Federal tax on rental income starts at your ordinary income tax rate

Rental income is taxed as ordinary income, which means it is added to your wages, self-employment earnings, and other income, then taxed at whatever rate applies to your total. If you earn $50,000 in wages and $12,000 in rental income, the IRS taxes you on $62,000 total. Your rental income does not get a special lower rate — it uses the same federal brackets as your salary.

For 2024, federal tax brackets range from 10% to 37% depending on your total income and filing status. A single filer with $62,000 in income pays roughly 12% on the portion above $11,600 and 22% on the portion above $47,150. The exact amount depends on which bracket your rental income pushes you into. You can find current brackets on the IRS website, but the key point is that more rental income means you move into a higher bracket, so each additional dollar of rent may be taxed at a higher rate than the last.

Key Takeaways

  • Rental income is taxed at your ordinary federal income tax rate, which ranges from 10% to 37% in 2024 depending on your total income and filing status.
  • You can deduct mortgage interest, property taxes, repairs, utilities, insurance, and depreciation from your rental income before calculating what you owe in federal tax.
  • Self-employment tax (Social Security and Medicare) does not apply to rental income unless you are a real estate dealer or provide substantial services to tenants.
  • Most states tax rental income at their ordinary income tax rate, but some states have no income tax and a few have special rules for real estate income.
  • You must report all rental income on Schedule E of your federal tax return, even if you received no 1099 form from the tenant or property manager.

What deductions reduce your taxable rental income

The IRS lets you subtract certain expenses from your rental income before you calculate tax. These deductions lower the amount that actually gets taxed. Common deductions include mortgage interest (but not principal), property taxes, homeowners insurance, repairs and maintenance, utilities you pay, property management fees, advertising for tenants, and depreciation of the building itself.

Depreciation is a major deduction that many landlords overlook. You can deduct a portion of the building's value each year over 27.5 years (for residential property), even though you are not actually spending money. If your building is worth $300,000, you might deduct roughly $10,900 per year. This deduction reduces your taxable income without reducing your cash, which is why it matters. You cannot deduct the land value, only the building.

You cannot deduct capital improvements — major upgrades like a new roof or foundation repair. These must be added to your property's cost basis and depreciated over time instead. The line between repair (deductible) and improvement (capitalized) is often unclear, and the IRS has specific rules. A new roof is an improvement. Patching a leak is a repair. When in doubt, a tax professional can advise you on what counts.

State and local taxes on rental income vary widely

Most states tax rental income at their ordinary income tax rate, just like the federal government does. If your state has a 5% income tax, you pay 5% on your rental income (after deductions). 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).

A few states have special rules. California, for example, taxes rental income at ordinary rates but also imposes a net investment income tax of 3.8% on high earners. New York City charges an additional city income tax on top of state tax. Some states allow deductions for depreciation; others do not. Your state tax bill depends on where the property is located, not where you live, so a landlord in Florida renting a property in New York pays New York tax on that income.

Local property taxes are separate from income tax and are not deducted from your rental income for tax purposes — instead, you deduct them as an expense when calculating your taxable rental income. A property tax bill is a deduction; income tax is what you owe on the result.

How to report rental income on your tax return

You report rental income and expenses on Schedule E (Supplemental Income or Loss), which attaches to your Form 1040. Schedule E has lines for rental income, then separate sections for each type of expense: mortgage interest, property tax, utilities, repairs, depreciation, and others. You add up all expenses, subtract them from rental income, and the result is your net rental income or loss.

If you own multiple properties, you file a separate Schedule E for each one (or group them if they are in the same state). The net income or loss from each property flows to your main tax return and is added to your other income. If one property loses money and another makes money, you can offset them — a $5,000 loss on one property reduces the $8,000 gain on another, leaving $3,000 in taxable rental income.

You must report all rental income, even if you received no 1099 form and the tenant paid you in cash. The IRS expects you to track it yourself. If a property manager or tenant sends you a 1099-NEC or 1099-MISC, that is a copy of what they reported to the IRS, so your Schedule E must match or explain the difference.

Self-employment tax usually does not apply to rental income

Rental income is generally not subject to self-employment tax (the 15.3% Social Security and Medicare tax that self-employed people pay). You pay federal income tax on it, and state income tax if your state has one, but not self-employment tax. This is one advantage of rental income over business income — you avoid the extra 15.3% hit.

There is an exception: if you are a real estate dealer (someone who buys and sells properties frequently as a business, not just a landlord) or if you provide substantial services to tenants (such as maid service, meals, or other hotel-like services), the IRS may classify your income as self-employment income subject to that extra tax. Most landlords who simply collect rent and handle repairs do not fall into this category.

Losses from rental property and passive activity rules

If your expenses exceed your rental income, you have a loss. Rental losses are classified as passive losses by the IRS, which means you generally cannot use them to offset wages or other active income on your tax return. If you earn $60,000 in salary and have a $10,000 rental loss, you cannot simply subtract the loss and pay tax on $50,000. The loss is suspended and can only offset passive income (like income from another rental property) or be carried forward to future years.

There is a limited exception called the passive activity loss allowance. If you actively participate in managing the property (you make decisions about repairs, tenant selection, and rent amounts) and your modified adjusted gross income is below $100,000, you can deduct up to $25,000 of rental losses against your other income. This allowance phases out between $100,000 and $150,000 of income. Above $150,000, the allowance is gone and losses are fully suspended.

Real estate professionals — people who spend more than half their working time in real estate and meet other IRS tests — can treat rental losses as active losses and use them to offset other income without limits. This is a narrow category and requires careful documentation, but it can be valuable for people who may have access to.

Frequently Asked Questions

Do I have to pay tax on rental income if I only rent out one room?

Yes. Any rental income, whether from a full property or a single room, must be reported on your tax return. You can deduct expenses related to that room (a portion of utilities, property tax, insurance, and depreciation), and you pay tax on the net amount. The size of the rental does not change the reporting requirement.

What if my tenant paid me in cash and I did not report it?

The IRS expects you to report all income regardless of how you received it. If you did not report cash income in prior years, you can file amended returns (Form 1040-X) going back three years. Unreported income can result in penalties and interest if discovered during an audit. It is better to report it voluntarily than to wait.

Can I deduct the cost of buying the property?

No, not as a single deduction. The purchase price becomes your property's cost basis. You recover it through depreciation over 27.5 years (for residential property). Mortgage interest on the loan used to buy the property is deductible each year, but the principal you paid is not — it is part of your equity in the property.

Do I owe tax on security deposits I collect from tenants?

No, security deposits are not income because you are holding them on behalf of the tenant. They become income only if you keep part or all of the deposit (for unpaid rent or damage). If you return the full deposit, you report nothing. If you keep $500 of a $1,000 deposit for damage, that $500 is rental income and must be reported.

What happens if I sell the rental property?

The sale itself is not rental income — it is a capital gain or loss. You calculate it by subtracting your adjusted cost basis (the purchase price plus improvements, minus depreciation you claimed) from the sale price. Capital gains are taxed differently than rental income and may be subject to a 3.8% net investment income tax if your income is high. Consult a tax professional before selling to understand your liability.