powerful because it can turn a cash-positive rental into a tax loss. You might collect $15,000 in rent, spend $8,000 on expenses, and have $7,000 in cash — but after claiming $9,000 in depreciation, you show a $2,000 loss on your tax return. This loss can offset other income, reducing your overall tax bill.

There is a catch: when you sell the property, the IRS recaptures depreciation. You pay tax on the depreciation you claimed, even if you did not actually receive that money. The recapture rate is 25%, separate from your ordinary income tax rate. This is why depreciation is a timing tool, not a permanent tax break.

State and local taxes on rental income

Most states tax rental income as part of state income tax. The rate varies widely: some states have no income tax (Florida, Texas, Wyoming), while others tax rental income at rates up to 13% or higher (California, New York, Oregon). A few states tax rental income differently than wages — for example, some have a flat tax rate regardless of income level.

You also may owe local income tax if your city or county collects it. Cities in Ohio, Pennsylvania, and a few other states impose local income tax on residents and sometimes on non-residents who own rental property there. Local rates are typically 1% to 2.5%.

Property tax is separate from income tax and is owed to the county or municipality where the property sits. Property tax rates vary by location and are based on the assessed value of the property, not your income. You deduct property tax when calculating your federal taxable rental income.

Self-employment tax and when it applies to rental income

Rental income from a property you own is not subject to self-employment tax (Social Security and Medicare tax). This is one advantage of rental income over self-employment income from a business or trade. You pay federal income tax on the profit, but not the additional 15.3% self-employment tax.

The exception is if you provide substantial services connected to the rental. If you run a hotel, bed and breakfast, or furnished short-term rental where you provide daily housekeeping, meals, or other services beyond simply renting space, the IRS may classify it as a business subject to self-employment tax. The line is not always clear, and the IRS looks at the facts of your situation.

If you hire a property manager or cleaning service, that does not make the income subject to self-employment tax. You are still a landlord; you are just paying someone else to do the work.

How to report rental income and expenses to the IRS

You report rental income and expenses on Schedule E (Form 1040), which is part of your federal tax return. Schedule E has separate sections for each property you own. You list the address, the rent collected, and each category of expense. At the bottom, you calculate your profit or loss for each property and carry the total to your main tax return.

You must file Schedule E even if you have a loss, because the IRS needs to see that you reported the income and claimed the deductions. If you own multiple properties, you file one Schedule E with a section for each.

Keep records of all income and expenses for at least three years, and ideally longer. The IRS can audit returns going back three years as a standard matter, and six years if it suspects underreporting of income. Records include bank statements, rent receipts, invoices for repairs and maintenance, property tax bills, insurance statements, and mortgage statements showing interest paid.

Tax situations that affect how much you owe

If your rental income pushes you into a higher tax bracket, you pay the higher rate only on income in that bracket, not on all your income. This is called progressive taxation. If you are single and earn $45,000 in wages, you are in the 22% bracket. If rental income brings you to $65,000, the first $11,000 of rental income is taxed at 22%, and the remaining $9,000 is taxed at 24%.

If you have a rental loss — expenses exceed income — you can use that loss to offset other income, but there are limits. Passive activity loss rules restrict how much loss you can claim in a given year if your income is above certain thresholds. If you actively participate in managing the property and your income is below $150,000, you can deduct up to $25,000 in losses. Above that income level, the deduction phases out and may not be available at all. Unused losses carry forward to future years.

If you sell the property, you owe capital gains tax on the profit (sale price minus your original cost basis plus improvements). Long-term capital gains rates (15% or 20% for most people) are lower than ordinary income tax rates, but depreciation recapture is taxed at 25%.

Frequently Asked Questions

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

Yes. Any rental income is taxable, whether you rent a room, a unit in a multi-family building, or a single-family home. You can deduct expenses for the rental portion of the house, such as a share of utilities, property tax, insurance, and depreciation. You cannot deduct expenses for the part you live in.

What if I rent out a vacation home or short-term rental?

Short-term rental income is taxable as ordinary income. If you rent it out fewer than 15 days per year, different rules apply and you may not be able to deduct losses. If you rent it out 15 or more days per year, you report it on Schedule E like any other rental. If you use it personally for more than 14 days or 10% of the days it is rented out, depreciation deductions are limited.

Can I deduct the cost of buying the property?

No. The purchase price is your cost basis, not a deductible expense. You recover that cost through depreciation over 27.5 years, or when you sell the property. Improvements that add value (new roof, new foundation, major renovation) are also capitalized and depreciated, not deducted in the year you pay for them.

What if I have a loss on my rental property?

You can use rental losses to offset other income, but passive activity loss limits may apply. If you actively manage the property and earn less than $150,000, you can deduct up to $25,000 in losses per year. If you earn more, the deduction phases out. Unused losses carry forward to future years or can be used when you sell the property.

Do I need to make estimated tax payments on rental income?

If your rental income is not subject to withholding and you expect to owe more than $1,000 in taxes for the year, you should make quarterly estimated tax payments. Estimated payments are due April 15, June 15, September 15, and January 15. Your tax preparer or the IRS website can help you calculate the amount.