Rental Income Tax Calculator

Rental income from a residential or commercial property is ordinary income taxed at your marginal federal rate plus state income tax where applicable. Gross rent received during the year flows to Schedule E (Supplemental Income and Loss), line 3. From it you subtract IRC §212 ordinary and necessary expenses to manage the property (advertising, cleaning, insurance, repairs, management fees, supplies, utilities, professional fees), mortgage interest paid (Schedule E line 12, separate from your Schedule A home-mortgage line), property taxes (line 16), and §168 depreciation (line 18). The remaining net rental income or loss carries to Schedule 1 line 5, then to Form 1040 line 8. If the property is held in an LLC taxed as a disregarded entity or partnership, Schedule E income flows through unchanged.

Under IRC §168(c) and Publication 946, residential rental property is depreciated straight-line over 27.5 years and nonresidential (commercial / mixed-use) over 39 years, using the mid-month convention. Only the BUILDING basis is depreciable — land is never depreciated (§167(a)). Tax assessor's land/building split is the most defensible allocation; appraisals or insurance schedules also work. Example: $400,000 purchase, 25% land allocation → $300,000 building basis → $300,000 / 27.5 = $10,909/year (full years), pro-rated in year of acquisition and disposition. The mid-month convention treats the month of placed-in-service as half a month, so a March acquisition deducts 9.5/12 of the first-year amount.

When you sell, the IRS "recaptures" depreciation taken. For residential and nonresidential real property the recapture is "unrecaptured §1250 gain" — taxed at a maximum federal rate of 25% (per IRC §1(h)(1)(E)), separate from your 0/15/20% long-term capital gains rate on the remaining appreciation. Example: $400k purchase, $80k depreciation taken over 8 years, sell for $500k → $100k total gain. $80k taxed at up to 25% recapture, $20k taxed at LTCG. Recapture applies even if you didn't deduct depreciation each year — the IRS treats it as "allowed or allowable" (§1250(b)(3)). This is why "skipping depreciation to avoid recapture" is a common but expensive mistake.

IRC §469 classifies rental real estate as passive activity by default, meaning losses can only offset other passive income (not W-2 wages or portfolio income). §469(i)(2)(A) carves out a SPECIAL ALLOWANCE: up to $25,000 of net rental loss deductible against ordinary income if you "actively participate" (low bar — approve tenants, set rent, decide repairs). The allowance phases out $1 per $2 of MAGI above $100,000, fully gone at $150,000. Critically, these thresholds have NEVER been indexed for inflation — they have stood since the Tax Reform Act of 1986. Suspended losses don't disappear: they carry forward (§469(b)) and either offset future passive income or unlock fully when you dispose of the property in a fully taxable sale (§469(g)).

IRC §469(c)(7) exempts a taxpayer who is a Real Estate Professional from the passive activity rule entirely. Two tests must BOTH be met annually: (1) more than 50% of your personal services during the year are in real estate trades or businesses; AND (2) more than 750 hours of service in real estate trades or businesses (development, construction, acquisition, conversion, rental, operation, management, leasing, brokerage). Each property is treated as a separate activity unless you file a §1.469-9(g) election to aggregate. REPS converts rental losses to non-passive — fully deductible against W-2 / 1099 income, no $25k cap, no phaseout. High-audit area: contemporaneous time logs are required.

Pub 527 deductible categories: mortgage interest (Schedule E line 12, includes mortgage points amortization for refis), property tax (line 16), insurance (line 9), HOA / condo fees, advertising (line 1), auto and travel to the property (line 6, only ordinary use — not commuting; standard mileage 70¢/mile for 2025), cleaning and maintenance (line 7), commissions to leasing agents (line 8), legal & professional (line 10), management fees (line 11), repairs (line 14, must NOT be capital improvements — see §263 / Reg 1.263(a)-3), supplies (line 15), utilities (line 17 if paid by owner), depreciation (line 18). Capital improvements that materially add to value, prolong life, or adapt to a new use must be capitalized and depreciated over the property's remaining life (§263(a)).

The Tangible Property Regulations (Reg §1.263(a)-3, 2014) split spending into REPAIRS (currently deductible) and IMPROVEMENTS (must be capitalized and depreciated). Three improvement tests: (1) BETTERMENT — a material increase in productivity, capacity, efficiency, strength, or quality; (2) RESTORATION — restoring deteriorated property to like-new; (3) ADAPTATION — new use the property wasn't designed for. Routine maintenance safe harbor: recurring activities reasonably expected within 10 years count as repairs. De minimis safe harbor: under §1.263(a)-1(f), expense items costing ≤$2,500 per invoice without a financial-statement audit (≤$5,000 with one), per AFS election. Painting a unit between tenants = repair. Replacing the entire roof = improvement.

Real property (the building itself, 27.5yr or 39yr) is NOT eligible for §179 expensing. But specific COMPONENTS of a rental building can be: appliances, carpeting, window coverings (5yr property), land improvements like fencing, paving, landscaping (15yr property), and post-TCJA qualified improvement property — interior nonresidential renovations (15yr). Bonus depreciation: OBBBA §70401 restored 100% bonus permanently for property placed in service on or after 2025-01-20 (40% rate applies January 1-19, 2025 — pre-OBBBA TCJA schedule). The 2025 §179 cap is $2,500,000 with phaseout starting at $4,000,000; 2026 is $2,560,000 per IRS Rev. Proc. 2025-32. Cost segregation studies break the building into 5/7/15-year buckets to unlock bonus depreciation — typical first-year deduction increase 5-15% of basis.

IRC §121 excludes up to $250,000 ($500,000 MFJ) of gain on sale of a principal residence used as such for 2 of the past 5 years. After 2008's Housing Assistance Tax Act, the exclusion is PROPORTIONATELY REDUCED for "nonqualified use" — periods after 2008-12-31 when the property was a rental. Example: bought 2019, lived 2019-2021 (3 years), rented 2022-2024 (3 years), sell 2024. Total ownership 6 years, qualified-use ratio 3/6 = 50%, exclusion = 50% × $250k = $125k. Plus, the unrecaptured §1250 gain on rental-period depreciation is taxed at up to 25% regardless of §121. Living in your rental for 2+ years before sale is the classic exit strategy for small landlords.

IRC §1031 defers all federal capital gains and §1250 depreciation recapture when you exchange investment real estate for "like-kind" investment real estate (post-TCJA only real property qualifies — personal property exchanges ended 2017). Strict deadlines: identify replacement property within 45 days of selling, close on it within 180 days, both held for investment / business use. Must use a Qualified Intermediary — you cannot touch the proceeds. Boot (cash received or debt reduction not replaced) is taxable in the year of exchange. Adjusted basis carries over to the replacement property minus boot, plus any additional capital invested. Stack 1031s indefinitely; on death, heirs receive a §1014 stepped-up basis, permanently eliminating the deferred gain. Multi-property landlords use serial 1031s to ladder up to larger buildings without ever paying tax.

IRC §280A divides "dwelling units" into three categories based on personal use. (1) Pure personal — rented <15 days/year — rental income is COMPLETELY tax-free and no expenses are deductible (the "Augusta rule"). (2) Mixed personal/rental — personal use exceeds the greater of 14 days or 10% of rental days — expenses are limited to rental income (no loss allowed), categorized using the Bolton/IRS allocation formulas. (3) Pure rental — personal use ≤14 days AND ≤10% of rental days — fully deductible like any rental property. Short-term rentals (avg stay <7 days) are SCHEDULE C self-employment income if you provide substantial services, NOT Schedule E — this triggers 15.3% self-employment tax on net rental profit.