Key Takeaways
Rental Income Taxation
When you rent out your home or a portion of it, the money you collect is generally considered taxable income by the IRS. You must report it on your federal return, though you're also entitled to deduct a range of qualifying expenses that offset what you owe. The net result — income minus allowable deductions — determines how much tax you'll actually pay on your rental activity.
Rental activity is typically reported on Schedule E (Form 1040). Passive activity loss rules under IRC Section 469 may limit how much of a rental loss you can deduct in a given year, depending on your income and level of participation.
What Counts as Rental Income
Rental income is broader than the monthly check a tenant writes you. The IRS counts advance rent, security deposits kept as final rent, payments for canceling a lease, and the fair market value of any services a tenant provides in lieu of cash rent. If a tenant pays your plumber directly and you reduce their rent accordingly, that trade still has a taxable value.
The key exception worth knowing: if you rent your home for fewer than 15 days in a calendar year, you may exclude that income entirely and owe no tax on it. You also cannot deduct rental expenses in that scenario, but the income stays off your return. This rule is particularly relevant for homeowners who rent during a major local event or sports tournament. Beyond that threshold, the income is reportable — no matter how informal the arrangement.
If you're still weighing whether renting makes financial sense for your situation, the decision between selling and renting involves more than just tax considerations, but tax treatment is a meaningful factor.
Deductions That Reduce Your Taxable Rental Income
The IRS allows landlords to deduct ordinary and necessary expenses connected to operating a rental property. Commonly deductible items include:
- Mortgage interest on the rental property
- Property taxes (note that how property taxes are calculated varies widely by location)
- Landlord insurance premiums
- Repairs and maintenance — fixing a broken heater qualifies; replacing it with a better system is an improvement, treated differently
- Property management fees and leasing commissions
- Advertising costs to find tenants
- Professional fees — accounting and legal costs related to the rental
Improvements that add value or extend the home's useful life — a new roof, an added bathroom — cannot be deducted immediately. Instead, they're capitalized and recovered through depreciation over time.
Keep a Rental Activity Log Year-Round
Don't wait until tax season to track rental days, personal-use days, and expenses. A simple spreadsheet updated monthly can save hours of reconstruction work and provide the documentation needed to support every deduction you claim. If you use the property personally even occasionally, accurate day counts are critical for determining how expenses must be allocated.
If you rent only a portion of your home, you must allocate expenses between personal and rental use, typically based on the ratio of rental square footage to total square footage. Only the rental share is deductible.
Depreciation: The Non-Cash Deduction Landlords Often Miss
Depreciation is one of the most significant tax advantages available to rental property owners, and one of the most frequently overlooked. Under IRS rules, you can deduct the cost of the home's structure — not the land it sits on — over 27.5 years using the straight-line method. On a home with a depreciable basis of $220,000, that works out to roughly $8,000 per year in depreciation deductions, without spending another dollar.
27.5 years
IRS depreciation period for residential rental property
The IRS requires residential rental property structures to be depreciated using straight-line method over 27.5 years, as established under the Modified Accelerated Cost Recovery System (MACRS).
Up to 25%
Depreciation recapture tax rate upon sale
When a rental property is sold, the IRS may tax previously claimed depreciation deductions at an unrecaptured Section 1250 gain rate of up to 25%, depending on the seller's income bracket.
14 days
Threshold below which rental income may be excluded
Per IRS Publication 527, homeowners who rent their home for fewer than 15 days in a tax year may exclude that income entirely and are not required to report it on their federal return.
This deduction continues as long as the property is in service as a rental, even if its market value is rising. However, when you eventually sell, the IRS may recapture the depreciation you claimed and tax it at a rate of up to 25%. That future liability is manageable with proper planning, but it's important to factor it in — particularly if you're also thinking through your rental income metrics and cash-flow projections.
Recordkeeping and When to Involve a Professional
Thorough recordkeeping isn't optional — it's what separates a clean tax filing from a stressful audit. From the day you place your home in service as a rental, maintain organized records of:
- All rental payments received (dates and amounts)
- Receipts for every repair, maintenance visit, and capital improvement
- Lease agreements and any amendments
- Days the property was rented versus personally used
- Insurance and property tax statements
The IRS can generally audit returns up to three years back, and up to six years if substantial income was underreported. Keeping records for at least six years is a reasonable standard.
Passive activity loss rules add another layer of complexity. If your rental expenses exceed your rental income, the resulting loss may or may not be deductible in the current year, depending on your adjusted gross income and whether you qualify as a real estate professional under IRS definitions. These rules can significantly affect your overall tax picture, and they're where a licensed CPA or enrolled agent earns their fee.
Before your first tenant moves in, it's also worth reviewing what to address to get your home rent-ready — including documentation that supports your depreciable basis.
This article is for general informational and educational purposes only and does not constitute tax, legal, or financial advice. Tax rules are complex and vary based on individual circumstances. Consult a licensed tax professional for guidance specific to your situation.