Rental income is taxed as ordinary income at your regular tax rate, and you must report all of it on your federal return even if you receive it in cash

The IRS treats money you receive from renting out property — whether a house, apartment, room, or commercial space — as taxable income. You report it on Schedule E (Supplemental Income and Loss) when you file your federal tax return. The income is taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status. Unlike some investments, there is no special lower rate for rental income.

You do not owe tax on the full rent amount you collect. Instead, you subtract your legitimate expenses — mortgage interest, property taxes, repairs, insurance, utilities you pay, and depreciation — to arrive at your taxable profit. If your expenses exceed your rental income in a year, you may be able to deduct the loss, though rules about loss deductions have limits.

Key Takeaways

  • All rental income must be reported to the IRS on Schedule E, regardless of whether you receive payment by check, cash, or direct deposit.
  • You reduce your taxable rental income by subtracting legitimate expenses like mortgage interest, property taxes, repairs, insurance, and depreciation.
  • Rental income is taxed at your ordinary income tax rate (10% to 37%), not at a preferential capital gains rate.
  • If rental expenses exceed income, you may deduct the loss, but passive activity loss rules limit how much you can deduct in a single year.
  • You must file Schedule E with your Form 1040 and may also owe self-employment tax if you provide substantial services to tenants.

What counts as rental income

Rental income includes the monthly rent your tenant pays, but it also includes other payments tied to the property. Security deposits are not rental income — they belong to the tenant and are returned at move-out. However, if you keep part of a security deposit to cover damage or unpaid rent, that amount becomes taxable income in the year you keep it.

Payments for late rent, lease-breaking fees, and damage charges are all taxable income. If a tenant pays you to break a lease early, that money is rental income. If you charge a pet fee or parking fee, those are rental income too. Even if a tenant pays you in cash or cryptocurrency, you must report it. The IRS does not care how you received the money — only that you received it.

Rent you did not collect is not income. If a tenant stops paying and moves out without paying the final month, you cannot deduct that as a loss on your rental income (though you may be able to deduct it as a bad debt in some cases, which requires a separate process).

Expenses you can subtract from rental income

Mortgage interest is deductible, but principal payments are not. If your mortgage payment is $1,500 and $800 of that goes to interest, you deduct $800. The $700 principal payment reduces your equity but is not a tax deduction.

Property taxes paid to your state or local government are fully deductible. Insurance — landlord liability, property damage, loss of rent coverage — is deductible. Repairs that restore the property to its original condition are deductible (fixing a broken window, patching a roof leak, repainting a wall). Improvements that add value or extend the life of the property are not when ready deductible; instead, you depreciate them over many years.

Utilities you pay on behalf of tenants are deductible. Maintenance and cleaning costs are deductible. Advertising to find tenants, property management fees if you hire a company, and legal fees related to evictions or lease disputes are deductible. Depreciation — a deduction for the wear and tear on the building itself — is calculated using IRS tables and is one of the largest deductions available to landlords.

Expenses must be ordinary and necessary. You cannot deduct the cost of a vacation home you happen to rent out for two weeks a year, or personal expenses like your own meals or vehicle use unless the vehicle is used solely for property management.

How depreciation works

Depreciation is a deduction that lets you write off the cost of the building (not the land) over 27.5 years for residential property. If you bought a rental house for $300,000 and the land is worth $50,000, the building is worth $250,000. You divide $250,000 by 27.5 to get roughly $9,091 per year in depreciation deductions.

Depreciation reduces your taxable rental income each year, even though you do not spend any money. This is one reason rental property can show a loss on paper while you collect positive cash flow. However, when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at 25% (higher than your ordinary income rate in most cases). If you sold that house for $400,000 after five years, you would owe tax on the depreciation you deducted, even though you are selling at a gain.

Passive activity loss limits

If your rental expenses exceed your rental income, you have a loss. In most years, you cannot deduct more than $25,000 of rental losses against your other income (wages, business income, investment income). This limit applies if your modified adjusted gross income is $100,000 or less. The limit phases out by $1 for every $2 of income above $100,000, so at $150,000 in income, you can deduct $0 in losses.

There is an exception: if you are a real estate professional — meaning you spend more than half your working hours on real estate activities and more than 750 hours per year — you may be able to deduct all your losses. This is a narrow exception with strict documentation requirements.

Losses you cannot deduct in the current year do not disappear. They carry forward to future years and can offset rental income when you have it, or can be deducted in full when you sell the property.

Self-employment tax on rental income

In most cases, rental income is not subject to self-employment tax (the 15.3% Social Security and Medicare tax). You pay income tax on it, but not self-employment tax. However, if you provide substantial services to your tenants — for example, you operate a hotel, a furnished short-term rental with daily housekeeping, or a boarding house where you provide meals — the IRS may classify the income as business income subject to self-employment tax.

The line between rental income and business income is not always clear. If you rent out a single-family home to a long-term tenant with no services provided, it is clearly rental income. If you rent out rooms in your home and provide linens, cleaning, and meals, it is likely business income. If you are uncertain, a tax professional can review your specific situation.

Reporting rental income on your tax return

You report rental income and expenses on Schedule E, which attaches to your Form 1040. You list each property separately if you own multiple rentals. You enter your total rental income, subtract your expenses, and report the net profit or loss.

If you have a net profit, you pay income tax on it at your ordinary rate. If you have a net loss and meet the passive activity loss rules, you may deduct it. You file Schedule E with your 1040 by April 15 (or October 15 if you file an extension).

Keep records of all rental income and expenses for at least three years, though the IRS can go back six years or longer if it suspects underreporting. Records include lease agreements, bank statements showing deposits, receipts for repairs and maintenance, property tax bills, insurance policies, and mortgage statements showing interest paid.

State and local taxes on rental income

Most states tax rental income as ordinary income at their state income tax rate. Some states have no income tax (Florida, Texas, Wyoming, and others), so you owe federal tax only. A few states have special treatment for rental income — for example, some allow deductions for depreciation differently than the federal government, or have different rules for passive losses.

You may also owe local property tax on the rental property itself, which is deductible on your federal return. Some cities tax rental income directly. Check your state and local tax authority websites or consult a tax professional to understand what applies in your location.

Frequently Asked Questions

Do I have to report cash rent payments to the IRS?

Yes. The IRS requires you to report all rental income, regardless of how you receive it. Cash, checks, digital payments, and cryptocurrency all must be reported. Failure to report cash income is tax evasion and can result in penalties, interest, and criminal charges.

Can I deduct losses from my rental property against my job income?

Only up to $25,000 per year if your income is $100,000 or less. Above that, the limit phases out. Losses you cannot deduct carry forward and can offset future rental income or be deducted when you sell the property. If you are a real estate professional, different rules explore.

What is the difference between a repair and an improvement?

A repair restores the property to its original condition (fixing a leak, replacing a broken window). An improvement adds value or extends the life of the property (replacing the entire roof, adding a new room, upgrading to a new HVAC system). Repairs are deductible when ready; improvements must be depreciated over many years.

Do I owe self-employment tax on rental income?

Not usually. Rental income from a long-term lease is not subject to self-employment tax. However, if you provide substantial services — such as daily housekeeping, meals, or other personal services — the income may be classified as business income and subject to self-employment tax.

What happens to depreciation when I sell the rental property?

The IRS recaptures the depreciation you claimed and taxes it at 25%, even if you sell the property at a loss or break even. This is separate from any capital gains tax you owe on the appreciation of the property itself. Keep records of your depreciation deductions so you can calculate the recapture amount accurately.