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).