Quick overview

Reporting rental income correctly is both a compliance task and a tax-planning opportunity. When done right you capture allowable expenses (mortgage interest, property taxes, repairs, depreciation), reduce taxable income, and limit audit exposure. When done poorly you risk missed deductions, penalties, and IRS inquiries. This article walks through the forms you’ll need, the most common deductions and depreciation rules, how to decide between Schedule E and Schedule C, what triggers audits, and practical recordkeeping and filing checklists.

Which IRS forms do landlords usually file?

  • Schedule E (Supplemental Income and Loss) — Most residential landlords report rental income and deductible expenses on Schedule E, which attaches to Form 1040. See the IRS overview for Schedule E for form details and line-item guidance (IRS, About Schedule E (Form 1040)). https://www.irs.gov/forms-pubs/about-schedule-e-form-1040

  • Form 4562 (Depreciation and Amortization) — Use Form 4562 to report depreciation and any Section 179 or bonus depreciation deductions related to rental property improvements or equipment. Residential rental real property is generally depreciated over 27.5 years using the MACRS system (IRS Publication 527). https://www.irs.gov/forms-pubs/about-form-4562 and https://www.irs.gov/publications/p527

  • Schedule C (Profit or Loss from Business) — Rarely, short-term rental activity or rentals that provide substantial services (daily cleaning, concierge, meals, etc.) may be treated as a business. In those situations you may report income and expenses on Schedule C, and the activity could be subject to self-employment tax. If you’re unsure which schedule applies, review whether your rental activity rises to the level of a trade or business; our guide comparing schedules can help: Choosing the Correct Schedule for Rental Income: Schedule E vs Schedule C.

  • Schedule SE (Self-Employment Tax) — If your rental income is reported on Schedule C because the activity is a business with substantial services, you may owe self-employment tax and must file Schedule SE. Otherwise, rents reported on Schedule E are typically not subject to self-employment tax (see IRS Schedule SE guidance). https://www.irs.gov/forms-pubs/about-schedule-se

Interlink: For a detailed breakdown of Schedule E line items and how to present rental income, see our glossary page: Schedule E (Supplemental Income and Loss).

What deductions can you claim against rental income?

Common deductible expenses for rental properties include:

  • Mortgage interest paid on loans for the rental property
  • Property taxes and other local real estate taxes
  • Insurance (landlord and liability policies)
  • Routine repairs and maintenance (painting, fixing leaks)
  • Property management fees and advertising costs
  • Utilities you pay for the rental
  • Professional fees (legal, accounting)
  • Homeowners association (HOA) fees
  • Depreciation on the building and qualifying improvements

Key distinction: repairs vs improvements. Repairs that keep the property in ordinary operating condition are deductible in the year paid. Improvements that add value or extend useful life are capitalized and depreciated over their recovery period. For residential rental buildings the recovery period is 27.5 years under MACRS (IRS Pub. 527). Use Form 4562 to report depreciation and to claim bonus or Section 179 in limited circumstances. See our depreciation resources: Form 4562 — Depreciation and Amortization and Depreciation basics.

How does passive activity and loss treatment affect rentals?

Most rental activities are treated as passive by default. Passive activity loss (PAL) rules generally limit the amount of rental losses you can use to offset nonpassive income (wages, business income). There are two common exceptions:

  • Active participation (the $25,000 special allowance): If you actively participate and your modified adjusted gross income (MAGI) is below phaseout thresholds, you may be able to deduct up to $25,000 of rental losses against nonpassive income. The allowance phases out at higher MAGI and phases out completely at higher income levels. (See IRS Pub. 527 for current rules.)

  • Real estate professional status: Taxpayers who qualify as a real estate professional and materially participate in rental operations may treat rental income and losses as nonpassive. This is a fact-intensive determination—document hours and duties carefully.

When is rental income taxable — and when might it be tax-free?

Most rent you receive for the use of property is taxable and must be reported. One important exception: if you rent out your personal residence for fewer than 15 days during the year and you use it as a residence, that income is not taxable and does not have to be reported (the “14‑day rule”). If the rental exceeds that threshold, you generally must report the income and allocate expenses between personal and rental use as required by IRS guidelines (IRS Pub. 527).

Short-term stays (Airbnb, VRBO) can complicate the analysis because of services provided, personal use days, and local business rules. If you provide substantial services (daily cleaning, meals, concierge), the IRS may treat the operation as a business.

Audit risks and red flags specific to rental returns

Common audit triggers include:

  • Large or repeated rental losses with little documentation or a record of not treating the activity as a business.
  • Excessive or inconsistent deductions relative to reported rental income (large contractor payments claimed without invoices).
  • Failing to reconcile amounts reported on informational returns (1099-MISC, 1099-NEC, 1099-K) with your tax return.
  • Taking personal expenses as rental deductions or failing to allocate between personal and rental use.

Practical steps to reduce audit risk:

  1. Keep contemporaneous, organized records: leases, rent ledgers, canceled checks, credit card statements, contractor invoices, receipts, and bank reconciliations.
  2. Maintain a depreciation schedule and supporting cost-basis documentation for each property (purchase agreement, settlement statement, capital improvements paperwork).
  3. Use a separate business bank account for rental cash flow when you manage multiple properties.
  4. Reconcile 1099s and tenant payments annually; correct any mismatches before filing.
  5. If you run short-term rentals with significant services, consult a CPA to confirm whether Schedule C and Schedule SE apply.

Practical filing checklist (step-by-step)

  1. Total gross rental income for each property (rent, nonrefundable fees, cancellation fees).
  2. Gather and categorize expenses by type (interest, taxes, insurance, repairs, management fees, utilities).
  3. Determine personal use days vs rental days and prorate deductible expenses when applicable.
  4. Determine repairs vs capital improvements; prepare a depreciation schedule for capitalized items and complete Form 4562 where needed.
  5. Complete Schedule E for each property (or Schedule C if activities meet the business test).
  6. Reconcile any 1099s and ensure totals match bank deposits and rent ledgers.
  7. Retain records for at least three years (longer if you claim depreciation or if you have an audit risk). The IRS recommends retaining records for the period in which they can question the return and for asset depreciation schedules (see IRS guidance).

Common mistakes I see in practice (and how to avoid them)

  • Mistake: Misclassifying a large capital improvement as a repair. Result: You miss depreciation deductions and increase current-year deduction incorrectly. Fix: Keep contractor contracts and invoices and treat value-adding work as capital improvements and depreciate.

  • Mistake: Ignoring personal-use allocation for vacation homes. Result: Overstated deductible expenses. Fix: Track calendar days carefully and prorate expenses.

  • Mistake: Not using Form 4562 for depreciation or starting depreciation in the wrong year. Result: Incorrect basis and recapture issues later. Fix: Use Form 4562 and maintain a perpetual depreciation schedule.

In my practice I also recommend periodic tax planning (at least annually) for rental portfolios—especially when buying, selling, or making large improvements to property. That planning often reveals strategies like cost segregation studies for larger properties or election timing for bonus depreciation.

What to do if the IRS contacts you or you need to amend

If you receive an IRS notice, read it carefully and respond within the time requested. Many notices request documentation or propose changes—respond with facts and documentation, or seek a tax professional’s help. If you discover an error on a filed return (omitted income or missed depreciation), you can file Form 1040-X to amend the return and correct the mistake. For depreciation errors there are specific correction procedures; see our article on amending returns for depreciation errors: https://finhelp.io/glossary/amending-a-return-for-depreciation-errors-on-rental-property/.

Final professional tips

  • Use accounting software or a ledger for each property; this dramatically cuts errors and simplifies audits.
  • Separate personal and rental funds and contracts to establish a clear record trail.
  • Keep receipts and invoices for at least as long as depreciation runs (27.5 years for residential buildings) or longer if you claim large credits or deductions.
  • Consult a CPA or tax attorney when you have a large purchase, sale, conversion of use (personal to rental or vice versa), or if you plan to claim real estate professional status.

This article is educational and reflects current IRS guidance (see IRS Publication 527 and the Schedule E page). It does not replace personalized tax advice. For decisions that affect your tax situation, consult a CPA or tax professional.

Authoritative sources

Note: This content is for educational purposes only and should not be relied on as individualized tax advice. Consult a licensed tax professional for guidance tailored to your situation.