What counts as rental income
Rental income is any money a tenant pays you for the right to live in your property. This includes the monthly rent itself, but also late fees, pet fees, parking fees, and utility reimbursements if your lease requires the tenant to pay you back for those costs. If you own a duplex and live in one unit while renting the other, only the tenant's portion counts as rental income — not the part you occupy.
Security deposits do not count as rental income in the year you receive them, because that money belongs to the tenant and you must return it (minus any legitimate deductions for damage). When you actually use part of the deposit to cover repairs or unpaid rent, that portion becomes income in the year you keep it. If you return the full deposit, there is no income to report.
Payments for things that are not rent — like reimbursement for a repair the tenant asked you to make, or money they pay to break the lease early — may or may not be taxable income depending on the circumstances. The IRS treats these differently than regular rent, so keep them separate in your records.
Key Takeaways
- Rental income includes rent, late fees, pet fees, and utility reimbursements — anything the tenant pays you under the lease terms.
- Security deposits are not income when you receive them, only when you actually keep part of the deposit for damage or unpaid rent.
- Record all payments separately by type (rent, fees, reimbursements) so you can report them accurately and deduct the right expenses against each category.
- Vacancy periods and unpaid rent still count as income you should have received, and the IRS expects you to report them using the accrual method or adjust your records accordingly.
- Keep a running total of rental income month by month, because you will need the annual figure for your tax return and to calculate your actual cash flow.
How to track rental income month by month
The simplest method is a spreadsheet or ledger with a row for each month. Write down the date, the tenant's name, the amount received, and what it was for (rent, late fee, pet fee, etc.). If you receive partial payments, record each one separately so you can see at a glance whether the tenant is behind. Many landlords use a free template or a basic accounting app, but even a notebook works as long as you write down the date and amount every time money changes hands.
If you use online rent collection (through a property management app or your bank), those systems usually generate a report showing all payments received. Download or print that report at the end of each month and file it with your records. This creates a paper trail that matches your bank deposits and makes tax time much simpler.
The key is recording the payment when you receive it, not when the tenant's lease says it is due. If rent is due on the first but the tenant pays on the tenth, you record it on the tenth. This matters because your tax return asks for income received during the calendar year, not income that was owed.
Calculating total rental income for the year
Add up all the money you actually received from tenants during the calendar year — January through December. Include rent, late fees, pet fees, parking fees, utility reimbursements, and any portion of a security deposit you kept. Do not include money you expect to receive but have not yet received, and do not include security deposits you returned in full.
If a tenant paid rent in advance (for example, paying three months' rent upfront), that entire amount counts as income in the year you received it, even though it covers rent for future months. The IRS taxes you on cash received, not on rent that is owed to you.
If you own multiple rental properties, calculate the total for each property separately first, then add them together for your overall rental income. This helps you see which properties are performing and makes it easier to track expenses by property if you need to later.
Handling unpaid rent and vacancy
Unpaid rent does not count as income in the year it was owed if you never received the money. If a tenant moves out owing you $2,000 in back rent and you never collect it, that $2,000 is not rental income for that year. You can write it off as a bad debt loss on your tax return, but only if you reported it as income in a previous year (which you would not have, since you did not receive it).
Months when the unit sits vacant and generates no rent simply result in lower total income for the year. There is no special calculation — if the unit was empty for two months, you received zero rent for those two months, and that is reflected in your annual total.
If you collected rent from a tenant but later had to refund part of it (for example, because you broke the lease early and owed them a prorated refund), subtract that refund from your total rental income for the year. Keep documentation of the refund so you can explain the adjustment if needed.
Recording expenses against rental income
Once you know your total rental income, you will subtract your expenses to find your taxable profit. Deductible expenses include mortgage interest (not principal), property taxes, insurance, repairs, maintenance, utilities you pay, property management fees, advertising to find tenants, and depreciation. Keep receipts and invoices for everything.
Some costs are repairs (deductible immediately) and some are improvements (depreciated over time). A new roof is an improvement. Fixing a leak in an existing roof is a repair. When in doubt, ask a tax professional, because the difference affects how much you can deduct and when.
Organize your expenses by category and by month so you can see which months had high costs and which were lean. This helps you understand your actual cash flow — the difference between money in and money out — which is what matters for deciding whether the property is worth keeping.
Understanding the difference between cash and accrual
Most individual landlords use the cash method, which means you report income when you receive it and expenses when you pay them. This is simpler and matches your bank account. If a tenant pays rent on the tenth but it is due on the first, you report it on the tenth.
Some landlords use the accrual method, which means you report income when it is earned (when rent is due) and expenses when they are owed (when you receive an invoice), regardless of when money actually changes hands. This is more complex but can give a clearer picture of your property's true profitability. The IRS allows most individual landlords to use either method, but you must pick one and stick with it year to year.
If you have multiple properties or significant rental income, a tax professional can help you decide which method works better for your situation. Switching methods requires IRS permission, so choose carefully at the start.
Reporting rental income on your tax return
You report rental income and expenses on Schedule E (Supplemental Income and Loss), which you file with your personal tax return. The form asks for total income received, then lists categories of expenses you can deduct. At the end, you calculate your profit or loss for each property.
If you have a loss (expenses exceed income), you may be able to deduct that loss against other income, though there are limits depending on how much money you make and how involved you are in managing the property. A tax professional can explain those limits in your specific situation.
Keep all receipts, bank statements, and payment records for at least three years in case the IRS asks questions. Many landlords photograph receipts or scan them into a folder on their computer, which makes it easy to find documentation later.
Frequently Asked Questions
Do I report rental income if I only rented the property for part of the year?
Yes. Report only the income you actually received during the months you rented it. If you owned the property but it sat vacant for three months, those months generate no rental income to report. You still deduct expenses for those months (property tax, insurance, maintenance) even though you had no income.
What if my tenant pays me in cash?
You must still report it as rental income. The IRS expects you to report all income, whether it is paid by check, bank transfer, cash, or any other method. Write down the date, amount, and tenant name for every cash payment so you have a record. Many landlords ask tenants to pay by check or transfer specifically to create a paper trail.
Can I deduct the mortgage payment as an expense?
No, but you can deduct the interest portion. The principal portion is not an expense — it is a return of your own money. Your mortgage statement breaks down how much of each payment is interest and how much is principal. Only the interest counts as a deductible expense.
How do I handle income from a roommate or family member paying rent?
If someone lives in your home and pays you rent, that is still rental income and must be reported. The amount does not matter — even if you charge a family member below-market rent, you report what they actually pay. The exception is a spouse or dependent you are legally required to support, but a roommate or adult family member paying rent counts as income.
What if I collected rent but the tenant later sued me and won a judgment against me?
You still report the rent as income in the year you received it. If you later pay out a judgment or settlement, that is a separate transaction and does not reduce the rental income you already reported. Consult a tax professional about how to handle the payment itself, as the treatment depends on what the judgment covers.