Rental income -- whether from a long-term tenant, an Airbnb listing, or a second home you rent occasionally -- is generally taxable as ordinary income at the federal level. But rental property comes with a set of deductions that W-2 employees do not have access to, including depreciation, which can significantly reduce or even eliminate taxable rental income on paper.
What Counts as Rental Income
The IRS requires you to report all rental income, including:
- Monthly rent payments
- Advance rent paid upfront
- Security deposits you keep (if applied to rent or to cover damages)
- Payments for canceling a lease
- Services provided by a tenant in lieu of rent (valued at fair market value)
The 14-Day Rule for Vacation Rentals
If you rent out a home that you also use personally, special rules apply. If you rent it for 14 days or fewer per year, the rental income is completely tax-free and does not need to be reported. If you rent it for more than 14 days, the rental income is taxable and you must allocate expenses between personal and rental use based on the number of days each way.
Deductible Rental Expenses
Landlords can deduct ordinary and necessary expenses for managing, conserving, and maintaining rental property:
- Mortgage interest: Fully deductible for rental properties (not subject to the $750,000 cap that applies to primary residences)
- Property taxes: Deductible as a rental expense (separate from the $10,000 SALT cap on Schedule A)
- Insurance premiums: Landlord insurance, liability coverage
- Repairs and maintenance: Fixing a leaky roof, replacing appliances, repainting -- costs that maintain the property, not improvements
- Property management fees
- Advertising and listing fees
- Professional fees: Accounting, legal fees related to the rental
- Travel: Miles driven to the property for management purposes at the 72.5 cents/mile 2026 rate
Depreciation: The Most Powerful Rental Deduction
Depreciation allows you to deduct the cost of the property (not including land) over 27.5 years for residential rental property. This is a non-cash deduction -- you do not spend money to claim it; you simply deduct a portion of the property's original value each year.
Example: You bought a rental house for $300,000. The land is worth $60,000, so the depreciable basis is $240,000. Annual depreciation: $240,000 / 27.5 = $8,727 per year. If your rental income is $18,000 and other deductible expenses are $12,000, depreciation turns a $6,000 taxable profit into a $2,727 loss on paper.
Important: when you sell the property, the IRS recaptures the depreciation you claimed at a rate of up to 25% (depreciation recapture tax). Keep careful records of all depreciation taken.
Passive Activity Loss Rules
Rental activities are generally classified as "passive" for tax purposes. Passive losses can normally only offset passive income. However, if your AGI is $100,000 or below and you actively participate in managing the rental, you can deduct up to $25,000 of rental losses against ordinary income. This allowance phases out between $100,000 and $150,000 of AGI.
If you qualify as a real estate professional (more than 750 hours per year in real estate activities), your rental losses are not passive and can offset all income without limit.
Source
IRS Publication 527 (Residential Rental Property); IRS Topic No. 414 (Rental Income and Expenses); IRS Form 4562 (Depreciation and Amortization).
Reporting Rental Income on Your Tax Return
Rental income from a long-term residential property is reported on Schedule E (Form 1040), Supplemental Income and Loss. Short-term rental income from platforms like Airbnb or VRBO is also generally reported on Schedule E, though if you provide substantial services to guests (daily cleaning, concierge services, meals), it may be reclassified as Schedule C self-employment income subject to SE tax. The distinction matters: Schedule E rental losses are subject to the passive activity rules discussed above; Schedule C income is always subject to SE tax regardless of profit or loss.
You will receive Form 1099-K from platforms like Airbnb, VRBO, or Furnished Finder once your rental income through those platforms exceeds the reporting threshold ($5,000 in 2026). The 1099-K shows gross payments -- before platform fees and host service fees. You can deduct those fees on Schedule E as an ordinary business expense, so your taxable income is the net, not the gross shown on the 1099-K.
Short-Term Rentals and the 14-Day Rule
If you rent out your home or a vacation property for 14 days or fewer during the year, the rental income is entirely tax-free. You do not need to report it, and you cannot deduct rental expenses. This is the tax code's built-in exemption for occasional rental use -- relevant for homeowners who rent out a room during a major local event or list their home while traveling.
Once you exceed 14 rental days, the property's expenses must be allocated between personal and rental use based on the ratio of rental days to total days used. If you rented for 60 days and used the property personally for 30 days (90 total days), 67% of expenses are allocable to rental use and deductible. Mortgage interest and property taxes for the personal-use portion remain deductible on Schedule A (subject to the standard deduction comparison), but rental-related expenses go on Schedule E.
Security Deposits and When They Become Income
Security deposits held in trust are not income when received -- you are holding someone else's money. They become taxable income only if you keep all or part of them: to cover unpaid rent, to repair damages beyond normal wear and tear, or because the lease allows you to apply the deposit to the final month's rent. Keep security deposits in a separate account and document clearly why any portion was retained. If a tenant disputes the withholding, maintaining clean records protects you both legally and for tax purposes.
Qualified Business Income Deduction (QBI) for Rental Activity
Some rental property owners may qualify for the 20% Qualified Business Income (QBI) deduction under Section 199A, which allows a deduction of up to 20% of qualified business income from pass-through entities and certain sole proprietorships. Qualifying for the QBI deduction requires that the rental activity rise to the level of a "trade or business," which the IRS generally interprets as requiring substantial regular involvement. The IRS issued a safe harbor: if you spend at least 250 hours per year on rental services (leasing, maintenance, rent collection, management, tenant communication), you can use the safe harbor to establish trade or business status and potentially claim the QBI deduction. Keep a log of hours.
Selling Rental Property: Depreciation Recapture
When you sell rental property, the IRS recaptures the depreciation you claimed during ownership and taxes it at a maximum rate of 25% -- even if you are in a lower long-term capital gains bracket. In addition to depreciation recapture, any remaining gain is taxed at long-term capital gains rates. Keeping detailed records of all depreciation claimed (usually on Form 4562 each year) is essential for accurately calculating your taxable gain on a future sale.
Source
IRS Publication 527 (Residential Rental Property); IRS Schedule E instructions; IRS Topic No. 414 (Rental Income and Expenses); IRS Rev. Proc. 2019-38 (QBI rental safe harbor).