Rental income is taxed as ordinary income, not at a special capital gains rate
The tax rate on rental income depends on your total income for the year and your filing status. The IRS treats rent you collect as ordinary income, which means it is taxed using the same brackets as wages or salary. If you rent out a house, apartment, or room, the money you receive goes into your income total, and you pay tax at whatever bracket that total puts you in — not at a flat percentage.
For 2024, the federal tax brackets range from 10% to 37%, depending on how much total income you report. A person filing as single with $50,000 in rental income will pay a different rate than someone with $200,000. Your state may also tax rental income, and some states tax it differently than federal tax does.
The key point: you do not pay tax on the full rent you collect. You subtract your expenses first — mortgage interest, property taxes, repairs, utilities, insurance, and depreciation — and pay tax only on what remains.
Key Takeaways
- Rental income is taxed at your ordinary income tax rate, which ranges from 10% to 37% federally depending on your total income and filing status.
- You report rental income on Schedule E (Form 1040), and you subtract all allowable expenses before calculating the tax you owe.
- Common deductible expenses include mortgage interest, property taxes, repairs, utilities, insurance, and depreciation — but not the principal portion of your mortgage payment.
- If you have a loss after expenses, you may be able to deduct it against other income, though passive activity loss rules can limit this.
- State income tax on rental income varies widely; some states do not tax it, and others tax it at a different rate than federal tax.
Federal tax brackets for rental income in 2024
The IRS applies the same tax brackets to rental income as to any other income. Your rental income is added to wages, interest, dividends, and other sources, and the total determines your bracket. For 2024, here are the federal brackets for single filers:
| Income Range | Tax Rate |
|---|---|
| $0 to $11,600 | 10% |
| $11,601 to $47,150 | 12% |
| $47,151 to $100,525 | 22% |
| $100,526 to $191,950 | 24% |
| $191,951 to $243,725 | 32% |
| $243,726 to $609,350 | 35% |
| $609,351 and above | 37% |
If you file as married filing jointly, the ranges are wider. If you file as head of household, they fall in between. These brackets adjust each year for inflation, so the numbers for 2025 will be slightly different.
Example: if you are single and earn $40,000 in wages plus $15,000 in net rental income, your total taxable income is $55,000. You fall into the 22% bracket, so your rental income is taxed at 22%, not at a separate rate.
What expenses you can deduct from rental income
You report rental income and expenses on Schedule E, which attaches to your Form 1040. The IRS allows you to deduct any ordinary and necessary expense of operating the rental property. This means you subtract these costs before calculating your taxable rental income.
Common deductible expenses include:
- Mortgage interest (not the principal payment)
- Property taxes
- Repairs and maintenance
- Utilities (if you pay them)
- Insurance premiums
- Depreciation (a non-cash deduction based on the building's value)
- Advertising for tenants
- Property management fees
- Homeowners association fees
- Cleaning and trash removal
- Condo or co-op fees
You cannot deduct the principal portion of your mortgage payment, because that is a return of your own capital. You also cannot deduct capital improvements — major upgrades like a new roof or foundation — in the year you make them. Instead, you depreciate them over many years.
If your total expenses exceed your rental income, you have a loss. Whether you can deduct that loss against your other income depends on passive activity loss rules and your income level.
How depreciation works and why it matters
Depreciation is a deduction that reduces your taxable rental income without requiring you to spend money in that year. The IRS assumes buildings wear out over time, and it lets you deduct a portion of the building's cost each year.
You cannot depreciate the land — only the building and improvements. If you bought a rental house for $300,000 and the land was worth $100,000, you depreciate $200,000. Residential rental property is depreciated over 27.5 years, which means you deduct roughly 3.6% of the building's cost each year.
Depreciation reduces your taxable income now, but it has a cost later. When you sell the property, the IRS recaptures the depreciation you claimed and taxes it at 25% — higher than your ordinary income rate. This is called depreciation recapture. If you claimed $50,000 in depreciation over the years, you will owe tax on that $50,000 when you sell, even if the property did not actually increase in value.
State and local taxes on rental income
Most states tax rental income as ordinary income, using their own brackets and rates. Some states do not tax income at all — Florida, Texas, Nevada, South Dakota, Tennessee, Washington, and Wyoming have no state income tax. If you own rental property in one of these states, you owe only federal tax on the rental income.
Other states tax rental income at rates ranging from roughly 3% to 13%, depending on the state and your total income. A few states tax rental income differently than wages — for example, some tax capital gains at a lower rate than ordinary income, but rental income is still treated as ordinary income in those states.
You also may owe local income tax if your city or county collects it. Some cities in Ohio, Pennsylvania, and other states impose local income tax on rental income. Check your state and local tax authority websites to learn the rates that explore to your property.
Self-employment tax does not explore to rental income
Rental income is not subject to self-employment tax, even if you actively manage the property yourself. Self-employment tax (Social Security and Medicare tax) applies to income from a business or trade where you provide services. Collecting rent is considered passive income, so you do not owe the 15.3% self-employment tax on it.
This is one advantage of rental income over business income. If you earn $50,000 as a freelancer or consultant, you owe self-employment tax on top of income tax. If you earn $50,000 in net rental income, you owe only income tax.
However, if you provide substantial services — for example, you operate a hotel or short-term rental where you clean rooms, provide meals, or offer other services — the IRS may reclassify the income as business income subject to self-employment tax. The line between passive rental income and active business income can be unclear, so consult a tax professional if you are unsure.
Passive activity loss limits and how they affect you
If your rental expenses exceed your rental income, you have a loss. The IRS limits how much rental loss you can deduct against your other income in a given year, using rules called passive activity loss limits.
If you are not a real estate professional, you can deduct up to $25,000 in rental losses against your other income (wages, interest, dividends) in a year, but only if your modified adjusted gross income is $100,000 or less. The $25,000 limit phases out as your income rises above $100,000, and it disappears entirely at $150,000 or more. Any losses you cannot deduct carry forward to future years.
If you may have access to as a real estate professional — meaning you spend more than half your working hours in real estate and more than 750 hours per year in real estate activities — you can deduct all your rental losses against other income with no dollar limit. This is a specific IRS definition, and you must keep detailed records to prove it.
How to report rental income on your tax return
You report rental income and expenses on Schedule E (Form 1040), Supplemental Income or Loss. This form has separate sections for each property you own. You list the rental income at the top, then list each category of expense below it, and the form calculates your net rental income or loss.
You will need to gather your rental records for the year: rent payments received, mortgage statements (to find the interest portion), property tax bills, insurance bills, repair invoices, utility bills, and any other expenses. If you use accounting software or a spreadsheet, organize these by category as you go through the year — it makes tax time much faster.
If you have a mortgage on the rental property, your lender will send you a Form 1098 showing the interest you paid that year. Use this figure on Schedule E. If you paid property taxes, you may see them on a property tax bill or a Form 1098-T if you paid them through escrow.
Schedule E also asks whether the property was rented for the entire year, and whether you or your family used it for personal purposes. If you rented it for only part of the year or used it yourself, you must allocate expenses between the rental and personal portions.
Frequently Asked Questions
Do I have to report rental income if I only rented the property for a few months?
Yes. Any rental income you receive must be reported, even if you rented the property for only one month or one week. You report the income on Schedule E and deduct the expenses for the months it was rented. If you used the property for personal purposes during other months, you allocate expenses between the rental and personal use.
What if I have a loss on my rental property — can I deduct it?
You can deduct up to $25,000 in rental losses against your other income if your modified adjusted gross income is $100,000 or less. The limit phases out above $100,000 and disappears at $150,000. Losses you cannot deduct carry forward to future years. If you are a real estate professional, you can deduct all losses with no limit.
Is the rent I collect from a roommate or family member taxable?
Yes, if you are charging fair market rent and operating it as a rental business. If you are charging below-market rent or the arrangement is informal, the IRS may still consider it taxable income. The safest approach is to report all rent you collect and deduct your expenses. If you are unsure, consult a tax professional.
Do I owe tax on security deposits I collect from tenants?
No. A security deposit is not income because you are holding it on behalf of the tenant and will return it (or part of it) when they move out. You report it as income only if you keep part or all of it — for example, to cover damage or unpaid rent. When you return the deposit, you do not deduct it as an expense.
Can I deduct the cost of furniture or appliances I provide to tenants?
You can deduct the cost in the year you buy them if they are inexpensive items (under $2,500 per item for most taxpayers). If they are more expensive, you depreciate them over their useful life — typically 5 to 7 years for furniture and appliances. Keep receipts and track what you bought and when.