Overview
Accurate reporting of rental income affects your taxable income, eligibility for deductions, and exposure to audits. The IRS treats rental revenue as ordinary income that you generally report on Schedule E (Form 1040). You can subtract allowable expenses — including depreciation — to determine taxable rental profit. This guide explains what counts as rental income, common deductible expenses, recordkeeping best practices, and important limits (passive activity rules, depreciation, and special short‑term rental rules).
Sources: IRS Topic 414 (Rental Income) and Publication 527 (Residential Rental Property) explain the fundamentals and are current as of 2025.
What counts as rental income?
Include any payment you receive for the use of your property. Common items that the IRS treats as rental income include:
- Monthly or periodic rent payments from tenants.
- Advance rent (rent you receive before the period it covers).
- Nonrefundable security deposits (generally taxable when not returned or applied to rent; refundable deposits held as true security are not income while still refundable).
- Cancellation or termination fees paid by a tenant or booking platform.
- Payments for utilities, services, or property use paid by tenants when the owner does not reimburse those amounts.
- Payments in kind — for example, trade for services or property — measured at fair market value.
- Rent received through third‑party platforms; amounts reported to you on Form 1099‑MISC (box 1) should be included.
Exceptions and nuances:
- Short personal use of a rental (for example, renting your home fewer than 15 days a year) may be excluded for a vacation home under IRC section 280A(g). See IRS Publication 527 for specific rules.
- Security deposits that are fully refundable remain a liability, not income, until applied to rent or damages.
Where and how you report it
Most individual landlords report rental income and expenses on Schedule E (Supplemental Income and Loss) of Form 1040. For residential rental property you typically:
- List gross rents received.
- Subtract allowable expenses to arrive at net rental income (or loss).
- Complete Form 4562 to calculate depreciation claimed in the year you place the property in service.
If you operate a larger rental enterprise and materially participate, or if rentals rise to the level of a trade or business, some items (including qualified business income considerations) may be reported differently. If you receive rent from a business payer, the payer may issue Form 1099‑MISC (box 1). Check the payer’s reporting and retain copies for your records.
Authoritative references: IRS Publication 527 and Form 4562 instructions.
Deductible expenses landlords commonly claim
Landlords can deduct ordinary and necessary expenses incurred to manage, conserve, and maintain rental property. Common deductible items include:
- Mortgage interest on loans used to purchase or substantially improve the rental property.
- Property taxes assessed by state, local, or foreign governments.
- Repairs and maintenance (costs that keep the property in ordinary operating condition).
- Insurance premiums for the rental property.
- Utilities paid by the owner while renting the property.
- Property management or leasing fees and advertising costs.
- Professional fees (accounting, legal) related to the rental activity.
- Supplies and small tools used for property upkeep.
- HOA or condominium fees paid for rental units.
- Travel and mileage for rental‑related trips (document purpose, date, and miles).
- Casualty and theft losses attributable to the rental (subject to rules in Pub 547).
Capital expenses vs. repairs:
- Repairs are deductible in the year incurred.
- Improvements that add value or prolong life are capitalized and generally depreciated over time.
Depreciation is a critical deduction for rental property. For residential rental property, the IRS uses a 27.5‑year Modified Accelerated Cost Recovery System (MACRS) recovery period (nonresidential property is 39 years). You claim depreciation on Form 4562; land cannot be depreciated. See our deeper guidance on depreciation for calculations and cost segregation strategies: Depreciation. Also review considerations on recapture when you sell: Depreciation Recapture.
Passive activity rules and loss limits
Rental activities are generally treated as passive under IRC section 469, which affects your ability to use rental losses to offset other income. Key points:
- Passive Loss Rule: Passive losses usually can only offset passive income. If losses exceed passive income, they’re suspended and carried forward until there’s passive income or you dispose of the property in a taxable transaction.
- Active Participation Exception: If you actively participate in the rental activity and your modified adjusted gross income (MAGI) is $100,000 or less, you can deduct up to $25,000 of rental losses against nonpassive income. The allowance phases out between $100,000 and $150,000 MAGI.
- Real Estate Professional: Taxpayers who qualify as real estate professionals and materially participate can treat rental losses as nonpassive, potentially allowing full offset against other income. The rules are narrow — document hours and duties.
See IRS Publication 925 (Passive Activity and At‑Risk Rules) for details.
Short‑term rentals and special cases
Short‑term rentals (Airbnb, VRBO) require extra attention:
- If you provide substantial services (daily cleaning, breakfasts, concierge-style services), the IRS may treat income as non‑rental business income subject to self‑employment tax.
- Renting your personal residence for a short period: the 14‑15 day rule (see Pub 527) can exclude income if conditions are met.
Recordkeeping checklist
Good records reduce audit risk and help substantiate deductions.
- Maintain a separate ledger or software record of gross rents received and dates.
- Keep receipts and invoices for repairs, supplies, and improvements.
- Preserve bank statements and cancelled checks for rental deposits and payments.
- Keep copies of contracts, leases, and correspondence with tenants or management companies.
- Track mileage with date, purpose, and miles; log travel expenses related to the rental.
- Retain documentation supporting allocation of expenses between personal and rental use.
IRS or state audits often pivot on documentation. In my practice, the single best audit defense is contemporaneous records that show business purpose and amounts.
Common mistakes to avoid
- Misclassifying capital improvements as repairs (or vice versa).
- Failing to report advance rent, cancellation fees, or noncash income.
- Neglecting depreciation or using incorrect recovery periods.
- Ignoring the passive activity rules and filing without assessing loss limitations.
- Combining personal and rental records; never mix personal expenses with rental accounts.
Practical examples (simplified)
Example A — Annual rental house:
- Gross rent: $18,000
- Mortgage interest: $6,000
- Property tax: $2,400
- Repairs and maintenance: $1,800
- Property management fees: $1,200
- Depreciation (residential, straight‑line): $4,000
Net taxable rental income = 18,000 – (6,000 + 2,400 + 1,800 + 1,200 + 4,000) = 2,600
Example B — Vacation home rented part of the year:
If you rent a vacation home and use it personally, allocate expenses between rental and personal use. Special rules (and the 14‑15 day exclusion) can apply — see IRS Publication 527.
Tax planning tips
- Don’t skip depreciation. It’s often the largest deduction and is required even if it creates a paper loss.
- Consider cost segregation for newer or higher‑basis properties to accelerate depreciation (consult a CPA or cost segregation specialist).
- Review whether you qualify as a real estate professional or can claim the active participation $25,000 loss allowance.
- Use an LLC or other entity for liability protection — this is a legal choice; tax consequences depend on how the entity is elected for tax purposes.
- Reconcile bank records monthly and use property accounting software to separate personal and business funds.
When to get professional help
If you have multiple properties, complex ownership structures, frequent short‑term rentals, or large improvements and dispositions, consult a qualified CPA or real estate tax advisor. In my experience advising landlords for over 15 years, cases with mixed personal use, depreciation recapture, or passive loss carryforwards benefit significantly from professional review.
Resources and further reading
- IRS Topic 414, Rental Income: https://www.irs.gov/taxtopics/tc414
- IRS Publication 527, Residential Rental Property (2024/2025 edition): https://www.irs.gov/publications/p527
- Form 4562, Depreciation and Amortization (instructions): https://www.irs.gov/forms-pubs/about-form-4562
Internal resources on FinHelp:
- Depreciation: https://finhelp.io/glossary/depreciation/
- Depreciation Recapture: https://finhelp.io/glossary/depreciation-recapture/
- Form 4562 – Depreciation and Amortization: https://finhelp.io/glossary/form-4562-depreciation-and-amortization/
Professional disclaimer: This article is educational and does not replace individualized tax advice. Tax rules change and your situation may require personalized analysis. Consult a licensed CPA or tax attorney for recommendations tailored to your facts.
