Rental Income
Money received for the use of property you own, including rent payments, advance rent, and security deposits applied to rent. Rental income is generally taxable and reported on Schedule E.
Rental income is any payment you receive for the use or occupation of property. This includes regular monthly rent, advance rent (rent received before the period it covers), lease cancellation fees, and security deposits that are applied to unpaid rent or property damage. All rental income is generally taxable in the year received regardless of when the rental period occurs.
Rental income is reported on Schedule E (Supplemental Income and Loss) as part of your Form 1040. You may deduct ordinary and necessary expenses associated with the rental property, including mortgage interest, property taxes, insurance, repairs and maintenance, utilities you pay, management fees, and depreciation of the building. Depreciation must be taken on the structural value (not land) over 27.5 years for residential rental property.
If your rental expenses exceed rental income, you have a rental loss. Whether you can deduct that loss against other income depends on the passive activity loss rules and your level of participation. The net taxable rental income (or loss) flows from Schedule E to your Form 1040. Rental income may also be subject to the 3.8% Net Investment Income Tax if your modified AGI exceeds the applicable threshold.
How it works
Rental income covers any payment you receive for letting someone use property you own — regular monthly rent, advance rent paid before the period it covers, lease cancellation fees, and any part of a security deposit you apply against unpaid rent or damage. It's taxable in the year you receive it, regardless of which rental period the payment is actually for, which trips up landlords who collect a January rent check in December and assume it belongs to next year's return.
You report it on Schedule E of Form 1040, and you can deduct ordinary and necessary expenses tied to the property against it: mortgage interest, property taxes, insurance, repairs and maintenance, utilities you pay, management fees, and depreciation of the building itself (never the land) over 27.5 years for residential rental property. The net figure from Schedule E — income minus expenses minus depreciation — is what flows through to your Form 1040.
When expenses exceed rental income, the passive activity loss rules govern whether and how much of that loss you can actually deduct against other income, based on your participation level and MAGI. Rental income above the applicable MAGI threshold can also trigger the 3.8% Net Investment Income Tax, so a profitable rental property can carry a bigger combined tax cost than the income tax bracket alone would suggest.
Example: net taxable rental income on Schedule E
A landlord collects $2,400 a month in rent, or $28,800 for the year, plus a $2,000 fully refundable security deposit that isn't counted as income because it hasn't been applied against rent or damage.
Deductible expenses for the year total $9,000 in mortgage interest, $3,500 in property tax, $1,200 in insurance, $2,000 in repairs, and $8,000 in depreciation on the $220,000 structure value (spread over 27.5 years) — $23,700 in all.
Net taxable rental income is $28,800 minus $23,700, or $5,100, which is what gets reported from Schedule E onto the landlord's Form 1040.
Frequently asked questions
Is a security deposit taxable when I receive it?
What expenses can I deduct against rental income?
Can I deduct a loss if my rental expenses exceed my rental income?
Related Terms
Passive Activity Loss
A loss from a business or rental activity in which you do not materially participate. Passive losses can generally only be deducted against passive income, not wages or portfolio income.
Net Investment Income Tax (NIIT)
A 3.8% surtax on the lesser of net investment income or modified AGI exceeding $200,000 (single) or $250,000 (married filing jointly). Applies to interest, dividends, capital gains, and rental income.
Depreciation
A tax deduction that spreads the cost of a business asset over its useful life. Section 179 and bonus depreciation may allow full first-year expensing for qualifying assets.
Schedule C
The IRS form (Schedule C of Form 1040) used by sole proprietors and single-member LLCs to report business income and expenses. The net profit flows to your personal tax return.