Landlord Taxes: How Rental Income Is Taxed and What to Record

Landlord taxes come down to one idea: the rent you collect is generally taxable income, and you pay tax on what is left after your deductible expenses and depreciation. This guide explains what counts as rental income, what you can generally deduct, how Schedule E works, and what to keep all year, with a sample annual summary for a duplex.

Everything here is general federal information from IRS Publication 527 and the Schedule E instructions. State rules vary by state, so treat this as a map for a conversation with your CPA.

Do landlords pay taxes on rent?

Yes, in most cases. IRS Publication 527 says you must generally include in gross income all amounts you receive as rent, and it defines rental income as any payment you receive for the use or occupation of property. It isn’t limited to the monthly rent check.

You are taxed on net rental income, not gross. Expenses of renting the property (Pub 527 names maintenance, insurance, taxes, and interest) generally come off the top, and so does depreciation. Many landlords with a mortgage show little taxable profit, and some show a loss, which may or may not be usable right away (see below).

One narrow exception: Pub 527 says rent from a property you also use as a home, rented fewer than 15 days in the year, is not included in income.

What counts as rental income

This is where landlords most often undercount. Publication 527 treats all of the following as rental income:

• Advance rent. Rent received before the period it covers is income in the year you receive it, whatever accounting method you use. Last month’s rent collected at lease signing is income now, not at the end of the lease.
• Lease cancellation payments. A payment to break the lease is rent in the year received.
• Expenses paid by the tenant. If a tenant pays a bill that is yours (say, a plumber, deducted from rent), that amount is rental income, and you can generally deduct it as an expense. The net is often zero, but both sides belong in the books.
• Property or services instead of money. The fair market value is rental income.
• Security deposits you keep. A deposit you plan to return is not income when you receive it. If you keep part or all of it because the tenant didn’t meet the lease terms, the amount kept is income that year. A “deposit” that will be applied as the final month’s rent is advance rent, taxable when received.

Deposits also carry state rules about holding and returning the money. Our Massachusetts security deposit law checklist shows how detailed they can get.

Rental income tax deductions and depreciation

Pub 527 lists the most common rental expenses: advertising, auto and travel, cleaning and maintenance, commissions, depreciation, insurance, mortgage and other interest, legal and other professional fees, management fees, points, rental payments, repairs, taxes, and utilities. A few rules trip people up:

• The mortgage payment is not one expense. Mortgage interest on the rental is generally deductible. The principal portion is not, because it is repaying a loan, not spending money.
• Repairs versus improvements. Repairs that keep the property in ordinary working condition (the Schedule E instructions give fixing a broken lock and painting a room as examples) are generally deductible. Improvements, meaning work that betters or restores the property or adapts it to a new use (replacing an entire HVAC system is one IRS example), must generally be capitalized and depreciated instead.
• Prepaid insurance. Insurance prepaid for more than one year is deducted year by year.

Depreciation is how you recover the cost of the building. Residential rental buildings are generally depreciated over 27.5 years under the general MACRS system, starting when the property is ready and available for rent, not when the first tenant moves in. Land is not depreciable, so the purchase price has to be split between land and building. Pub 527 allows using the ratio of assessed values from your property tax bill if you aren’t sure of the fair market values. Appliances, carpeting, and furniture in a residential rental are generally 5-year property. Leave depreciation choices to your CPA, but your books should hold the inputs: purchase price, closing costs, the land and building split, and every improvement with its cost and in-service date.

Schedule E basics

For most individual landlords, rental income and expenses go on Schedule E (Form 1040), Part I. Per the Schedule E instructions:

• Each property gets its own column (A, B, or C). With more than three properties, you attach additional Schedules E and put the combined totals on just one.
• Line 2 asks for the number of fair rental days and personal use days for each property.
• Line 3 is rents received. Lines 5 through 19 are expense categories, with depreciation on line 18.
• Line A asks whether you made payments that would require you to file Forms 1099, so collect a W-9 from contractors before paying them.
• A single-member LLC is generally disregarded for federal income tax, so its rentals typically go on your Schedule E.

Two exceptions. If you provide substantial services for the tenant’s convenience, such as regular cleaning or changing linens, Pub 527 says the activity goes on Schedule C and may owe self-employment tax. And if you use a unit personally for more than the greater of 14 days or 10% of the days it is rented at fair rental value, the Schedule E instructions say your deductions may be limited.

A sample year: one duplex on a Schedule E

Here is an illustrative year for one duplex. The numbers are invented to show how events in the books map to the return.

• Unit A rents for $1,800 a month all year. In March the tenant paid a $350 plumber with the landlord’s approval and deducted it from rent.
• Unit B rented for $1,650 through May. That tenant moved out, and the landlord kept $400 of the $1,650 deposit for damage and returned $1,250. The unit sat vacant in June. A new tenant started in July at $1,700, paying last month’s rent ($1,700) and a $1,700 security deposit at signing.
• The building’s depreciable basis, after allocating part of the purchase price to land, is $330,000. This is a full year after the year it was placed in service.

Just as important is what stays off the expense lines: $4,600 of mortgage principal, the $1,250 deposit refund, and a $7,500 furnace replacement. Replacing a furnace is the kind of cost that is often treated as an improvement (the Schedule E instructions give replacing an entire HVAC system as an example), so in this example it goes on the depreciation schedule rather than the repairs line. Its depreciation starts in the month it is placed in service; to keep the math simple, the table leaves out that small first-year amount. Reconstructing this year from bank statements in March is how the advance rent and the tenant-paid repair get missed.

Passive loss limits and other rules, briefly

If Schedule E shows a loss, more rules can limit the deduction. Pub 527 says rental real estate is generally a passive activity, and passive losses generally can’t offset nonpassive income such as wages; the excess carries forward. There is an exception: if you actively participate (for example, approving tenants and setting rents), you may be able to deduct up to $25,000 of rental loss against other income, and that allowance phases out as modified adjusted gross income rises above $100,000. At-risk rules, real estate professional rules, the excess business loss limit, and the 3.8% net investment income tax can also apply (Publication 925 has the details). These depend on your whole return, so this is a question for your CPA. If you don’t have one, book a free call with JAV or call 978-986-9154: for tax preparation and planning, we work with trusted CPA partners.

Estimated taxes

Rent has no withholding. Publication 505 lists rents among the kinds of income that may require estimated tax payments, and says you generally must pay estimated tax if you expect to owe at least $1,000 after withholding and credits and your withholding and credits will be less than the smaller of 90% of this year’s tax or 100% of last year’s (higher earners have a different percentage). Payments for 2026 are due April 15, June 15, and September 15, 2026, and January 15, 2027, using Form 1040-ES. Some landlords raise paycheck withholding instead. Either way, a current year-to-date profit by property lets your CPA set the amount instead of guessing.

Bookkeeping for rental property: records to keep all year

The Schedule E instructions say you must keep records to support the items you report. In practice:

1. A separate bank account for the rentals, with every transaction tagged to a property.
2. A rent ledger by unit: what was due, what was paid, and when, including advance rent and lease-break payments.
3. A deposit ledger: amount received, where it is held, and what was returned or kept and why.
4. Receipts for every expense, coded to Schedule E categories, and a W-9 for each contractor.
5. Your closing statement, the land and building split, and an improvement log with costs and in-service dates.
6. Form 1098 mortgage statements, property tax bills, and mileage logs.

The IRS says to keep records supporting a return until the period of limitations runs out (generally three years), and property records until it expires for the year you sell, since they support depreciation and gain or loss.

If you’d rather not keep all of that yourself, that is what our bookkeeping for rental property service does. JAV keeps the books by property every month, coded to Schedule E categories, and Susan Volpe reviews every client’s books. For the return itself, we work with trusted CPA partners, or with your own CPA, so tax season becomes a handoff of reconciled numbers. For the bigger picture, see our plain-English guide to real estate accounting.

This article is general information, not tax or legal advice. Talk with your CPA or attorney about your situation.