Rental Income Taxes: What Landlords Need to Know
Rental real estate can be an excellent investment, but it comes with tax obligations that every landlord needs to understand. The good news is that the tax code offers significant deductions that can reduce or even eliminate the tax on your rental income.
What Counts as Rental Income?
- Monthly rent payments from tenants
- Advance rent (taxed in the year received, regardless of the period it covers)
- Security deposits kept or applied to final rent
- Tenant-paid expenses (like utilities the tenant pays on your behalf)
- Lease cancellation payments
Deductible Rental Expenses
- Mortgage interest on the rental property
- Property taxes
- Insurance premiums
- Repairs and maintenance (not improvements)
- Property management fees
- Advertising and tenant screening costs
- Travel expenses to manage the property
- Professional services (accountant, attorney)
Depreciation: Your Biggest Deduction
Residential rental property is depreciated over 27.5 years. This means you can deduct a portion of the property's cost every year, even though the property may be increasing in value. Depreciation often creates a paper loss that reduces your taxable rental income significantly.
Passive Activity Rules
Rental income is generally considered passive income. Losses can typically only offset other passive income. However, if your AGI is under $100,000 and you actively participate in managing the rental, you can deduct up to $25,000 in rental losses against your ordinary income.
Report rental income and expenses on Schedule E of your Form 1040. Keep detailed records of all income and expenses throughout the year.
