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ContinueUnderstanding tax on rental income and how to track and report expenses will enable you to reduce your tax bill and increase portfolio profitability.
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The IRS tax filing deadline for the 2025 tax year is April 15th, 2025.
If you're like most landlords, tax season probably isn't your favorite time of year. Between tracking receipts, categorizing expenses, and trying to figure out what's actually deductible, it's easy to feel overwhelmed, or worse, leave money on the table.
Here's the good news: 2025 brought the most landlord-friendly tax changes in years. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation, made the QBI deduction permanent, and opened up new opportunities to reduce your tax burden significantly. Whether you own one rental property or manage an entire portfolio, understanding these changes could save you thousands.
This guide breaks down everything you need to know about tax on rental income, from calculating what you owe to maximizing every deduction available.
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, introducing the most significant tax reforms for rental property owners since the Tax Cuts and Jobs Act of 2017. These changes create substantial opportunities for landlords to reduce tax liability and improve cash flow.
Critical Legislative Updates:
100% Bonus Depreciation Permanently Restored
The OBBBA permanently reinstates 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This represents a dramatic reversal from the scheduled phase-down that would have reduced bonus depreciation to 40% in 2025.
Example: A landlord who spends $25,000 on property improvements in 2025 (eg, replacing HVAC systems, appliances, and flooring) can potentially deduct the entire $25,000 in year one, compared to only $10,000 under the previous 40% rate.
Qualified Business Income Deduction Made Permanent
The 20% QBI deduction, previously scheduled to expire after 2025, is now permanent. This allows eligible landlords to deduct up to 20% of qualified rental business income, effectively reducing the top tax rate on rental income from 37% to 29.6%.
Section 179 Limits Increased
Both amounts will be indexed for inflation
Business Interest Deduction Calculation Enhanced
The OBBBA reverts the business interest limitation calculation back to EBITDA (from EBIT), allowing depreciation and amortization to be added back when calculating the 30% limitation. This change increases deductible interest expense for leveraged property owners.
According to recent industry data, the rental property market continues to represent a significant investment opportunity:
These statistics underscore the importance of effective tax planning. With average gross profits of $8,552, strategic tax management can mean the difference between marginal returns and substantial portfolio growth.
The IRS defines rental income as any payment you receive for the use or occupation of property. Unless you are filing as a corporation (eg, an LLC or S-Corp), rental income is taxed at your standard income tax rates. And may be owed at both a state and federal level unless you’re in a state with no income tax.
Key Principles:
Christanne Wright, real estate CPA, explained that the taxation of “rental income is typically considered ordinary income, and it's subject to federal and state income taxes. This means that the rental income you receive from your properties needs to be reported on your tax return."
The Profitable Rental Podcast | View All Episodes →
As rental income is deemed passive income by the IRS it needs to be reported separately from ordinary W-2 income. Most real estate investors will need to file a Schedule E which is the part of the form 1040 that deals with supplemental income and loss, such as rental income and royalties.
The United States employs a progressive tax system with seven marginal tax brackets. Understanding how this structure works is essential for accurate tax planning.
How Marginal Rates Work:
You don't pay your top tax rate on all income. Instead, different portions of income are taxed at different rates as you move up the brackets.
Example: Single filer with $50,000 in total taxable rental income (2025):
2025 Tax Brackets (Due April 2026)
2024 Income Tax Brackets - For Reference
When calculating rental income tax, there are several types of income to include. Some examples of these are:
Understanding the calculation methodology enables accurate tax planning and helps identify optimization opportunities.
Important: Active participation allows up to $25,000 in rental losses to offset other income for taxpayers with Modified AGI below $100,000 (phases out completely at $150,000). Above these thresholds, losses may be suspended and carried forward.
Planning Consideration: Understanding how rental income impacts your overall tax bracket enables strategic decision-making around expense timing, property improvements, and depreciation strategies.
When tracking rental property expenses throughout the year, or more specifically, when filling out a Schedule E form during tax season, expenses need to be broken down by property and into specific categories. Common rental property expenses that can be deducted in any given tax year include:
For more information A Breakdown of your Schedule E Expense Categories or read The Complete Guide To Tax Deductions For Rental Property
Once you have a clear picture of your rental income and expenses, you will need to deduct your expenses from your income to determine your taxable income. Rather than waiting until the end of the tax year to do this, it’s a good idea to track your income and expenses in real time throughout the year. It's easier to record one expense that happened last week than record a hundred expenses that happened six months ago.
Using a rental accounting solution such as Landlord Studio will enable you to digitize your receipts, categorize your expenses and keep them updated on the go. Bank feed integration will save you time too, as you aren’t having to manually input data. At the end of the tax year, you can give your accountant view-only access to your data, so they can see the reports that are useful for them.
Consistent record-keeping may seem like a hassle when you’re in the moment but will pay off in the long run. Even if you aren’t using a property management software solution, make sure you are at least using a spreadsheet that contains all of the necessary information. Your CPA will thank you for being organized for the duration of the year.
Depreciation is the process of deducting the value of an asset, in this case, your property and any improvements made to it against your taxes over its useful lifetime. Think of it as compensation for the wear and tear on your rental property.
It is calculated depending on the useful lifespan of the asset, which is set by the IRS. For residential rental properties, this is 27.5 years, so depreciation will be calculated by taking the value of the property and dividing it by 27.5.
Understanding this is key when it comes to tax season, as depreciation reduces the amount of tax you pay via tax deductions.
The One Big Beautiful Bill Act dramatically expanded depreciation benefits through permanent 100% bonus depreciation restoration.
What Qualifies:
Tangible personal property with recovery period of 20 years or less:
Strategic Application:
Traditional Depreciation (Pre-OBBBA):
100% Bonus Depreciation (Post-OBBBA):
Related: What Investors Need to Know About Bonus Depreciation
QBI is a tax break that allows self-employed and small business owners to deduct up to 20% of their business income from their taxes (after depreciation).
In order to qualify, the total taxable income in 2023 must be under $364,200 for someone married filing jointly, or $182,10 for single filers. Exclusions include passive rentals which aren’t considered a trade or business and properties that are used as a residence by the taxpayer at some point during the year.
Even if you do not qualify as a real estate professional, you can still qualify for the QBI deduction as long as your rental activities are classified as business activities.
Activities Generally Qualifying:
IRS Safe Harbor (Revenue Procedure 2019-38):
Rental real estate enterprise automatically qualifies if:
Activities NOT Qualifying:
Beyond federal obligations, rental income taxation varies significantly by state and local jurisdiction. These variations can substantially impact investment returns and property acquisition decisions.
State Income Tax on Rental Income:
State taxation of rental income generally follows one of three models:
Property Tax Variations:
Local property taxes represent significant ongoing expenses, with effective rates ranging from 0.28% (Hawaii) to 2.13% (New Jersey) of assessed property value annually.
Recent State Legislative Changes:
Arizona implemented landlord-friendly reforms effective January 2025, eliminating the Transaction Privilege Tax on long-term residential rentals—a significant benefit for property owners in that jurisdiction.
Nonresident Property Owners:
Property owners must file state income tax returns in states where rental properties are located, regardless of residency. Most states require:
Example: California resident owning rental property in Oregon must file Oregon nonresident return reporting Oregon rental income, in addition to California resident return reporting all income.
State Conformity with Federal Tax Law:
States vary in conformity with federal tax provisions:
Tax Credits and Incentives:
Certain states offer credits for:
Given the complexity and variability of state and local rental income taxation, landlords should:
Related: States Without Property Tax: From Lowest to Highest
You may need to file several rental tax income forms, even if your property is not for personal use.
The main form that owners of rental properties will need to file is a Schedule E form, which you file with your 1040. You report all your income and rental expenses on this form. If you have any personal expenses associated with your rental property, you may be able to deduct some of them using a Schedule A form.
For depreciation and improvements to your property use Form 4562. This allows you to report depreciation from the year you began leasing your rental property. Note that you’ll only be able to deduct a percentage of expenses in the year you incur them.
Finally, if net investment income tax applies to your rental income, you need to file Form 8960. Working through the form will show you if this form applies to your situation.
You may also be required to file a 1099 if you have paid any contractors over $600 during the tax year.
Find out more about required Landlord tax documents: Everything you need to know.
Having a clear understanding of how to track and report rental income will make this year’s tax season a breeze. Make the most of purpose-built software like Landlord Studio, which exists to make your job as a landlord more efficient and will help you with all aspects of rental property accounting, from income and expense tracking to tax reporting.
Landlord Studio allows you to customize and generate a number of reports such as the Schedule E 1040 report and supplier expense reports, designed to make tax time as simple and stress-free as possible.
For further clarification regarding rental income tax, calculating depreciation, and QBI deduction, talk to your accountant or CPA.
Q: Do I have to pay taxes on rental income?
Yes, rental income is taxable at federal and potentially state levels. The IRS requires reporting all rental income regardless of amount. Even if you rent property for only part of the year or operate at a loss, you must file appropriate tax forms reporting rental activities.
Q: What is the rental income tax rate for 2025?
Rental income is taxed at ordinary income tax rates ranging from 10% to 37%, depending on your total taxable income and filing status. Your specific rate depends on where your total income falls within the seven federal tax brackets. Additionally, high-income taxpayers may face the 3.8% Net Investment Income Tax.
Q: How is rental income different from regular income for tax purposes?
While taxed at ordinary income rates, rental income is classified as passive income and reported separately on Schedule E rather than as wages on Form 1040. This classification affects loss limitations, allows rental-specific deductions, and may qualify for the 20% QBI deduction.
Q: Can rental income push me into a higher tax bracket?
Yes, rental income is added to your total taxable income and can push you into a higher marginal tax bracket. However, only the income above the threshold is taxed at the higher rate due to the progressive tax system.
Q: What expenses can I deduct as a landlord?
Landlords can deduct ordinary and necessary expenses including: mortgage interest, property taxes, insurance, repairs and maintenance, property management fees, utilities, advertising, professional fees, supplies, HOA dues, travel expenses, depreciation, and business-related technology costs.
Q: Can I deduct mortgage interest on rental property?
Yes, mortgage interest on loans secured by rental property is fully deductible without limitation. This differs from personal residence mortgage interest, which faces various restrictions. Only interest is deductible—principal payments are not.
Q: What's the difference between repairs and improvements for tax purposes?
Repairs maintain property in ordinary condition and are immediately deductible (fixing leaks, painting, replacing broken appliances). Improvements add value, extend useful life, or adapt property to new use and must be capitalized and depreciated (new roof, room additions, major remodels). With 100% bonus depreciation, some improvements may qualify for immediate deduction through cost segregation.
Q: Are property management fees tax deductible?
Yes, property management fees, including percentage-based fees, tenant placement fees, and leasing commissions paid to professional management companies or agents are fully deductible as ordinary business expenses.
Q: Can I deduct travel expenses for my rental property?
Yes, travel expenses for rental property management are deductible. Local travel can be deducted using the standard mileage rate ($0.70 per mile in 2025) or actual expense method. For out-of-area properties, airfare, lodging, rental cars, and meals (50%) are deductible when travel is primarily for business purposes.
Q: What is depreciation and how does it reduce my taxes?
Depreciation allows systematic deduction of property value (excluding land) over 27.5 years for residential rentals. It's a non-cash deduction, meaning you reduce taxable income without spending money. For a property with $275,000 depreciable basis, annual depreciation is $10,000, potentially saving $2,200-$3,700 annually depending on tax bracket.
Q: How does the 2025 bonus depreciation work for rental properties?
The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for property acquired after January 19, 2025. This allows immediate deduction of qualifying personal property (appliances, flooring, landscaping, HVAC) with useful life of 20 years or less, rather than depreciating over multiple years. Combined with cost segregation studies, this creates substantial first-year tax benefits.
Q: What is depreciation recapture?
When selling rental property, previously claimed depreciation must be "recaptured" and taxed at up to 25%. However, depreciation benefits typically outweigh recapture costs due to time value of money, and 1031 exchanges can defer recapture indefinitely.
Q: Do I have to claim depreciation?
The IRS assumes depreciation whether you claim it or not. If you don't claim depreciation, you still face recapture upon sale. Always claim allowable depreciation. If previously unclaimed, file Form 3115 to catch up without amending prior returns.
Q: How is Airbnb or short-term rental income taxed?
Short-term rental taxation depends on rental duration and services provided. If average guest stay is 7 days or less and you provide substantial services, income may be treated as non-passive (subject to self-employment tax but with greater loss deduction flexibility). The 14-day rule allows tax-free rental income if you rent your primary residence 14 days or fewer annually.
Q: What is the QBI deduction for rental income?
The Qualified Business Income deduction allows up to 20% deduction on qualified rental business income for eligible taxpayers. To qualify, rental activities must constitute a trade or business (not passive rental). The IRS safe harbor requires 250+ hours of rental services annually. Income thresholds and limitations apply above $197,300 (single) or $394,600 (married filing jointly) for 2025.
Q: Can I deduct rental losses against my W-2 income?
It depends on your participation level and income. Active participants can deduct up to $25,000 in rental losses against W-2 income if Modified AGI is below $100,000 (phases out completely at $150,000 AGI). Real estate professionals with material participation face no passive loss limitations and can deduct rental losses fully against any income.
Q: What is real estate professional status and how do I qualify?
Real estate professional status eliminates passive activity loss limitations. To qualify: (1) more than 50% of personal services during the year must be in real estate trades or businesses, and (2) you must perform 750+ hours in real estate activities. This status allows full deduction of rental losses against any income without limitation.
Q: Do I need to report rental income if I only rent part-time or occasionally?
Yes, all rental income must be reported regardless of frequency or amount. Even occasional Airbnb rentals, renting a room in your home, or seasonal rentals require reporting. The only exception is renting your primary residence 14 days or fewer annually.
Q: What tax forms do landlords need to file?
Primary forms include: Schedule E (Form 1040) for income and expenses, Form 4562 for depreciation, Form 8582 for passive loss limitations if applicable, and Form 8960 for Net Investment Income Tax if high-income thresholds are met. Landlords must also issue Form 1099-NEC to contractors paid $600+ annually.
Q: When are rental property taxes due?
For tax year 2025, the filing deadline is April 15, 2026. Quarterly estimated tax payments are due April 15, June 15, September 15, and January 15 (following year). Extensions move the filing deadline to October 15, 2026, but don't extend payment deadlines.
Q: Do I need to make quarterly estimated tax payments on rental income?
If rental income generates tax liability beyond withholding, quarterly estimated payments are required. Safe harbor rules: pay 90% of current year tax or 100% of prior year tax (110% if prior year AGI exceeded $150,000) to avoid underpayment penalties.
Q: Do I pay state taxes on rental income?
Most states tax rental income, though nine states have no state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming). If you own property in a state where you're not a resident, you must file a nonresident return in that state reporting rental income.
Q: Are property taxes on rental property deductible?
Yes, all state and local property taxes on rental real estate are fully deductible with no limitation. This differs from the $10,000 SALT cap on personal residences. The SALT cap doesn't apply to rental property taxes, which are deducted as business expenses on Schedule E.
Q: How does the IRS know if I have rental income?
The IRS identifies rental income through: third-party reporting (Form 1099-K from payment platforms), property records databases, income/expense discrepancies, mortgage interest deductions reported on Form 1098, audits, and informant tips. Accurate reporting is essential as the IRS has multiple verification methods.
Q: What records should I keep for rental property?
Maintain: all income records (lease agreements, rent payments, fee collections), expense receipts and invoices, bank and credit card statements, mileage logs, property purchase documents, improvement records, depreciation schedules, insurance policies, mortgage statements, property tax bills, and professional service contracts. Retain tax records for 7 years minimum; property purchase documents permanently.
Q: Can I use software to manage rental property taxes?
Yes, property management and accounting software like Landlord Studio streamlines tax compliance through automated income/expense tracking, receipt digitization, bank feed integration, default expense categories in line with IRS requirements, and one-click Schedule E generation. Software reduces errors, saves time, and helps identify all eligible deductions.
Q: What is a 1031 exchange and how does it help with taxes?
A 1031 exchange allows deferral of capital gains taxes when selling rental property by reinvesting proceeds into like-kind replacement property. Strict rules apply: identify replacement property within 45 days, complete purchase within 180 days, use qualified intermediary, and reinvest equal or greater value. Properly executed, 1031 exchanges defer all capital gains and depreciation recapture taxes.
Q: What is a cost segregation study?
Cost segregation is a tax strategy that identifies building components qualifying for accelerated depreciation. Rather than depreciating the entire building over 27.5 years, components are reclassified into 5-, 7-, or 15-year property. With 100% bonus depreciation, this creates substantial immediate tax deductions. Studies typically cost $5,000-$15,000 and can generate $20,000-$100,000+ in first-year tax savings.
Q: Should I hire a CPA for rental property taxes?
For multiple properties, complex situations, or significant rental income, hiring a real estate CPA provides substantial value through: maximized deductions, proper form completion, audit protection, strategic tax planning, guidance on entity structure, depreciation optimization, and multi-state compliance. Professional fees are tax-deductible.
Landlord Studio is an easy to use property management and accounting software designed for landlords.
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