Learn How To Calculate Tax On Rental Income (2026)

What Counts as Rental Income?

You don’t want to end up paying taxes on income that shouldn’t be taxed in the first place. But did you know that the monthly rent checks you get from tenants aren’t the only thing classified as rent?

These are a few expenses the Internal Revenue Service (IRS) counts as rental income:

• Rent paid in advance (even if it’s to rent the property in the next calendar year)
• Money paid to cancel a lease
• Utility payments made to you

If you keep any portion of a tenant’s security deposit, you typically will need to report that amount as rent, too.

How Rental Income Is Taxed

The IRS taxes your rental income as ordinary income. This means that if you have a W-2 job, you would add your rental income to that income. Total income determines your marginal tax bracket.

Common Rental Property Tax Deductions

Tax deductions can lower how much you owe in taxes. These are some common deductions for landlords:

• Materials needed for routine maintenance
• Landlord insurance
• Mortgage interest
• Property depreciation
• Property tax
• Cost of repairs
• Advertising costs

This isn’t an exhaustive list. Your tax professional might be able to help you identify additional deductions.

Repairs vs. Improvements for Tax Purposes

You can deduct the cost of necessary repairs and routine maintenance right away. However, if you make an improvement to the property (like adding a deck or a new roof), you wouldn’t deduct the cost in the year you add it.

Instead, the improvement adds to the value of the property and then depreciates over time. Improvements on rental properties usually depreciate over 27.5 years.

How Depreciation Lowers Your Taxable Income

Don’t forget to factor in rental property depreciation when calculating taxes. For residential rentals, the IRS uses the General Depreciation System (GDS), which calculates depreciation in a straight line over 27.5 years.

In practice, GDS usually results in you deducting around 3.6% of the home’s depreciable value each year.

Passive Loss Limits on Rental Losses

When you deduct expenses from rental income, you’re offsetting gains with business losses. The IRS allows you to use rental losses to offset gains in other types of passive income. However, you can’t use rental losses to offset non-passive income (like money you make at a traditional job).

How to Report Rental Income on Schedule E

Schedule E is a tax form attached to your main tax return (Form 1040). It will ask you to enter the total rent received and then list and deduct all relevant deductions.

The Importance of Accuracy

Calculating tax on your rental income might seem like just another of your many landlord responsibilities. However, the importance of accuracy can’t be overstated. Working with a tax professional can give you the peace of mind that comes with knowing your taxes are done right.