Rental Income Tax 2026
Owning a rental is a business, and the tax code treats it like one. Your rent is income — but a stack of deductions, led by depreciation, can turn a cash-flowing property into a paper loss on your return. Here is the 2026 landlord rulebook.
Rental income
Taxable
On Schedule E
Depreciation
27.5 years
Residential property
Loss exception
$25,000
Active participation
Key deduction
Depreciation
A paper loss, no cash out
How Rental Income Is Taxed
Rental income is reported on Schedule E and taxed as ordinary income at your marginal rate. You are taxed on your net rental income — gross rent minus deductible expenses — not the gross rent you collect. A property that brings in $24,000 a year but has $22,000 of deductible expenses generates only $2,000 of taxable income.
See your tax bracket
Understand where your rental profit would land.
The Deductions That Shrink It
- Mortgage interest on the rental loan (fully deductible against rental income — unlike the personal home, no $750,000 itemizing limit applies here).
- Property taxes and insurance.
- Repairs and maintenance — fixing a leak, repainting, replacing a broken appliance.
- Property management fees and advertising.
- Utilities you pay, HOA dues, and travel to the property.
Improvements (a new roof, an addition) are not expensed immediately — they are added to the property's basis and depreciated over time.
Depreciation: The Paper Loss
Residential rental property is depreciated over 27.5 years. That means the cost of the building (not the land) is deducted a little each year — a $275,000 building generates roughly $10,000 of annual depreciation. It is a deduction with no out-of-pocket cost, and it is often what pushes a profitable rental into a tax loss.
Note that depreciation is eventually "recaptured" — taxed at up to 25% when you sell — so it is a deferral, not a permanent escape.
Loss Limits and the $25,000 Exception
Rental losses are generally passive, meaning they can only offset passive income (like other rentals), not your W-2 salary. But there is a valuable exception: if you actively participate in managing the rental, you can deduct up to $25,000 of rental loss against ordinary income, phasing out between $100,000 and $150,000 of MAGI. Real estate professionals can deduct more, but that status has strict hours requirements.
Frequently Asked Questions
Do I owe self-employment tax on rental income?
Usually not. Ordinary long-term rental income is not subject to self-employment tax. Short-term rentals run like a hotel (frequent turnover with substantial services) can be, which is a key distinction for Airbnb-style hosting.
Can I deduct mortgage interest on a rental?
Yes, in full against rental income — it is a business expense, not subject to the personal $750,000 itemized-deduction cap.
What happens when I sell a rental?
You owe capital gains tax on the profit, plus depreciation recapture (up to 25%) on the depreciation you claimed. A 1031 exchange can defer the tax if you reinvest in another rental.
Is a vacation home rental taxed the same way?
Only if you rent it out. A home used personally most of the year follows different rules — if you rent it 14 days or fewer, the income is tax-free; more than that, expenses are allocated between personal and rental use.
Sources
- IRS Publication 527 — Residential Rental Property.
- IRS — depreciation (MACRS 27.5-year) and passive activity loss rules.
- IRS Revenue Procedure 2025-32 — brackets for rental profit examples.
This is informational, not tax advice. Depreciation, loss limits, and sale treatment depend on your specific situation — consult a tax professional.