Rental income is taxed as ordinary income at your regular federal tax rate, not at a special rental rate
The federal government does not have a separate tax bracket for rental income. Instead, the money you collect from tenants is added to your other income — wages, self-employment earnings, investment returns — and taxed at whatever rate applies to your total income for the year. If you are in the 22% federal tax bracket, rental income is taxed at 22%. If you are in the 12% bracket, it is taxed at 12%.
This matters because it means your rental income can push you into a higher tax bracket. If you earn $50,000 in wages and $30,000 in rental income, the IRS treats that as $80,000 of total income and taxes it accordingly. The rental portion does not get a discount.
State and local income taxes also apply to rental income in most states. The rate varies by where you own the property and where you live. Some states have no income tax at all; others tax rental income at rates between 3% and 13%. You owe tax to the state where the property is located, regardless of where you live.
Key Takeaways
- Rental income is taxed at your ordinary income tax rate — the same rate that applies to wages and other earnings — not at a special rental rate.
- Rental income can push you into a higher federal tax bracket, meaning the more you earn from rent, the higher percentage you may owe in federal tax.
- You owe state income tax on rental income in the state where the property sits, and rates range from 0% to 13% depending on the state.
- You can deduct operating expenses — repairs, property management, insurance, utilities you pay — which reduces the taxable rental income you report.
- Self-employment tax does not apply to rental income, but you may owe estimated tax payments four times per year if rental income is substantial.
Federal tax brackets for 2024 and how rental income fits in
The IRS uses tax brackets that change each year. For 2024, the federal brackets range from 10% at the lowest to 37% at the highest. Your bracket depends on your filing status (single, married filing jointly, head of household) and your total taxable income after deductions.
Rental income is added to your other income to determine which bracket you fall into. If you are single and earn $45,000 in wages, you are in the 22% bracket for 2024. If you then earn $20,000 in rental income, your total is $65,000, and you move into the 24% bracket. The rental income itself is taxed at 24%, not 22%.
The brackets are progressive, meaning only the income within each bracket is taxed at that rate. You do not pay 24% on all $65,000; you pay 10% on the first portion, 12% on the next portion, 22% on the next, and 24% only on the income above the 22% threshold. This is why rental income can increase your overall tax bill by more than the rental amount itself.
Deductions that reduce your taxable rental income
You do not pay tax on the full rent you collect. The IRS lets you deduct ordinary and necessary expenses of operating the rental property. These deductions reduce your taxable rental income dollar-for-dollar.
Common deductions include mortgage interest (not principal), property taxes, insurance, repairs and maintenance, utilities you pay, property management fees, advertising to find tenants, and depreciation of the building itself. If you spend $500 on repairs and $300 on insurance in a month, and collect $2,000 in rent, your taxable rental income for that month is $1,200, not $2,000.
Depreciation is a deduction that does not involve cash leaving your pocket. The IRS assumes the building loses value over time and lets you deduct a portion of the building's cost each year — typically over 27.5 years for residential rental property. This deduction can significantly reduce taxable income in the early years of ownership.
You cannot deduct capital improvements — major upgrades like a new roof or foundation repair — in the year you make them. Instead, you add the cost to your basis in the property and depreciate it over time. The line between repair (deductible now) and improvement (depreciated later) is often unclear, and the IRS scrutinizes this distinction.
State and local income tax on rental income
Most states tax rental income as ordinary income at rates that vary widely. California taxes rental income at rates up to 13.3%. New York taxes it at up to 10.9%. Texas, Florida, and several other states have no state income tax at all, so you owe only federal tax on rental income from property in those states.
You owe state tax in the state where the property is located. If you live in Florida (no income tax) but own a rental property in California, you owe California state income tax on the rental income from that property, even though you live in a no-tax state. You may also owe tax to your home state depending on its rules, though most states do not double-tax you.
Some cities and counties also impose local income taxes on rental income. New York City, for example, taxes rental income at rates up to 3.876% in addition to state tax. Check your local government's website or speak with a tax professional to learn what local taxes apply to your specific property.
Self-employment tax and estimated payments
Rental income 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 freelance work. You do not owe the 15.3% self-employment tax on rental earnings.
However, if your rental income is substantial, you likely owe estimated tax payments. The IRS expects you to pay tax throughout the year, not just when you file your return. If you will owe $1,000 or more in federal income tax on your rental income for the year, you should make quarterly estimated payments on April 15, June 15, September 15, and January 15.
Underpayment of estimated tax can result in penalties and interest, even if you ultimately owe the full amount when you file. Many landlords calculate estimated payments based on the previous year's rental income and adjust if circumstances change. A tax professional can help you determine the correct amount.
How to report rental income on your tax return
Rental income and expenses are reported on Schedule E (Supplemental Income and Loss), which you attach to your Form 1040 federal tax return. You list the property address, the gross rent collected, and each category of deductible expenses. The form calculates your net rental income or loss.
If you own multiple rental properties, you file a separate Schedule E for each one. If you have a loss in one year — expenses exceed rent collected — you can generally deduct that loss against other income, though passive loss rules may limit the deduction in some cases.
You must also report rental income on your state tax return using your state's equivalent form. Most states follow federal rules for what is deductible, but some have differences. Keep detailed records of all rent collected and all expenses paid, including receipts, invoices, and bank statements. The IRS can audit rental income years after you file, so documentation matters.
Frequently Asked Questions
Do I owe tax on rental income if I only rent out one room in my house?
Yes. Any rental income — whether from a single room, a basement apartment, or a full house — is taxable. You report it on Schedule E and can deduct a proportional share of expenses (mortgage interest, property tax, insurance, utilities, repairs) based on the percentage of the house used for rental.
What if my rental expenses exceed my rental income in a year?
You have a rental loss. You can deduct this loss against other income (wages, investment income) on your tax return, though passive loss rules may limit the deduction to $25,000 per year if your income exceeds certain thresholds. Unused losses carry forward to future years.
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 and must return them (or a portion) when the lease ends. Only amounts you keep as rent or to cover damage beyond normal wear are taxable income.
Can I deduct the cost of a new furnace or roof?
No, not in the year you install it. These are capital improvements, not repairs. You add the cost to your basis in the property and depreciate it over time — typically 27.5 years for residential rental property. A repair to an existing furnace or roof is deductible in the year you pay for it.
What happens if I do not report rental income?
The IRS can assess back taxes, penalties, and interest if you underreport or fail to report rental income. The statute of limitations is generally three years, but can extend to six years or longer if the underreporting is substantial. Penalties can reach 75% of the unpaid tax in fraud cases.