Rental Property Taxes: How Much Tax on Rental Income?

Published on September 1, 2023

Rental Property Taxes: How Much Tax on Rental Income?

Rental Property Taxes: How Much Tax on Rental Income?

As an owner of rental property, it is essential to understand the tax implications associated with your taxable net income from these investments. Managing taxes on rental income, without a doubt, is an important aspect of successful real estate investing. 

As such, this blog aims to unpack the complexities of taxation on investment properties. We will discuss tax rates, types of rental property income that are taxable, applicable deductions, and more. 

Ultimately, this comprehensive guide will empower you to make more informed decisions, potentially maximizing your returns and reducing your tax burden on your residential rental properties.

What Rental Income is Taxable?

What Rental Income is Taxable?

Understanding how different forms of rental real estate income are treated from a tax perspective is crucial for landlords or real estate investors when they calculate taxable income. Remember that rental income is taxed as ordinary income.

That said, let's break down the types of taxable rental income.

Regular Rent Payments

This is the most straightforward form of taxable income for real estate investors. It includes the monthly rent payment you receive from tenants. The IRS considers this taxable income, which must be reported in the year you receive it.

Advance Rent Payments

If you receive rent payments in advance, for instance, a tenant pays for future months, that amount is taxable in the year you receive it, not when it would ordinarily have been due.

Security Deposits

Generally, security deposits are not considered income when received, provided they are intended to be returned to the tenant at the end of the lease. 

However, if you end up keeping part or all of the security deposit because the tenant didn't meet the terms of the lease, that amount becomes taxable income. You should include it when you calculate rental income at the end of the year.

Lease with Option to Buy

If a lease agreement includes an option to buy, and the tenant pays an increased rent price to exercise that option, the extra money received is usually considered taxable income.

Lease Cancellation or Termination Payments

If a tenant pays to break their lease, the money you receive as a result of this is considered rental income and must be reported in the year you receive it so they can be deducted from your income tax depending on your tax bracket.

Partial Interest

If you own only a part of a rental property and receive a portion of the rent apart from the purchase price, that partial interest income is still considered rental income and should be reported on your tax return for your rental income taxes.

Property or Services Received in Place of Rent

Sometimes, a tenant may provide property or services which lowers its operating expenses, such as property improvements or maintenance work, instead of rent. You must report the fair real estate market value of these services or property as rental income for tax purposes.

Tenant-Paid Owner Expenses

If a tenant pays any of your rental expenses that you are supposed to pay, such as repairs or utility bills, that payment is considered rental income and can be tagged as deductible expenses from your taxable net income. 

You must include this income when calculating your net rental income for your investment property, but you may also be able to claim these income and expenses as deductions. Consult a tax professional to understand this better.

Rental Income Tax Rate: How is Rental Income Taxed?

Rental Income Tax Rate: How is Rental Income Taxed?

IRS defines rental income as money you gained from someone occupying your property. Rental income is considered taxable income, and it is taxed based on your income tax bracket. In the United States, the tax rates range from 10% to 37%, with progressive tax rate brackets based on your total income, not just your rental income. 

As a rental property owner, you'll need to consider how the annual changes in federal tax rate brackets due to factors like inflation could impact your tax liabilities. This is needed when you calculate rental income tax or your total annual rental income.

How you calculate your rental income for tax purposes depends on several factors. Generally, it includes the rent you receive from your tenants.

Then, you can deduct expenses related to owning and maintaining the property, such as mortgage interest, insurance, utilities, and rental property depreciation. The ability to claim these deductions can significantly lower the amount you'll pay when you owe taxes and the tax rate bracket you'll belong to.

Example of Rental Income Tax Calculation

Example of Rental Income Tax Calculation

Let's say you have an income producing real estate that brings in $30,000 per year in rent in your real estate investment portfolio.

However, you have expenses paid for the property, such as mortgage interest, insurance, and utilities or operating expenses that total $10,000. Additionally, you can depreciate the fair market value of the property at a rate of 3.636% per year for 27.5 years. 

If the property's value or purchase price (not including the land) is $200,000, you can deduct a depreciation expense of $7,272 ($200,000 * 3.636%) from your income. (This is why you should calculate depreciation beforehand).

This means the rental property generates $12,728, which is taxable ($30,000 - $10,000 - $7,272).

Let's assume, hypothetically, that you fall into a 12% tax bracket. Your tax due on the rental income would be $1,527.36 when you deduct the percentage of the tax rate bracket ($12,728 * 12%).

Deductions Available on Rental Income

Deductions Available on Rental Income

Tax deductions can be quite complex, and individual situations can vary widely. However, there are certain tax deductions that can help mitigate the tax burden on your rental income and affect your tax rate bracket. Check them out below before calculating rental income tax.

Property Depreciation

The cost of buying your rental property isn’t fully deductible in the year you pay for it. Instead, landlords or real estate investors get back the cost of real estate through depreciation

Depreciation lets you deduct a portion of the cost of the property over several years. The depreciable life of residential rental property is 27.5 years, and 39 years for commercial property.

Property Tax

Any real estate taxes you pay for your rental properties are deductible. If you're escrowing your rental income taxes with your mortgage payment, make sure you only deduct the amount actually paid to your taxing authority that year.


This is often a landlord's biggest deductible expense. Common examples of interest that landlords or real estate investors can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.


The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. This can include anything from fixing a broken lock to patching a roof. 

Property Management Costs

If you use a property manager or if you pay someone for services like advertising, cleaning, and maintenance, these common rental property expenses are deductible. 


You can deduct the premiums you pay for almost any insurance for your rental property. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance.

Travel Related to Rental Activity

The costs of traveling to your investment properties for the purposes of managing them or making repairs are deductible. If you use your car, you can either deduct your actual expenses or take a standard mileage rate.

Home Office Expenses

If part of your home is used exclusively and regularly for your rental property business, you might be able to deduct the associated costs as a home office expense. 


You can deduct expenses for advertising your rental units, including online listings, print ads, and signage.

Legal Services

Legal and professional services, such as fees charged by lawyers, accountants, and real estate investment consultants, are deductible, as long as these fees are directly related to your rental activity.

HOA Fees

If your rental property is part of a homeowners association (HOA), you can deduct the fees you pay. However, you cannot deduct a portion of your HOA fees that's a contribution to the association's capital reserve fund.

How to Report Rental Income

How to Report Rental Income

Accurately reporting rental income and expenses to the Internal Revenue Service (IRS) is a crucial part of your financial responsibilities. The process can be complex, especially if you have multiple properties or diverse forms of income.

To help you out, here is a general guide on reporting your rental income.

Important note: Tax laws change regularly. Always seek advice from a qualified tax professional to ensure you're correctly calculating and reporting your rental income and to make sure you're taking advantage of all available tax benefits.

Step 1: Gather Relevant Information

When owning rental properties or just one rental property, start by gathering all the relevant information for the tax year. This will include records of rent received from each tenant, receipts for deductible expenses, details of any property or services received in place of rent, any advance rent payments received, and any tenant-paid expenses. 

It is essential to maintain good record-keeping practices throughout the year to streamline this process.

Step 2: Determine Your Net Rental Income

Your net rental income is your gross rental income minus allowable expenses. Gross rental income includes all the rental payments you received plus any additional taxable amounts like leasing fees or non-refundable security deposits you kept.

From this total, subtract your allowable expenses such as repairs, property management fees, insurance, property taxes, property management, mortgage interest, security deposit, and others mentioned in the deductions section of this article. 

Remember, these must be expenses you actually paid during the tax year for the residential real estate you are renting out. 

Step 3: Report Rental Income on Tax Return

Report rental income on your tax return, typically on Schedule E (Form 1040 or 1040-SR). On this form, you will list your total rental income, total expenses, supplemental income, and your resulting net rental income.

For each rental property or rental real estate you own, you'll need to complete a separate column for their tax implications. If you have more than three rental properties, you'll need to complete and attach as many Schedule E's as necessary. 

Step 4: Depreciation Expenses

Depreciation on a rental property is reported on Form 4562, Depreciation and Amortization. You'll list the cost of the property, the date you began renting it, and the calculated depreciation for the year. This total is then reported on your Schedule E.

Step 5: File Your Tax Return

Once you've filled out all the necessary information and calculated your total tax owed, attach Schedule E and Form 4562 to your Form 1040 or 1040-SR, and file your tax return with the IRS.

Frequently Asked Questions

Frequently Asked Questions

How Much is Rental Income Taxed in the US for Non-Residents?

Non-resident aliens who have U.S. rental income must have 30% of their gross rental income withheld for taxes, or they can elect to have the net rental income (after expenses) taxed at graduated rates. 

The specific percentage may vary depending on tax treaty benefits with the renter's home country. It's essential to consult with a tax advisor or a CPA for the most current regulations.

What is Qualified Business Income Deduction and Does This Apply to Rental Tax?

The Qualified Business Income Deduction, also known as Section 199A deduction, allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from certain businesses. 

Whether rental activity qualifies for a QBI deduction depends on the specific circumstances and whether the activity rises to the level of a trade or business. 

What are the Taxes When Selling a Rental Property?

When selling a rental property in the U.S., you may encounter several types of taxes. One is the capital gains taxes, which applies if you sell the property for more than what you originally paid. 

Aside from capital gains tax, another tax you will encounter when selling a rental property is the depreciation recapture tax. This property tax is applicable if you've taken depreciation deductions on the property over the years.

And lastly, you may also have to pay a net investment income tax on your profit from the sale, depending on your income level.

Key Takeaways: How Much Tax to Pay on Rental Income

The taxation of rental income requires careful understanding and navigation of U.S. tax laws. As detailed in this blog, rental income is taxed as ordinary income as part of your federal tax responsibilities. It is subject to your marginal tax rate based on the IRS tax brackets. 

However, it is essential to remember that when owning rental property, you can deduct a multitude of expenses related to the ownership and maintenance, like mortgage interest, insurance, utilities, and depreciation.

Now that you already know how rental income is taxed, it’s time to start looking for your next investment property. Check us out at Property Leads, as we offer highly motivated seller leads in multiple markets.

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