Owning a rental property can be a great way to build wealth—but when tax season comes around, it also brings a lot of questions. How is rental income taxed? What expenses can you deduct? And how do you make sure you’re not overpaying the IRS?
If you’re earning money from tenants, you’ve got tax responsibilities. But with the right strategy, you can reduce what you owe—and maybe even come out ahead.
Let’s break it down.
What Counts as Rental Income?
Rental income includes more than just your tenant’s monthly check. According to the IRS, it’s any payment you receive in exchange for the use of property.
That can include:
- Rent payments (even in advance)
- Security deposits you keep
- Fees for breaking a lease
- Utility bills or repairs paid by the tenant
- Services exchanged for rent (like landscaping or renovations)
If it puts money in your pocket or covers an expense you’d normally pay, it counts as income—and needs to be reported.
Common Rental Property Tax Deductions
Here’s the good news: landlords can deduct a wide range of expenses tied to owning and managing a rental. These deductions reduce your taxable rental income—and your overall tax bill.
Deductible expenses include:
- Mortgage interest
- Property taxes
- Repairs and maintenance
- Homeowner’s insurance
- Utilities (if you pay them)
- Legal and accounting fees
- Property management costs
- Advertising for tenants
- Travel expenses related to the property
It’s important to track these throughout the year and keep good records. Miss a deduction, and you could be leaving money on the table.
Depreciation: The Landlord’s Secret Weapon
Depreciation is one of the most powerful (and often misunderstood) tools available to property owners.
Even if your property is increasing in market value, the IRS lets you depreciate the structure over 27.5 years, assuming it’s residential. This means you can deduct a portion of the building’s value every year—regardless of actual wear and tear.
Here’s how it works:
- Determine the building’s value (excluding land).
- Divide that by 27.5.
- Deduct that amount annually as a non-cash expense.
Let’s say the building is worth $275,000. You could deduct $10,000 each year in depreciation—without spending a dime.
You can also depreciate major improvements, like a new roof or updated kitchen, under different timelines. This strategy adds up fast—and can often turn a “paper loss” into real tax savings.
How to Report Rental Income on Your Tax Return
If you rent out property, you’ll report your income and expenses on Schedule E (Form 1040). Each property gets its own section, where you list:
- Gross rental income
- Expenses (repairs, insurance, taxes, etc.)
- Depreciation
- Net profit or loss
You’ll still file a standard federal return, but Schedule E breaks out your rental activity separately.
Important notes:
- Short-term rentals (like Airbnb) may be subject to different rules.
- If you live in part of the home, you can only deduct a portion of shared expenses.
- If you rent the property fewer than 15 days per year, the IRS may not require you to report it at all.
The key is documentation. Keep detailed records of all payments, receipts, mileage, and communications related to your rental. Dimov Tax helps landlords streamline this process and avoid audit risks.
What Happens If You Sell the Property?
Selling a rental property often comes with tax consequences—including capital gains tax and recaptured depreciation.
Here’s what to expect:
- Capital Gains Tax: If your property sells for more than your adjusted cost basis, you’ll pay tax on the gain. Long-term capital gains (on properties held over a year) are taxed at 0%, 15%, or 20% depending on income.
- Depreciation Recapture: The IRS may “recapture” a portion of your depreciation deductions at a 25% tax rate—even if you never took them.
- 1031 Exchange: Want to avoid tax on a sale? A 1031 exchange lets you defer capital gains by reinvesting proceeds in another investment property.
Planning ahead is critical. A CPA can help you run the numbers and avoid surprises at closing.
How State Taxes Affect Rental Income
Federal taxes are only part of the story—state tax laws can also impact your rental income.
Some key factors:
- Where the property is located: You’ll usually owe state income tax where the rental is physically located, even if you live elsewhere.
- States with no income tax: Florida, Texas, and a few others don’t tax rental income—but many do.
- Filing requirements: You may need to file a nonresident state return if you earn rental income out of state.
- Passive loss rules: States may treat losses differently than the IRS, limiting your ability to offset other income.
If you own rentals in multiple states, or if you moved during the year, your tax picture gets more complex. That’s where Dimov Tax helps landlords sort through overlapping rules and file correctly the first time.
Tax-Saving Strategies for Rental Income
You can’t avoid paying taxes altogether—but with smart planning, you can reduce how much you owe. Some of the best ways to cut your rental income tax bill include:
- Claim every available deduction—Don’t overlook insurance, travel, or advertising costs.
- Depreciate the property annually—It’s a powerful non-cash write-off.
- Use a cost segregation study—Break your building into faster-depreciating components.
- Track your hours—Qualifying as a real estate professional can unlock passive loss deductions.
- Explore the QBI deduction—Rental income may qualify for a 20% pass-through deduction.
- Hold property in an LLC—It can offer legal protection and potential tax benefits depending on your setup.
- Hire a tax advisor—CPAs who understand real estate can help you avoid red flags and maximize returns.
Can You Deduct Rental Losses?
Not every rental makes a profit—especially in the early years. The good news? You might be able to deduct rental losses to offset other income, depending on your situation.
Here’s how it works:
- Passive activity rules apply: Rental activity is generally considered passive, which means losses are limited unless you qualify as a real estate professional.
- Up to $25,000 in losses allowed: If your adjusted gross income is below $100,000 and you actively participate in the rental (e.g., making management decisions), you may deduct up to $25,000 in losses against other income.
- Phaseout applies: This deduction gradually phases out between $100,000 and $150,000 of AGI.
- Carryforward allowed: If you can’t use all your losses in one year, they don’t disappear—you can carry them forward to future tax years.
Understanding how to structure and time these losses can create real tax savings. At Dimov Tax, we help landlords use these rules to their advantage and avoid common missteps.
Don’t Let Rental Income Taxes Catch You Off Guard
Whether you’re a new landlord or managing a growing portfolio, rental income taxes can get complicated fast. Missed deductions, poor record-keeping, or incorrect filings can cost you more than just money—they can open the door to audits and penalties.
At Dimov Tax, we help landlords simplify the process. Our CPAs work with real estate owners across the country to reduce tax liability, ensure compliance, and plan for long-term success. We’ll help you take control of your rental income taxes—so you can focus on building wealth, not worrying about paperwork.
Get in touch with Dimov Tax today for personalized guidance and year-round support.