Rental income is the money your tenant pays you, minus the expenses you can deduct
Rental income on your tax return is not the same as the rent check you deposit. The IRS wants to know your net rental income — what you actually keep after paying the costs of owning and maintaining the property. You report the full rent amount first, then subtract your deductible expenses to arrive at the number that gets taxed.
This matters because many landlords think they owe tax on the full monthly rent. In reality, you can deduct mortgage interest, property taxes, insurance, repairs, utilities you pay, advertising for tenants, and many other costs. The difference between gross rent and these deductions is what you report as taxable income.
The form you use is Schedule E (Form 1040), which asks for rental income on one line and expenses on another. You fill it out once per property, or combine multiple properties if you own several. If you have a mortgage, your lender will send you a Form 1098 showing the interest you paid — that goes into your deductions.
Key Takeaways
- Report the total rent your tenant paid, even if they paid late or you had to pursue collection.
- Subtract every expense directly tied to the property: mortgage interest, property tax, insurance, repairs, utilities, and advertising for tenants.
- Keep receipts and records for every deduction — the IRS asks for proof if you are audited.
- If you collect rent but do not yet have a tenant, or if a unit sits empty, you still report zero income for that period but can deduct the carrying costs.
- Depreciation is a separate deduction that reduces your taxable income but may affect what you owe when you sell the property.
What counts as rental income
Rental income includes any payment a tenant makes for the right to occupy your property. This is straightforward: if your lease says $1,500 per month and the tenant pays it, you report $1,500. If they pay $1,200 one month and $1,800 the next to catch up, you report both amounts in the year you receive them.
Rental income also includes payments for services that are part of the lease. If you charge a tenant $50 extra per month to cover water and sewer, that $50 is rental income. If you charge a pet fee of $200 upfront, that is rental income in the year you collect it. If a tenant pays you to break the lease early, that payment is rental income too.
Security deposits are not rental income. You hold them on behalf of the tenant and return them (or deduct damages) when they move out. If you keep part of a security deposit for unpaid rent or damage, that portion becomes rental income in the year you keep it. If you return the full deposit, you report nothing.
Rent you never collect is still tricky. If a tenant owes you $3,000 and moves out without paying, you report that $3,000 as income in the year it was due (not the year you eventually collect it, if you do). You can then deduct it as a bad debt loss on Schedule D, but only if you use the accrual method of accounting — most small landlords use the cash method, which means you report income only when you actually receive it.
Expenses you can deduct
The IRS divides rental expenses into two categories: those that reduce your current taxable income, and those that must be depreciated over time. For most landlords, the deductible expenses are straightforward.
Mortgage interest is deductible; principal payments are not. Your Form 1098 from your lender shows the interest you paid that year. Property taxes are fully deductible. Homeowners insurance and any liability coverage are deductible. Utilities you pay (electric, gas, water, trash) are deductible. Repairs — fixing a leaky roof, replacing a broken window, patching drywall — are deductible in the year you pay for them.
Advertising to find tenants is deductible: online listing fees, newspaper ads, signs. Property management fees if you hire someone to collect rent and handle maintenance are deductible. Legal and accounting fees related to the rental are deductible. HOA fees are deductible. Pest control, lawn care, and snow removal are deductible if you pay for them.
The line between repair and improvement matters. A repair keeps the property in its current condition; an improvement adds value or extends its life beyond the original. Replacing a broken window is a repair. Replacing all the windows with new energy-efficient ones is an improvement and must be depreciated. Fixing a roof leak is a repair. Replacing the entire roof is an improvement. When in doubt, if the cost is under $2,500 and fixes something that is broken, it is usually a repair.
Expenses you cannot deduct include principal on your mortgage, capital improvements (which must be depreciated), personal expenses (even if you work from home in the rental), and any cost that benefits you personally rather than the rental business.
Depreciation and how it works
Depreciation is a deduction that lets you write off the cost of the building and certain improvements over many years, even though you paid for them upfront. The building itself is depreciated over 27.5 years. Appliances, carpeting, and other fixtures are often depreciated over 5 to 7 years. A new roof or HVAC system is depreciated over 15 to 39 years depending on what it is.
You do not need to claim depreciation, but most landlords do because it reduces taxable income. The catch is that when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at a higher rate (25 percent, not your ordinary income rate). If you never claimed depreciation, you cannot go back and claim it later — the IRS assumes you did and taxes you on it anyway.
Calculating depreciation requires knowing the cost basis of the building (not the land), the date you placed it in service, and the category each improvement falls into. Many landlords hire a tax professional or use rental property software to handle this. If you do it yourself, you will need IRS Publication 946 (How to Depreciate Property).
Keeping records and organizing expenses
The IRS does not require you to send receipts with your tax return, but you must keep them for at least three years (six years if you underreport income by 25 percent or more). A receipt shows the date, the amount, what you paid for, and ideally who you paid.
Organize expenses by category as you go through the year. Use a spreadsheet or rental property software to track: mortgage payments (with interest and principal separated), property taxes, insurance, utilities, repairs, improvements, advertising, management fees, and any other costs. Take photos of receipts or scan them. If you pay by credit card or check, your bank statement serves as backup.
For improvements and depreciation, keep the receipt and a note about what was done and when. If you replaced the roof, save the invoice showing the date and cost. If you painted the interior, keep the painter's receipt. These records matter because the IRS may ask you to prove that a $5,000 expense was actually a repair (deductible now) and not an improvement (depreciated over time).
If you use accounting software like QuickBooks or a rental-specific tool, categorize each transaction as you enter it. At tax time, the software can generate a report showing your total expenses by category, which you can then transfer to Schedule E.
Reporting on Schedule E
Schedule E is a two-page form. You fill out one section per property. The form asks for the address, the type of property (single-family, apartment, etc.), and how many days the property was rented versus vacant.
Line 3 asks for your total rental income for the year. Line 5 asks for your total rental expenses. You list individual expenses on lines 8 through 27: advertising, auto and travel, cleaning and maintenance, commissions, insurance, mortgage interest, repairs, taxes, utilities, and others. If an expense does not fit a listed category, there is a line for "other."
You subtract total expenses from total income to get your net rental income or loss. If the number is positive, that is your taxable rental income. If it is negative, you have a rental loss, which can offset other income (subject to limits if your income is high).
If you own multiple properties, you file one Schedule E per property, or combine them all on one form if they fit. The total from all properties goes on your Form 1040.
Common mistakes that cost time and money
The most common mistake is reporting only the rent you actually deposited, forgetting that you received a check in December that you did not deposit until January. If you use the cash method (which most landlords do), you report income in the year you receive it, not the year it was due. If a tenant paid December rent in early January, that goes on next year's return.
Another mistake is deducting personal expenses. If you stay at the rental property for a weekend and deduct your meals, that is not allowed. If you use part of your home office to manage the rental, you cannot deduct your home office rent — but you can deduct the cost of a separate office space or a desk and chair you buy specifically for the rental business.
Mixing repair and improvement costs causes problems. Replacing one broken window is a repair. Replacing all the windows is an improvement. If you are unsure, err on the side of treating it as a repair (deductible now) rather than an improvement, because the IRS is more likely to accept that.
Failing to keep records is the biggest risk. If you are audited and cannot show a receipt for a $2,000 repair deduction, the IRS will disallow it. Keep every receipt, invoice, and bank statement related to the property for at least three years.
Frequently Asked Questions
Do I report rental income if my tenant did not pay rent?
If you use the cash method (most landlords do), you report income only when you actually receive it. If a tenant owes you rent but never pays, you do not report it as income. If you eventually collect it in a later year, you report it then. If you use the accrual method, you report it in the year it was due, but this is rare for small landlords.
Can I deduct the cost of furniture I bought for the rental?
Furniture is a capital asset and must be depreciated, not deducted when ready. If you bought a bed for $1,000, you depreciate it over five to seven years rather than deducting the full $1,000 in year one. Small items under $2,500 can sometimes be deducted when ready under Section 179, but this requires specific elections on your tax return.
What if I rented out the property for only part of the year?
Report the rent you received during the months it was rented. Deduct only the expenses you paid during those months. If the property was vacant, you can still deduct carrying costs like property tax and insurance, but not repairs or maintenance you did not actually pay for.
Do I report rent paid in cryptocurrency or other non-cash forms?
Yes. If a tenant pays you in cryptocurrency, stock, or any non-cash asset, you report the fair market value of that asset on the date you received it as rental income. You may owe tax on the value even though you did not receive dollars.
Can I deduct losses from my rental property against my regular job income?
Rental losses can offset other income, but there are limits. If your modified adjusted gross income is under $100,000, you can deduct up to $25,000 in rental losses. Above that, the deduction phases out and may be limited or eliminated. If you are a real estate professional (more than half your time and income come from real estate), different rules explore.