How to Calculate Rental Income Tax and Every Allowable Deduction

What the IRS Actually Taxes

The IRS taxes net rental income, not gross rent collected. That distinction matters enormously. Gross rent is what your tenants pay. Net rental income is what remains after every allowable deduction. You report rental income on Schedule E of Form 1040, and the resulting figure flows into your ordinary income calculation.

Rental income is taxed at your marginal federal rate. At $150,000 of total household income, that rate is 22% for a single filer in 2025. At $250,000, it reaches 32%. State taxes layer on top. California adds up to 13.3%. New York adds up to 10.9%.

Understanding which deductions apply is not optional financial hygiene. It is the difference between a 22% effective rate and a 4% effective rate on your rental activity.

The Full List of Allowable Deductions

The IRS recognizes the following categories as ordinary and necessary expenses for rental property owners.

Mortgage Interest

Interest paid on the mortgage financing your rental property is fully deductible. Principal repayment is not. Review your annual Form 1098 from your lender for the precise interest figure.

Property Taxes

Real estate taxes paid to state and local governments are deductible against rental income on Schedule E. Unlike the $10,000 SALT cap that applies to your primary residence, rental property taxes face no cap.

Insurance Premiums

Landlord insurance, also called dwelling fire or rental dwelling coverage, is fully deductible. If you pay for flood insurance, umbrella coverage, or loss-of-rent insurance, those premiums qualify as well.

Repairs and Maintenance

Repairs restore the property to its original condition. They are deductible in the year paid. Examples include fixing a broken furnace, patching a roof leak, or replacing a failed water heater. Improvements, by contrast, must be capitalized and depreciated. Replacing a 20-year-old roof with a superior material crosses into improvement territory.

Property Management Fees

Fees paid to a property management company, typically 8% to 12% of gross monthly rents, are fully deductible. So are leasing commissions paid to find new tenants.

Professional Services

Accountant fees for preparing Schedule E, attorney fees for lease drafting or eviction proceedings, and fees paid to a real estate attorney for title review all qualify. Allocate only the portion attributable to your rental activity.

Travel and Transportation

Trips made for legitimate rental purposes, including showing the property, meeting contractors, or purchasing supplies, are deductible. The 2025 IRS standard mileage rate is 70 cents per mile. Keep a mileage log with dates, destinations, and purposes.

Home Office and Administrative Expenses

If you manage your rental portfolio from a dedicated home office space, a proportional deduction applies. This requires the space to be used exclusively and regularly for rental management.

Advertising

Costs for listing the property on Zillow, Apartments.com, or local publications are fully deductible. Photography fees for listing photos qualify as well.

Utilities Paid by the Landlord

If you cover water, trash, gas, or electricity for your tenants, those costs are deductible in full.

Depreciation

This is the largest deduction most landlords underuse. The IRS allows you to depreciate the cost of a residential rental building, excluding land value, over 27.5 years using the straight-line method. Land is never depreciable.

How Depreciation Works: The Math

Separate the land value from the building value at purchase. You can use the county assessor's ratio or an appraisal.

Example: Purchase price: $350,000. County assessor values land at 20% of total assessed value, so $70,000. Depreciable basis equals $280,000.

Annual depreciation deduction: $280,000 divided by 27.5 equals $10,181.82 per year.

This deduction requires no cash outlay. It exists purely on paper. But it reduces your taxable rental income by $10,181 every single year regardless of whether the property appreciates.

At a 24% marginal federal rate, that annual deduction saves $2,443.64 in taxes. Over a 10-year hold, that compounds to $24,436.40 in preserved capital.

Worked Example 1: Single-Family Rental in Texas

Gross rent collected: $24,000 per year ($2,000/month)

Expenses:

• Mortgage interest: $8,400
• Property taxes: $3,200
• Insurance: $1,100
• Repairs and maintenance: $1,800
• Property management (10%): $2,400
• Advertising: $300
• Depreciation (building basis $220,000 / 27.5): $8,000

Total deductions: $25,200

Net rental income: $24,000 minus $25,200 equals negative $1,200

This landlord shows a $1,200 paper loss on Schedule E. Subject to passive activity loss rules, this loss may offset other income. Texas has no state income tax, so federal exposure is the only calculation needed. At 22% federal, the deductions eliminate all federal rental income tax and generate a potential offset.

Worked Example 2: Condo Rental in New York

Gross rent collected: $36,000 per year ($3,000/month)

Expenses:

• Mortgage interest: $12,600
• Property taxes: $5,400
• HOA fees: $3,600
• Insurance: $900
• Repairs: $1,200
• Depreciation (building basis $330,000 / 27.5): $12,000

Total deductions: $35,700

Net rental income: $36,000 minus $35,700 equals $300

Federal tax at 24%: $72 New York state tax at 6.85%: $20.55

Total tax on $36,000 in gross rent: $92.55

Without depreciation, net income rises to $12,300. Federal tax alone increases to $2,952. Depreciation saved this landlord $2,859.45 in a single tax year.

Passive Activity Loss Rules: The Cap You Need to Know

The IRS classifies rental income as passive by default. Passive losses generally offset only passive income. However, an important exception exists.

If your adjusted gross income falls below $100,000 and you actively participate in managing the property, you may deduct up to $25,000 of rental losses against ordinary income. This allowance phases out completely at $150,000 AGI.

Real estate professionals, defined by IRS rules as those spending more than 750 hours per year on real estate activities and more hours on real estate than any other profession, can deduct unlimited rental losses against ordinary income. This designation is powerful. It is also scrutinized closely by the IRS. Document your hours rigorously.

Depreciation Recapture: Plan Ahead

Depreciation deductions carry a future cost. When you sell the property, the IRS recaptures depreciation at a 25% federal rate, separate from long-term capital gains rates. This is called Section 1250 recapture.

On a property where you claimed $80,000 in depreciation over 10 years, the recapture tax equals $20,000 at the federal level, regardless of your marginal rate. State taxes apply additionally.

A 1031 exchange defers both capital gains and depreciation recapture into a replacement property. Qualified Opportunity Zone investments offer additional deferral mechanisms. Neither eliminates the liability permanently. Plan for it in your net proceeds model before listing.

Short-Term Rentals: Different Rules

Properties rented for an average of 7 days or fewer per year of rental activity fall outside the passive activity framework. The IRS treats short-term rental income as active self-employment income in many cases. This subjects net profits to self-employment tax of 15.3% on the first $176,100 of net earnings in 2025.

The deduction categories remain largely the same. The tax character differs significantly. Model both scenarios before deciding whether to list a property on Airbnb versus securing a long-term tenant.

How to Calculate Your Rental Tax Liability

Follow this sequence for each property:

1. Sum all gross rents collected during the tax year, including security deposits applied to rent or damage.
2. Subtract all allowable operating expenses as itemized above.
3. Subtract annual depreciation calculated on building basis divided by 27.5.
4. Apply the resulting net income figure to your marginal federal rate.
5. Apply your state's marginal rate on the same net figure.
6. Account for passive activity loss limitations based on your AGI.
7. Track carryforward losses for application in future years or upon sale.

The CalcMoney income tax calculator handles steps 4 through 6 automatically. Input your net rental income alongside your other income sources, and the calculator returns your blended effective rate, marginal rate exposure, and estimated liability across federal and state.

Run the numbers before year-end. If your net rental income is trending higher than expected, accelerating repairs or prepaying January's property management fee in December reduces your current-year taxable income dollar for dollar.

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