Is Rental Income Taxable? How the IRS Taxes Landlords

Yes, rental income is taxable in the United States. You report it, along with your rental expenses, on Schedule E (Form 1040), and you pay income tax on the net profit. The good news is that the deductions are generous: mortgage interest, property taxes, insurance, repairs and depreciation often reduce taxable rental profit sharply, and sometimes produce a loss.

This guide follows IRS Publication 527, Residential Rental Property, and covers what counts as rental income, what you can deduct, the short-rental exception, how losses are limited, and a worked example with real numbers.

What counts as rental income

Rental income is more than the monthly rent. According to the IRS, you must include:

• Normal rent for the use of the property.
• Advance rent: include it in the year you receive it, whatever period it covers and whatever accounting method you use. Rent for January 2027 received in December 2026 is 2026 income.
• Security deposits you keep: a deposit you may have to return is not income when received. If you keep part of it for damage or because the tenant broke the lease, that part becomes income in the year you keep it. A deposit used as the final month's rent is advance rent.
• Expenses paid by the tenant: if the tenant pays one of your bills, such as a water bill or a repair, that payment is rental income (and you can deduct the expense if it is deductible).
• Lease cancellation payments from a tenant who ends the lease early.
• Property or services instead of rent: include the fair market value. If a tenant who is a painter paints your unit in exchange for a month's rent, that month's rent is income.

What you can deduct

You can deduct ordinary and necessary expenses of managing, conserving and maintaining the rental property, including:

• Mortgage interest on the rental (not the principal)
• Property taxes
• Insurance premiums
• Repairs and maintenance that keep the property in good working condition
• Property management fees, advertising and legal or accounting fees
• Utilities you pay for the tenant
• Travel to the property for rental business, using actual costs or the standard mileage rate
• Depreciation of the building and improvements

Depreciation: the deduction most landlords underuse

You cannot deduct the cost of the building in one go. Residential rental property is depreciated over 27.5 years using the mid-month convention. Land is never depreciated, so you split the purchase price between land and building. Depreciation starts when the property is placed in service, meaning ready and available for rent, and is reported on Form 4562. When you later sell, the depreciation you were allowed to claim reduces your basis whether or not you actually claimed it, so skipping it only costs you.

Repairs versus improvements

Fixing a leaking tap is a repair, deductible now. Replacing the whole roof or adding a bathroom is an improvement, which you capitalise and depreciate. The distinction is one of the most common audit adjustments for landlords.

Short rentals and personal use: the 14-day rules

If you also use the property yourself, for example a vacation home, special rules apply:

• Rented fewer than 15 days in the year: if the property is used as your residence and rented for fewer than 15 days, you do not report the rental income and do not deduct rental expenses.
• Personal use above the limit: the property counts as your residence if your personal use is more than the greater of 14 days or 10% of the days it is rented at a fair price. Then you must divide expenses between rental and personal use, and rental deductions are capped at rental income, with any excess carried forward.

Rental losses and the passive activity rules

Rental activities are generally passive, so a rental loss usually cannot offset wages or business income. There are two important exceptions in IRS Publication 925:

• The $25,000 special allowance: if you actively participate (for example, you approve tenants, set rents and approve repairs), you can deduct up to $25,000 of rental loss against other income. The allowance is reduced by 50% of your modified adjusted gross income above $100,000 and is gone at $150,000. Married people filing separately get a reduced allowance only if they lived apart all year, and none if they lived together at any time.
• Real estate professionals: if more than half of your personal services and more than 750 hours a year are in real property trades or businesses in which you materially participate, your rentals can be non-passive.

Losses you cannot use are not lost; they carry forward and are generally freed up when you sell the property. Separately, if you have a rental profit and higher income, you may owe the 3.8% net investment income tax on Form 8960.

Worked example: one rental condo

Dana owns a two-bedroom condo in Columbus that she rents out all of 2026 and manages herself. Her modified adjusted gross income from her salary is $95,000.

Income:

• Rent: $1,600 x 12 = $19,200
• Part of the previous tenant's deposit kept for carpet damage: $350
• Total rental income: $19,550

Expenses:

• Mortgage interest: $7,800
• Property tax: $3,100
• Insurance and HOA dues: $1,200
• Repairs (carpet patch, dishwasher repair): $1,450
• Depreciation: she allocated $210,000 of her cost to the building (the rest to land). $210,000 / 27.5 = about $7,636 for a full year.
• Total expenses: $21,186

Result: $19,550 - $21,186 = a rental loss of $1,636.

Because Dana actively participates and her MAGI is under $100,000, the full $1,636 loss is within the $25,000 special allowance and can offset her salary. Notice that before depreciation (and before mortgage principal, which is not deductible) her income of $19,550 minus cash expenses of $13,550 leaves $6,000, yet her taxable result is a loss. That is depreciation at work, and it is why tracking basis carefully matters.

Short-term rentals that look like a business

If you provide substantial services primarily for the guest's convenience, such as regular cleaning during stays, meals or concierge-style services, the IRS treats the activity more like a hotel business. The income then goes on Schedule C and may be subject to self-employment tax. Check Topic 414 and Publication 527 if you run a short-term rental with hotel-style service.

Outside the United States

Other countries tax rental income under their own rules. India, for example, taxes it under the head income from house property, with a flat 30% standard deduction on the net annual value of a let-out property instead of itemised repairs. If you own property abroad as a U.S. person, you generally report it on your U.S. return too, and may be able to claim a credit for foreign tax paid. Get advice in both countries.

Common mistakes

• Not depreciating the building, or depreciating the land
• Expensing improvements as repairs
• Forgetting advance rent, kept deposits or tenant-paid bills
• Deducting a rental loss without checking the passive activity limits
• Mixing personal and rental spending in one account

hellobooks< / a > -helps-landlords">How HelloBooks helps landlords

HelloBooks lets you tag every transaction by class, location or project, so each property gets its own profit and loss without separate files. Bank feeds bring in rent and expenses automatically and AI categorisation suggests the right accounts for your approval. The fixed assets register calculates straight-line depreciation for buildings and improvements, invoices with automated reminders keep rent on schedule, and the mileage tracker logs trips to your properties. At year-end you hand your CPA a clean per-property report that maps directly to Schedule E.

This is general information as of November 2026, not tax advice. Check IRS Publication 527 and Publication 925 or a qualified CPA for your situation.