Rental property tax deductions

Rent is taxable income, but you pay tax only on what is left after expenses. Nearly every cost of owning and running the property is deductible:

• Mortgage interest, but not principal
• Property taxes and insurance
• Repairs and maintenance that keep the property in working order
• Management fees, leasing fees, advertising, and legal or accounting fees
• Utilities and HOA dues you pay
• Travel to the property, including mileage
• Depreciation

Depreciation is the one deduction you never write a check for. You deduct the cost of the building, not the land, in equal amounts over 27.5 years, about 3.6% a year. Commercial buildings use 39 years. Improvements that last more than a year, such as a new roof, are depreciated rather than deducted at once.

Components with a shorter life, such as appliances, carpet, and fences, can be written off in full in the year you buy them. Bonus depreciation is 100% for qualifying property acquired after January 19, 2025.

A profit is taxed as ordinary income. A loss is harder to use. Rental losses are passive, so they normally offset only other passive income, not your salary. There are three ways around that.

• Active participation: if you make the management decisions (approving tenants, setting rent, arranging repairs) and own at least 10% of the property, you can deduct up to $25,000 of rental losses against other income. The allowance shrinks by 50 cents for every dollar of MAGI over $100,000 and is gone at $150,000.
• Real estate professional: if you spend more than 750 hours a year in real property businesses, that is more than half of your working time, and you materially participate in the rentals, the losses are not passive. This rarely fits someone with a full-time job elsewhere.
• Short-term rental: if the average stay is seven days or less, the property is not a rental activity under the passive rules, so its losses are not passive as long as you materially participate.

Net rental income can also qualify for the 20% qualified business income deduction if you run the rental as a business. The IRS safe harbor asks for 250 hours a year of rental services and separate books.

A $300,000 house with $60,000 of land value, rented for $2,000 a month. Rent is $24,000 for the year. Cash expenses are $19,200 (mortgage interest $12,000, property tax $3,600, insurance $1,200, repairs and management $2,400). Depreciation on the $240,000 building is $8,727 ($240,000 divided by 27.5). Total deductions are $27,927, so the property shows a $3,927 loss even though it produced $4,800 of cash before principal. With $90,000 of wages, filing single, and active participation, the whole loss offsets your wages and saves about $864 at the 22% rate.

Selling triggers two taxes. The depreciation you took, or could have taken, is recaptured at up to 25%. Any gain above that on a property held more than a year is a long-term capital gain taxed at 0%, 15%, or 20%. The 3.8% net investment income tax also applies to the gain, recapture included, to the extent your MAGI is over $200,000 ($250,000 married filing jointly). A 1031 exchange into another investment property defers all of it.

Rental income and expenses go on Schedule E, Part I, one column per property. Depreciation is figured on Form 4562 in the year you place the property in service and carried to Schedule E after that. If the property shows a loss, Form 8582 applies the passive loss limits and tracks what carries forward. The net figure flows to Schedule 1, line 5, and then to Form 1040. You do not need to itemize.

Enter the purchase price, loan, rent, and expenses to see monthly cash flow, the first-year tax result, a 10-year projection, and the tax due on a sale. Entries save in your browser and carry into the advanced calculator.