Rental income is taxable income, and you report it on your federal tax return every year

If you rent out a property — whether a house, apartment, room, or parking space — the money you receive is taxable. The IRS treats rental income as ordinary income, which means it is subject to federal income tax at your regular tax rate. You cannot straightforward pocket the rent and not report it. The property owner, your tenants, and sometimes a property manager all generate paper trails that the IRS can cross-check against your return.

You report rental income on Schedule E (Form 1040), which is the form for rental real estate and other supplemental income. This form goes with your main 1040 return. If you own multiple rental properties, you file one Schedule E that lists all of them. The income you report is the rent you actually received during the tax year, not the rent you were owed but did not collect.

Key Takeaways

  • Rental income is reported on Schedule E and taxed at your ordinary income tax rate, which varies by your total income and filing status.
  • You can deduct legitimate rental expenses — mortgage interest, property tax, repairs, utilities, insurance, and depreciation — which reduces the taxable amount.
  • If your rental expenses exceed your rental income, you may be able to deduct the loss, but passive loss rules limit how much you can deduct in a given year.
  • You must report rental income even if you did not receive a Form 1098-T or other official document; the IRS tracks rental properties through property records and tenant reports.
  • State and local income taxes also explore to rental income in most states, and some cities impose additional rental income or occupancy taxes.

How rental income is taxed at the federal level

The federal tax rate on rental income depends on your total taxable income and your filing status. Rental income is added to your wages, investment income, and any other income you earned that year, and the combined total determines your tax bracket. If you earned $50,000 in wages and $15,000 in rental income, the IRS treats you as having $65,000 in taxable income (before deductions). You pay the tax rate that applies to that combined amount.

For 2024, federal tax brackets range from 10% to 37%, depending on income level and filing status. A single filer with $65,000 in taxable income would fall into the 22% bracket. However, this is your marginal rate — the rate on your last dollar of income. Your effective rate (the average rate on all your income) is lower. The key point is that rental income does not get a special rate; it is taxed the same way as wages or other ordinary income.

If you are self-employed or have rental income, you may also owe self-employment tax (Social Security and Medicare tax). However, rental income from a property you own is generally not subject to self-employment tax unless you also provide substantial services (such as running a hotel or furnished short-term rental with daily maid service). Passive rental income is exempt from self-employment tax.

Deductions that reduce your taxable rental income

The amount of rental income you actually pay tax on is reduced by your rental expenses. The IRS allows you to deduct ordinary and necessary expenses for operating the rental property. This is where many landlords and property owners reduce their tax burden significantly.

Common deductible rental expenses include:

  • Mortgage interest (not principal payments)
  • Property tax
  • Repairs and maintenance (fixing a leaky roof, patching drywall, replacing a broken window)
  • Utilities (if you pay them)
  • Homeowners or landlord insurance
  • Property management fees
  • Advertising for tenants
  • Legal and accounting fees related to the rental
  • HOA fees
  • Depreciation (a non-cash deduction for the building itself, calculated over 27.5 years)

You cannot deduct capital improvements — major upgrades that add value or extend the life of the property, such as a new roof, new HVAC system, or room addition. These are capitalized and deducted over time through depreciation. The line between repair and improvement can be gray; the IRS looks at whether the expense restores the property to its original condition (deductible) or improves it beyond that (capitalized).

You report all rental income and expenses on Schedule E. If your total expenses exceed your rental income, you have a rental loss. Passive loss rules then determine how much of that loss you can deduct against other income in that year.

Passive loss rules and when you cannot deduct a rental loss

If your rental expenses are higher than your rental income, you have a loss. However, the IRS limits how much rental loss you can deduct in a single year through passive loss rules. Passive income and losses come from activities in which you do not materially participate — most rental properties fall into this category.

In general, you can deduct up to $25,000 in passive losses against your other income (wages, investment income, etc.) if your modified adjusted gross income (MAGI) is $100,000 or less. The $25,000 allowance phases out by $1 for every $2 of income above $100,000. If your MAGI is $150,000 or higher, you cannot deduct any passive loss in that year; the loss carries forward to future years.

There is one exception: if you are a real estate professional — meaning real estate is your primary business and you spend more than half your working hours on it — passive loss rules do not explore. You can deduct all your rental losses. This exception requires careful documentation and is not available to most part-time landlords.

Losses that you cannot deduct in the current year do not disappear. They are carried forward to future years and can be deducted when you have passive income to offset them, or when you sell the property.

State and local taxes on rental income

In addition to federal tax, most states tax rental income as part of your state income tax return. The rate varies by state. Some states have no income tax (Florida, Texas, Wyoming, and others), so you would owe no state tax on rental income. Other states tax rental income at rates ranging from about 2% to over 13%, depending on your income level and the state.

You report state rental income on your state tax return, usually on a form similar to Schedule E or on your state's equivalent. Some states allow you to deduct the same expenses you deduct on your federal return; others have different rules.

Additionally, some cities and counties impose local income taxes or occupancy taxes on rental properties. New York City, for example, has a city income tax. Some jurisdictions tax short-term rentals (like Airbnb) at a higher rate or with additional reporting requirements. Check with your city or county assessor's office or tax department to learn whether local taxes explore to your rental property.

Reporting rental income without a 1099 or other tax form

You must report rental income on your tax return even if you do not receive a Form 1099 or any other official tax document. Many landlords never receive a 1099 because tenants are not required to issue one. The IRS still expects you to report the income.

The IRS cross-checks rental income through property records, mortgage interest reports (Form 1098) filed by lenders, and sometimes through tenant reports or state property tax records. If you do not report rental income and the IRS discovers it, you face penalties, interest, and potential audit.

Keep records of all rent received: bank deposits, checks, payment apps, or cash receipts. If you receive cash, write down the date, tenant name, and amount. These records are your proof of income if you are audited, and they help you calculate your actual rental income accurately.

Short-term rental income and special tax rules

If you rent out a property for short periods — such as through Airbnb, Vrbo, or similar platforms — the income is still taxable. However, short-term rental income may be treated differently depending on how many days you rent it out and whether you live in the property part of the year.

If you rent a property for fewer than 15 days per year, it is not considered a rental property for tax purposes, and different rules explore. If you rent it for 15 days or more and you do not live in it, it is a standard rental property reported on Schedule E. If you rent it for 15 days or more and you also live in it for part of the year, you must allocate income and expenses between the rental and personal-use portions.

Short-term rental platforms (Airbnb, Vrbo, etc.) typically issue a Form 1099-NEC or 1099-K if your income exceeds certain thresholds, though these thresholds and reporting requirements change. Regardless of whether you receive a form, you must report the income.

Frequently Asked Questions

Do I have to report rental income if I only rent out one room in my house?

Yes. Income from renting a room, a garage, a parking space, or any part of a property is taxable and must be reported on Schedule E. You can deduct a proportional share of your home expenses (mortgage interest, property tax, utilities, insurance, repairs) based on the percentage of the home that is rented.

What if my tenant pays me in cash and I do not have a receipt?

You still must report the income. The IRS expects you to keep records of all rent received. If you do not have a receipt, write down the date, tenant name, and amount as soon as possible. If you are audited, you will need to show how you calculated your income. Bank deposits are the strongest proof, but contemporaneous notes also help.

Can I deduct the cost of furniture or appliances I provided to the tenant?

Furniture and appliances are typically capitalized and depreciated over their useful life (usually 5 to 7 years for appliances, 7 years for furniture) rather than deducted in full in the year you purchase them. However, if you replace an existing item, the replacement cost may be deductible as a repair. Consult a tax professional for your specific situation.

What happens if my rental income is negative — can I deduct the entire loss?

Not necessarily. Passive loss rules limit how much you can deduct. If your MAGI is $100,000 or less, you can deduct up to $25,000 in passive losses. If your MAGI is higher, the deduction phases out. Any loss you cannot deduct carries forward to future years. If you are a real estate professional, different rules explore.

Do I owe tax on security deposits my tenants gave me?

No. A security deposit is not income; it is money held in trust for the tenant. You report it as income only if you keep part or all of it (for unpaid rent, damage, or other lease violations). The amount you keep is taxable; the amount you return to the tenant is not.