How Is Rental Income Taxed? Understand Rates and Deductions

Each year, millions earn income from renting out homes and other types of real estate, either as a way to supplement other revenue or as their sole source of income. Like most other income, the IRS taxes the money you earn from rent, meaning landlords need to understand their tax responsibilities to ensure compliance. 

Rental income has a few unique considerations when it comes to taxation, including IRS filing deadlines and the upcoming expiration of certain tax provisions. In this guide, we’ll explain everything you need to know about how rental income is taxed, cover the best practices to maintain accurate financial records, and explore tax strategies for landlords to reduce their tax liability this year. Let’s take a look.

Key Takeaways

• Rental income is considered taxable, just like salaries, wages, and other forms of income.
• Unless you file taxes as a corporation, rental income is taxed at the standard individual tax rates (10% to 37%).
• To calculate total rental income, you must add all rents received, plus any advance rent payments, non-refunded deposits, fees collected, tenant-paid expenses that are the owner’s responsibility, and the values of services rendered instead of rent.
• Rental income is reported on Schedule E: Supplemental Income and Loss, which goes onto your Form 1040.
• You can claim a number of tax deductions from your rental income for various rental expenses.
• You may be able to claim a qualified business income (QBI) deduction of up to 20% of your rental income.
• One of the biggest tax perks for rental owners is depreciation, which allows you to recover the costs of buying and improving a rental property over its useful lifespan.

Table of Contents

• How Is Rental Income Taxed?
• How to Calculate Rental Income
• How to Report Rental Property Income on Your Tax Return
• Tax Deductions for Rental Property
• Qualified Business Income Deduction
• Rental Property Depreciation
• How to Calculate Rental Property Depreciation
• Keep Track of Rental Property Income and Expenses With FreshBooks
• FAQs About Rental Income Tax

How Is Rental Income Taxed?

In the eyes of the Internal Revenue Service, rental income is taxable income, just like wages or salaries. The IRS defines rental income as any payment you receive in exchange for using or occupying a piece of real estate you own. This means all your rental income is taxable, whether you rent out real estate full-time to tenants, occasionally on weekends through a short-term rental platform like Airbnb, or even on a day-by-day basis for events. 

Unless you file taxes as a corporation, like an S corporation or limited liability company (LLC), the IRS taxes your rental income at the standard individual tax rates. The same goes for those living in a state with a state income tax. For the 2024 tax year, the federal income tax rates are as follows:

2024 tax rate	Filing singly	Married filing jointly
10%	>$11,600	>$23,200
12%	$11,601–$47,150	$23,201–$94,300
22%	$47,151–$100,525	$94,301–$201,050
24%	$100,526–$191,950	$201,051–$383,900
32%	$191,951–$243,725	$383,901–$487,450
35%	$243,726–$609,350	$487,451–$731,200
37%	$609,351+	$731,201+

Remember that the IRS only taxes you at each rate for the portion of your income that exceeds the given threshold. In other words, if you make $50,000 in rental income in 2024, you would pay tax at 10% on the first $11,600, 12% on the portion between $11,601 and $47,150, and 22% on the remaining portion between $47,151 and $50,000.

How to Calculate Rental Income

You’ll need to organize and report all forms of income you earned related to rentals when calculating your rental income tax liability. These include:

• All rents received: All regular rent payments count towards your rental income.
• Advanced rent payments: Any payments you receive from tenants before the period they cover are considered taxable rental income. This includes situations where you collect the first and last month’s rent in advance.
• Lease cancellation payments: If you charge a tenant money in exchange for prematurely terminating their lease, you add this fee to your taxable income.
• Other fees: If you charge additional fees to tenants for having pets, extra parking spaces, or as a penalty for late rent payment, they’re added to your taxable rent income.
• Security deposits: Keeping any portion of your tenant’s security deposit to cover damages adds to your taxable income. If you return the entire deposit, however, you don’t have to pay taxes on it.
• Tenant-paid expenses: If your tenants pay for any costs you would typically be responsible for, add them to your taxable income. For example, if your tenant pays the utility bill and subtracts the amount from that month’s rent, you would add the reduced rent and the utility expense to your taxable income. This goes for any bill that the tenant isn’t obligated to pay.
• Services rendered instead of rent: If your tenant does work for you in exchange for a reduced rent cost, add the amount they would have paid to your taxable rent income.

In addition, the IRS requires you to report payments made as a “lease with the option to buy” agreement. You also must report all rental income you earn if you are only a part-owner of a rental property.

How to Report Rental Property Income on Your Tax Return

To report income from your rental property on your 2024 individual tax return, you’ll need to complete Schedule E: Supplemental Income and Loss. This form lets you report your rental income, expenses, and deductions. The total income or loss reported on Schedule E will carry over to your Form 1040.

You’ll also need to use Form 4562: Depreciation and Amortization to report depreciation of your rental property on your tax return. We’ll cover how to calculate rental property deduction below.

Tax Deductions for Rental Property

Although the IRS taxes rental income like any other form of ordinary income, you can lower your taxable income (and, therefore, your tax bill) by claiming several available rental property tax deductions. Here are a few common deductible rental expenses available to rental property owners:

• advertising costs incurred when searching for new tenants
• vehicle and travel expenses
• cleaning and maintenance of your rental properties
• dues paid to a homeowners association (HOA)
• insurance premiums
• legal and professional fees incurred
• mortgage interest
• property management expenses
• property taxes
• utilities

Generally speaking, you would claim these deductions in the same year you incurred the expense. You can also claim a deduction for the cost of buying and improving a property to rent it out, but this deduction works differently. You’re reimbursed gradually through depreciation rather than deducting the entire expense at once.

Qualified Business Income Deduction

Suppose you actively manage your rental properties and are considered a pass-through entity as a landlord. In that case, you may be eligible to claim another deduction for qualified business income or QBI. Some income thresholds restrict certain taxpayers from claiming this deduction—but if you qualify, you can deduct up to 20% of your rental income (before depreciation) from your tax liability. 

Rental Property Depreciation

One of the most significant tax breaks for rental income is property depreciation. This lets you deduct the costs associated with buying and improving a rental property throughout its useful life, lowering your tax liability over the years.

For a residential rental property built after 1986, the IRS considers its useful life 27.5 years. This means that when using the modified accelerated cost recovery system (MACRS), you spread your costs over 27.5 years. The rules are the same for commercial properties, only their depreciation has a longer period of 39 years. There are specific rules for property depreciation. The requirements you’ll have to meet to depreciate a rental property for tax purposes are:

• You must own the property (even if it’s subject to debt).
• You must use the property as a business or for an income-generating activity (such as renting it out).
• Your property must have a determinable, measurable, useful life (i.e., something that wears out, deteriorates, or otherwise loses its value over time).
• Your property must reasonably last at least 1 year.

If you and your rental property meet all 4 of these requirements, you can claim depreciation on your income taxes and save a significant amount of money on your taxes over the years. Remember that you can’t do this if you’re only renting land since the IRS doesn’t consider it a depreciable asset like a house or commercial building. 

How to Calculate Rental Property Depreciation 

Calculating real estate depreciation for a rental is a little more complex than dividing the costs you paid by its lifespan. Here’s how to calculate the depreciation of your rental for tax purposes:

• Determine the property’s basis: The basis is the amount you paid to acquire the property, whether with cash, a mortgage, or some other method. You can also include settlement fees and closing costs in this amount.
• Separate the cost of land from the price of buildings: Since land isn’t considered depreciable like buildings are, you have to subtract the cost of the land from the cost of the buildings on it. To do this, you can either use the fair market value of the buildings (i.e., the price the buildings alone would sell for in current market conditions) or base the amount on assessed real estate tax values.
• Calculate your basis in the building: With your overall property basis and the cost of the buildings determined, all you need to do is express the price of the buildings as a percentage of the cost of the buildings plus land, then apply that percentage to your total basis. For example, if you determined through a fair market assessment that the buildings make up 90% of the overall property value, you would depreciate 90% of your total basis on your taxes.

Keep Track of Rental Property Income and Expenses With FreshBooks

Rental income is subject to income tax like most other sources of earned money. However, you can significantly reduce your tax liability with a good understanding of the deductions you can claim for expenses, qualified business income, and depreciation. Of course, you’ll need to accurately track your costs and income throughout the year.

One way to simplify this task is with top-notch accounting software like FreshBooks. Our platform makes it easy to organize financial data, categorize expenses, track income, generate financial reports, and simplify the entire tax prep process for landlords. FreshBooks saves you valuable time on the financial management side of your properties, helping you remain tax-compliant while reducing your taxable income as much as possible. Thanks to its automated features and simple user interface, it’s one of the top options for landlords nationwide. Find out how we can help you track rental income: Try FreshBooks for free!

FAQs About Rental Income Tax

Are you still curious about the facts about rental income tax? Expand your knowledge with the answers to these frequently asked questions.

How Do I Avoid Reporting Rental Income?

The only way to get away with not reporting any rental income is to rent the property for less than 14 days out of the year. Assuming you, as the owner, spend at least 14 days of the year there, it’s a personal dwelling rather than a rental property.

What Is the Best Tax Structure for a Rental Property?

Most landlords opt to rent the property out under their own name since there are no additional tax benefits to doing so under an LLC. The main advantage of renting property as an LLC is the possibility of reduced liability for your other assets in case of a lawsuit.

How Does the IRS Know If I Have Rental Income?

The IRS can determine if you have rental income through third-party reporting, analyzing discrepancies in your reported income and expenses, audits and reviews, and examining public records.

Is Rental Income Passive Income?

Yes, the IRS generally considers rental income passive income. The exception is if you’re a real estate professional—meaning you spend at least 750 hours per year on real estate-related work.

What Happens if You Do Not Report Rental Income?

Failing to report rental income is tax evasion, meaning you risk severe fines, penalties, obligations to pay back taxes with interest, or even criminal charges.

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