Yes, rental income is taxed as ordinary income on your federal return

Any money you receive from renting out a property — whether it's a house, apartment, garage, or even a spare room — counts as taxable income. The IRS treats rental income the same way it treats wages or salary: you report it, and you owe federal income tax on it at your ordinary tax rate. This applies whether you rent the property for the full year, part of the year, or only occasionally.

The key difference from a job is that you also deduct your rental expenses before calculating what you actually owe tax on. If you spend money to maintain the property, pay property tax, or cover insurance, those costs reduce your taxable rental income. Many landlords end up owing less tax than they expect because they forget to claim these deductions.

Key Takeaways

  • All rental income must be reported on your federal tax return, even if you received it in cash or the tenant paid you informally.
  • You report rental income and expenses on Schedule E (Form 1040), not on your main 1040 form.
  • Deductible expenses include mortgage interest, property tax, insurance, repairs, utilities you pay, and depreciation — these reduce the income you owe tax on.
  • If your rental expenses exceed your rental income, you may be able to deduct the loss, though passive loss limits explore if your income is above certain thresholds.
  • State and local taxes may also explore to rental income, and rules vary by where the property is located.

Where rental income goes on your tax return

You report all rental income and expenses on Schedule E (Form 1040), titled "Supplemental Income or Loss." This is a separate form that attaches to your main 1040 return. You do not report rental income on the main 1040 itself.

Schedule E has two parts. Part I is for rental real estate income and loss — this is where most landlords report. You list each property separately if you own more than one. Part II covers royalties and other passive income, which does not explore to most rental situations.

When you file, you complete Schedule E, calculate your net rental income or loss, and then transfer that number to your main 1040 return. Tax software like TurboTax, H&R Block, or TaxAct will walk you through this automatically if you tell the program you have rental income. If you prepare your return by hand, you can read Schedule E from IRS.gov.

What counts as rental income

Rental income includes any payment you receive for allowing someone to use your property. This covers the obvious: monthly rent payments. But it also includes security deposits that you keep (not ones you return), advance rent payments, and payments for cancelling a lease early.

If a tenant pays you in goods or services instead of cash — for example, they paint the house instead of paying rent — that counts as income too, and you report it at fair market value. If you let someone live in the property rent-free in exchange for them maintaining it, that is also taxable income to you.

Payments you receive to cover utilities, parking, or other services are rental income. If you own a duplex and live in one unit while renting the other, only the income from the rented unit is taxable rental income.

Deductions that reduce your taxable rental income

The expenses you pay to own and maintain the rental property reduce your taxable income. Common deductible expenses include:

  • Mortgage interest (not the principal portion of your payment)
  • Property tax
  • Homeowners or landlord insurance
  • Repairs and maintenance (fixing a leaky roof, replacing a broken window)
  • Utilities you pay (electric, gas, water, trash)
  • Advertising to find tenants
  • Property management fees
  • Depreciation (a deduction for the building wearing out over time)
  • HOA fees or condo fees
  • Legal and accounting fees related to the rental

You cannot deduct capital improvements — work that adds value to the property or extends its life, like a new roof or new foundation. Instead, you depreciate these over many years. The line between a repair (deductible) and an improvement (depreciated) matters, and the IRS has specific rules. A new roof is an improvement. Patching a roof is a repair.

You also cannot deduct personal expenses. If you use part of your home as a rental office, you can deduct that portion of rent, utilities, and insurance — but only the percentage of the home that is actually used for business.

How depreciation works

Depreciation is a deduction that lets you write off the cost of the building itself over 27.5 years (for residential rental property). You do not deduct the land — only the structure. This is one of the largest deductions available to landlords, and many forget to claim it.

To calculate depreciation, you need to know the original purchase price, the portion of that price that was the building (not the land), and the year you placed the property in service as a rental. You then divide the building cost by 27.5 to get your annual depreciation deduction. Tax software calculates this for you if you provide the purchase price and date.

Depreciation reduces your taxable income year after year, even though you are not actually spending money. However, when you sell the property, the IRS recaptures the depreciation you claimed and taxes it at a higher rate (25% instead of your ordinary rate). This is why depreciation is powerful during the years you own the property but has a cost when you sell.

What happens if expenses exceed income

If your rental expenses are higher than your rental income, you have a rental loss. You can use this loss to reduce your other income (like wages or investment income) — but only up to certain limits.

If your modified adjusted gross income is $150,000 or less, you can deduct up to $25,000 of rental losses against your other income in a single year. This is called the passive activity loss limitation. If your income is above $150,000, the limit phases out, and at $200,000 and above, you cannot deduct rental losses against other income at all (though you can carry them forward to future years).

There is an exception: if you are a real estate professional (you spend more than half your working hours in real estate and more than 750 hours per year), you may be able to deduct all your losses. This is a specific IRS category and requires documentation.

State and local taxes on rental income

In addition to federal income tax, most states tax rental income. The rate and rules vary by state. Some states have no income tax at all (Florida, Texas, Wyoming, and others), so if your rental property is in one of those states, you owe no state income tax on the rental income. If the property is in a state with income tax, you report the same income and expenses to that state.

Some cities and counties also impose local income tax or rental tax. New York City, for example, has a city income tax that applies to rental income. A few jurisdictions have specific rental property taxes or transfer taxes. You need to check the rules for the state and locality where the property is located.

Frequently Asked Questions

Do I have to report rental income if I received it in cash?

Yes. The IRS requires you to report all income, regardless of how you received it. Cash income is still income. Not reporting it is tax evasion, which carries penalties and potential criminal charges. Report it on Schedule E like any other rental income.

What if I only rented out the property for part of the year?

You report the income and expenses for the months the property was rented. If you rented it for six months and left it vacant for six months, you report six months of rent and six months of expenses. Expenses for months when the property was vacant (like property tax or insurance) are still deductible if they relate to the rental activity.

Can I deduct the cost of furniture or appliances I bought for the rental?

Yes, but how depends on the cost and expected life. Items under $2,500 (or $5,000 if you make an election) can usually be deducted in full in the year you buy them. More expensive items are depreciated over several years. Keep receipts and document what you bought and when.

Do I owe self-employment tax on rental income?

No. Rental income is not subject to self-employment tax (Social Security and Medicare tax). You owe ordinary income tax, but not the additional 15.3% self-employment tax that applies to business income or wages. This is one advantage of rental income over running a business.

What if I have a loss in one year and income in another?

You report each year separately. If you have a loss in year one and income in year two, you cannot carry the loss back to reduce year one's taxes. You can carry unused losses forward to future years, subject to the passive activity loss limits. Keep records of any losses you could not deduct so you can use them later.