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

If you own a rental property and collect rent, the IRS treats that money as income. You must report it on your federal tax return, even if you receive it in cash, even if the tenant pays you informally, and even if you do not receive a 1099 form. The IRS expects you to report all rental income.

The amount you owe in taxes depends on your total income for the year, your filing status, and what expenses you can deduct. Most landlords do not pay taxes on the full rent amount — they subtract legitimate property expenses first, then pay taxes only on what remains.

Key Takeaways

  • You must report all rental income on your federal tax return, regardless of how you receive payment or whether you get a 1099 form.
  • You can deduct ordinary property expenses — mortgage interest, property taxes, repairs, insurance, utilities you pay, and depreciation — to reduce your taxable income.
  • Self-employment tax (Social Security and Medicare) applies to rental income in most cases, adding roughly 15.3 percent on top of regular income tax.
  • You report rental income and expenses on Schedule E, which attaches to your Form 1040, and you must file this form even if you have no taxable income after deductions.

What counts as rental income and what does not

Rental income is any money a tenant pays you for the right to live in or use your property. This includes monthly rent, deposits the tenant forfeits because they broke the lease, fees for late payment, and money tenants pay to break a lease early. If a tenant pays you in cash, by check, through a payment app, or any other way, it all counts.

Money that does not count as rental income includes a security deposit you hold and return to the tenant at move-out (though you do report it as income if you keep part of it for damage). Utility payments tenants reimburse you for are not rental income if the tenant is simply paying their own share — but if you bill them more than the actual utility cost, the overage is income.

If you provide furnished housing and the rent includes furniture, the entire rent amount is still rental income. You cannot separate out a "furniture fee" to avoid reporting it.

Deductions that reduce your taxable rental income

The IRS allows you to deduct ordinary and necessary expenses of operating a rental property. These reduce the amount of rental income you actually owe tax on. Common deductions include:

  • Mortgage interest (not the principal payment) on a loan used to buy or improve the rental property
  • Property taxes you pay to your local government
  • Insurance for the building, liability, or loss of rent
  • Repairs that restore the property to its previous condition (fixing a broken window, patching a roof leak, repainting a wall)
  • Maintenance costs like lawn care, snow removal, or pest control
  • Utilities you pay if the lease does not require the tenant to pay them
  • Advertising costs to find tenants
  • Property management fees if you hire someone to collect rent or handle repairs
  • Depreciation — a deduction for the building's wear over time (not the land)
  • Home office expenses if you use part of your home exclusively to manage the rental

You cannot deduct capital improvements — work that adds value to the property or extends its life, like a new roof, new kitchen, or room addition. Instead, you depreciate these over many years. The line between repair and improvement can be unclear; the IRS has specific rules, and a tax professional can help you decide what qualifies.

How depreciation works and why it matters

Depreciation is a deduction for the theoretical wear on your building over time. You do not actually spend money on depreciation — it is an accounting deduction. The IRS assumes residential rental buildings lose value over 27.5 years, so you can deduct roughly 3.6 percent of the building's cost each year (not including the land value).

Depreciation reduces your taxable income now, but it has a catch: when you sell the property, the IRS taxes you on the depreciation you claimed, even if the property actually went up in value. This tax is called depreciation recapture, and it is taxed at 25 percent, which is higher than your regular capital gains rate in many cases. A tax professional can show you whether depreciation makes sense for your situation.

Self-employment tax on rental income

In most cases, you also owe self-employment tax on rental income. This covers Social Security and Medicare and amounts to roughly 15.3 percent of your net rental income (after deductions). If you have a W-2 job, your employer already withholds Social Security and Medicare from your paycheck, but rental income is not subject to withholding, so you owe it when you file your return.

There are narrow exceptions: if you hire a property manager and do not actively participate in managing the property, you may not owe self-employment tax. If you own a corporation that owns the rental property, the rules differ. These situations are complex, and a tax professional should review your setup.

Reporting rental income on your tax return

You report rental income and expenses on Schedule E (Form 1040), which is a separate form that attaches to your main tax return. You list each property separately, report the total rent received, subtract your deductions, and arrive at a profit or loss for each property.

If you have a loss (deductions exceed income), you can use that loss to reduce other income on your return, though there are limits. Passive activity loss rules may prevent you from deducting a loss in the current year if your income is above certain thresholds, though you can carry the loss forward to future years.

You must file Schedule E even if you have no taxable income after deductions. The IRS wants to see the full picture of your rental activity. If you do not receive a 1099-NB or 1099-MISC from a tenant or property manager, you still report the income yourself — the absence of a form does not mean you skip reporting it.

State and local taxes on rental income

Most states tax rental income as part of your regular state income tax. Some states have no income tax at all (Florida, Texas, Wyoming, and others), so you would owe no state tax on rental income there. A few states tax rental income at a different rate than wages.

Local taxes vary widely. Some cities tax rental income, some tax the property itself, and some do both. You may also owe local property tax on the rental property itself, separate from income tax. Check your state and local tax authority websites or ask a tax professional in your area what you owe.

Frequently Asked Questions

Do I have to report rental income if I received cash and no one knows about it?

Yes. The IRS requires you to report all income, including cash rent. Not reporting it is tax evasion, which can result in penalties, interest, and criminal charges. The IRS can also audit you years later if they discover unreported income.

What if my rental property lost money this year?

You still file Schedule E and report the loss. You can use that loss to reduce your other income (wages, investment income) on your return, though passive activity loss limits may apply if your income is above certain thresholds. Losses you cannot use this year carry forward to future years.

Do I owe taxes on a security deposit I collect from a tenant?

Not if you return it. A security deposit is the tenant's money held in trust. If you return the full amount at move-out, it is not income. If you keep part of it for damage or unpaid rent, the amount you keep is rental income and must be reported.

Can I deduct the cost of a new roof or kitchen remodel?

Not in the year you pay for it. A new roof or kitchen is a capital improvement, not a repair. You depreciate it over many years instead. A repair — fixing a leak in an existing roof or repainting a wall — can be deducted in full in the year you pay for it.

What if I only rent out one room in my house?

You still report the rental income on Schedule E. You can deduct a portion of your home expenses (mortgage interest, property tax, utilities, insurance, repairs) based on the percentage of your home the rental room occupies. You cannot deduct personal expenses like your own bedroom or living room.