Rental income is taxed as ordinary income at your regular tax rate

Yes. Money you receive from renting out a property—whether it's a house, apartment, or room—counts as ordinary income on your federal tax return. The IRS taxes it at the same rate as wages or salary, which means it's added to your other income and taxed according to your overall tax bracket for the year.

This applies whether you rent the property full-time, part-time, or only occasionally. Even if you rent out a room in your home or lease a vacation property for a few months a year, that income must be reported. The key difference from employment income is that you can deduct certain expenses directly tied to the rental, which can lower the amount you actually owe tax on.

Key Takeaways

  • Rental income is taxed at your ordinary income tax rate, not a special rental rate, and is added to your total income for the year.
  • You must report all rental income on Schedule E (Form 1040), even if the property lost money or you only rented it for part of the year.
  • You can deduct expenses directly tied to the rental, such as mortgage interest, property taxes, repairs, insurance, and utilities, which reduces your taxable rental income.
  • Depreciation on the building itself (not the land) can be deducted each year, but you must recapture that depreciation as income when you sell the property.
  • State and local taxes on rental income vary by location, and some states have no income tax while others tax rental income at higher rates than the federal level.

How rental income is reported to the IRS

You report rental income on Schedule E (Form 1040), which is the IRS form for rental real estate, royalties, and other passive income. This form goes with your main tax return (Form 1040) and is filed with your federal return each year. You must file Schedule E even if the rental property lost money during the year.

On Schedule E, you list the address of the rental property, the gross rental income you received, and then subtract your allowable expenses. The result—your net rental income or loss—is then transferred to your main return and combined with your other income. If you own multiple rental properties, you file a separate Schedule E for each one (or list them all on one form if space allows).

The IRS considers you a rental business if you rent out property with the intent to make a profit. This is important because it determines which expenses you can deduct and how losses are treated. If you rent out a vacation home that you also use yourself, the rules are stricter and some expenses cannot be deducted.

Expenses you can deduct from rental income

The main advantage of owning rental property is that you can subtract business expenses from your gross rental income before calculating what you owe in tax. Common deductible expenses include mortgage interest (not principal), property taxes, homeowners insurance, repairs and maintenance, utilities you pay, property management fees, advertising to find tenants, and legal or accounting fees related to the rental.

Repairs are deductible in the year you make them. Improvements that add value or extend the life of the property—such as a new roof, new plumbing system, or room addition—are not deducted when ready. Instead, they are capitalized, meaning you deduct them over several years through depreciation.

You cannot deduct personal expenses, even if the property is partly your home. For example, if you rent out one room in a house you live in, you can deduct a portion of mortgage interest, property tax, and utilities based on the percentage of the home that is rented. You cannot deduct the cost of furniture in your own bedroom or meals you eat at home.

Depreciation and what happens when you sell

Depreciation is a deduction that lets you recover the cost of the building over time. You cannot depreciate the land itself—only the structure and improvements on it. For residential rental property, you depreciate the building cost over 27.5 years. This means if your building cost $200,000, you can deduct roughly $7,273 per year ($200,000 ÷ 27.5).

Depreciation is a powerful deduction because you claim it even though you are not spending money that year. However, there is a catch: when you sell the property, the IRS requires you to add back all the depreciation you claimed as income in the year of sale. This is called depreciation recapture, and it is taxed at a rate of 25 percent at the federal level, regardless of your regular tax bracket.

For example, if you claimed $80,000 in depreciation over ten years and then sell the property, you must report $80,000 as income in the year of sale. On top of that, you also owe capital gains tax on any profit from the sale price itself. This is why it is important to track depreciation carefully and understand the tax impact before you sell.

State and local taxes on rental income

In addition to federal income tax, you may owe state income tax on rental income. The amount varies significantly by state. Some states, such as Florida, Texas, and Wyoming, have no state income tax at all. Other states tax rental income at rates ranging from about 1 percent to over 13 percent, depending on your total income and the state.

A few states also impose property taxes specifically on rental income or have special rules for out-of-state owners. Some cities or counties may have local income taxes as well. You should check the tax rules in the state where the property is located, not just where you live, because rental income is often taxed in the state where the property sits.

If you own rental property in multiple states, you may need to file tax returns in each state. Some states offer credits to avoid double taxation if you pay tax to another state, but the rules are complex and vary. A tax professional familiar with multi-state rental income can help you understand what you owe.

Self-employment tax and rental income

Rental income is generally not subject to self-employment tax (Social Security and Medicare taxes), even though you are self-employed as a landlord. This is one advantage of passive rental income compared to running a business where you are actively involved.

However, if you provide substantial services to tenants—such as cleaning, laundry, or meals—the IRS may classify some of your income as active business income rather than passive rental income. In that case, part of it could be subject to self-employment tax. The line between passive rental income and active business income is not always clear, so if you provide services beyond typical landlord duties, consult a tax professional.

Rental losses and how they affect your taxes

If your rental expenses exceed your rental income in a given year, you have a rental loss. You can use this loss to offset other income on your tax return, which can lower your overall tax bill. However, there are limits on how much rental loss you can deduct in a single year.

If you are not a real estate professional (a specific IRS classification), you can deduct up to $25,000 in rental losses against other income, but only if your modified adjusted gross income is $100,000 or less. Above that income level, the deduction phases out and may disappear entirely. Any unused losses can be carried forward to future years and used when you have rental income again or when you sell the property.

Real estate professionals—people who spend more than half their working time in real estate and meet other IRS tests—can deduct unlimited rental losses. This is a significant advantage, but the IRS scrutinizes these claims carefully. If you think you might may have access to, work with a tax professional to document your status.

Frequently Asked Questions

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

Yes. Any rental income, no matter how short the rental period, must be reported on your tax return. Even if you rented a vacation home for two weeks, that income counts and must appear on Schedule E. The same rule applies to income from renting out a room, parking space, or storage area.

What if I rent out a property at a loss—do I still have to file Schedule E?

Yes. You must file Schedule E even if the property lost money. In fact, reporting the loss can reduce your overall tax bill if you are within the income limits for deducting rental losses. However, if your income is too high, you may not be able to deduct the loss in that year, though you can carry it forward.

Is the money my tenant pays for utilities that I collect reimbursement taxable?

If you collect utilities as a separate reimbursement and you are not making a profit on them, it is generally not taxable income. However, if you collect more than your actual utility costs, the excess is taxable rental income. Keep clear records of what you paid and what you collected to support your position if audited.

Can I deduct the cost of a new roof or major repair to the rental property?

It depends. A repair that fixes existing damage—such as patching a roof leak—is deductible in the year you do it. A replacement that adds value or extends the life of the property—such as replacing the entire roof—must be depreciated over several years. If you are unsure whether something is a repair or an improvement, a tax professional can help you determine the correct treatment.

What happens to rental income if I inherit a rental property?

You must report rental income from an inherited property just as you would from any other rental. However, inherited property receives a "step-up in basis," meaning the property's value is reset to its fair market value on the date of death. This can significantly reduce or eliminate capital gains tax if you sell the property soon after inheriting it. Depreciation recapture still applies to any depreciation you claim after you inherit the property.