Rental income is taxable income, and you must report it to the IRS

Any money you receive from renting out a property — whether it's a house, apartment, room, or parking space — counts as taxable income. The IRS requires you to report this income on your tax return every year, even if you didn't receive a 1099 form and even if you were paid in cash. There are no exceptions based on how much you earned or how often you rent the property.

The good news is that you don't pay tax on the full rental amount. You can deduct legitimate expenses related to the rental, which lowers the taxable portion. The difference between what you collected and what you spent is your taxable rental income.

Key Takeaways

  • All rental income must be reported to the IRS on Schedule E of your tax return, regardless of the amount or payment method.
  • You can deduct ordinary and necessary expenses like mortgage interest, property taxes, repairs, insurance, and utilities to reduce your taxable income.
  • Depreciation is a deduction that reduces your taxable income each year even though you don't spend cash, but it affects your capital gains tax when you sell.
  • If you rent out a room in your primary home or rent for fewer than 15 days per year, different rules apply and may reduce or eliminate your tax obligation.
  • Keeping detailed records of all income and expenses is essential because the IRS can audit rental properties, and missing documentation can result in penalties.

What counts as rental income

Rental income includes the monthly rent payment, but it also includes other money tenants pay you. Security deposits do not count as income when you receive them — they belong to the tenant. However, if you keep part or all of a security deposit because of damage or unpaid rent, that amount becomes taxable income in the year you keep it.

Payments for late rent, pet fees, parking fees, and utility reimbursements all count as rental income. If a tenant pays you to break a lease early, that payment is also taxable. Even non-cash income counts — if a tenant pays rent by doing repairs or providing services, you must report the fair market value of that work as income.

Expenses you can deduct from rental income

The IRS allows you to deduct expenses that are ordinary and necessary for operating the rental. These reduce your taxable income dollar-for-dollar. Common deductible expenses include mortgage interest (not principal), property taxes, homeowners insurance, liability insurance, repairs and maintenance, utilities you pay, property management fees, advertising to find tenants, and legal or accounting fees related to the rental.

You can also deduct travel expenses directly related to managing the property, such as driving to fix a leak or meet a contractor. Office supplies, phone bills for a dedicated rental line, and software for tracking rent are deductible. Pest control, landscaping, snow removal, and HOA fees are deductible if you own the property.

One major deduction is depreciation. The IRS assumes rental buildings lose value over time and allows you to deduct a portion of the building's cost each year — typically over 27.5 years for residential rentals. You cannot depreciate the land itself, only the structure. Depreciation reduces your taxable income even though you don't spend cash, but it has a cost: when you sell the property, you may owe capital gains tax on the depreciation you claimed.

Expenses you cannot deduct

You cannot deduct mortgage principal payments, even though they reduce your equity. Principal is a personal investment in the property, not an operating expense. You also cannot deduct capital improvements — major upgrades like a new roof, new kitchen, or new HVAC system. These must be depreciated over time instead of deducted in one year.

Personal expenses are never deductible, even if the property is also your home. If you rent out one room in your primary residence, you cannot deduct the portion of your mortgage principal, property taxes, or insurance that relates to your personal living space — only the rental portion. Meals, entertainment, and vehicle expenses unrelated to the rental are not deductible.

Special rules for renting out a room in your home

If you rent out a room or rooms in your primary residence, you still must report the income. However, you can only deduct expenses that relate to the rental portion of the home. You calculate this by dividing the rental square footage by the total square footage.

For example, if your home is 2,000 square feet and you rent out one 200-square-foot bedroom, you can deduct 10 percent of your mortgage interest, property taxes, insurance, utilities, and maintenance. You can deduct 100 percent of expenses that benefit only the rental space, such as a lock on the bedroom door or furniture in that room.

The 15-day rental rule

If you rent out a property for fewer than 15 days per year, the income is still taxable, but different rules apply. You must report the income, but you generally cannot deduct rental expenses. This rule exists to prevent people from claiming large deductions on vacation homes they rarely rent.

However, if you rent for 15 days or more and use the property personally for more than 14 days per year (or more than 10 percent of the days it's rented, whichever is greater), the property is treated as a personal residence with rental use. In this case, you can deduct expenses only up to the amount of rental income you received — you cannot create a loss.

Record-keeping and IRS reporting

The IRS does not require you to file a specific form to report rental income, but you must report it on Schedule E (Supplemental Income and Loss), which attaches to your Form 1040 tax return. You list all rental properties, the income received, and all deductible expenses. The result is your net rental income or loss.

Keep records of all income and expenses for at least three years, though the IRS can go back six years if they suspect underreporting. Maintain copies of the lease, rent payment records, receipts for repairs and supplies, utility bills, insurance policies, mortgage statements, and property tax bills. Digital records, photos of repairs, and contractor invoices all count as documentation.

If you receive rent of $600 or more from a single tenant during the year, the tenant may receive a Form 1099-NEC or Form 1099-MISC from you (or a property manager). However, you must report all rental income regardless of whether a form is issued. Not receiving a 1099 does not mean the income is not taxable.

Rental losses and passive activity rules

If your deductible expenses exceed your rental income in a year, you have a rental loss. The rules for deducting this loss depend on your income level and whether you actively participate in managing the property. This is called the passive activity loss limitation.

If you actively participate in managing the rental (making decisions about tenants, repairs, and rent amounts), you can deduct up to $25,000 of rental losses against other income, such as wages or investment income. This deduction phases out if your modified adjusted gross income exceeds $100,000. If you do not actively participate or if your income is too high, losses are considered passive losses and can only offset other passive income, not wages or other income.

Unused losses can be carried forward to future years and used when you have rental income or when you sell the property. Understanding these rules is important because they affect how much of a loss you can actually use on your tax return.

Frequently Asked Questions

Do I have to report rental income if I only rented for a few months?

Yes. Any rental income, no matter how short the rental period, must be reported on your tax return. If you rented for just one month, that month's income is taxable. You can deduct expenses for the months the property was rented.

What if a tenant never paid the rent I'm owed?

Unpaid rent is not income, so you do not report it or pay tax on it. You can only deduct expenses you actually paid. If you later collect the unpaid rent in a future year, you report it as income in that year. If you write off the debt as uncollectible, you may be able to claim a bad debt deduction, but the rules are strict and require professional guidance.

Can I deduct the cost of furniture or appliances I provided in the rental?

Furniture and appliances are capital assets and must be depreciated over several years rather than deducted in full in the year you buy them. The depreciation period depends on the type of asset. Keep receipts and track the purchase date and cost for each item.

Do I owe self-employment tax on rental income?

No. Rental income is not subject to self-employment tax. You report it on Schedule E, and it is subject to regular income tax but not the additional 15.3 percent self-employment tax that applies to business income or freelance work.

What happens if I don't report rental income?

The IRS can audit your tax return and assess back taxes, interest, and penalties. Penalties for underreporting income can be 20 percent or more of the unpaid tax. If the IRS determines the underreporting was intentional, criminal charges are possible. Reporting all income, even if you owe tax, is always the safer choice.