Rental income is considered "passive income" by the IRS, meaning special rules and limitations may apply when deducting rental expenses.
Landlords can deduct mortgage interest, property taxes, insurance, utilities, repairs, and depreciation as business expenses to lower their taxable rental income.
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The "passive activity loss" rules limit the amount of rental losses that can be deducted against other types of income, unless the landlord "materially participates" in the rental activity.
Rental income is subject to self-employment tax in addition to regular income tax, unless the landlord hires a property management company.
Depreciation recapture taxes may apply when a rental property is sold, requiring landlords to pay taxes on the accumulated depreciation deductions.
The Net Investment Income Tax (NIIT) of 3.8% may apply to rental income for high-income taxpayers, on top of regular income taxes.
Rental income must be reported even if the property was vacant for part of the year, though there are some exceptions for personal use of the property.
Special tax rules exist for renting out a portion of the landlord's primary residence, such as a basement apartment or spare room.
Landlords must carefully document all rental income and expenses, as the IRS closely scrutinizes rental real estate activities.
1031 "like-kind" exchanges allow landlords to defer capital gains taxes when selling one investment property and purchasing another.
Rental income from properties located in certain low-income "Opportunity Zones" may qualify for preferential tax treatment.
Landlords must pay quarterly estimated tax payments on their rental income if their total tax liability exceeds $1,000 for the year.
The depreciation period for residential rental properties is 27.5 years, while commercial properties are depreciated over 39 years.
Landlords can deduct the cost of repairs and maintenance, but improvements that increase the property's value must be capitalized and depreciated over time.
Security deposits are not considered taxable income unless the landlord keeps a portion of the deposit for damages or unpaid rent.
Rental income from vacation homes or short-term rentals is subject to different tax rules, depending on the number of days the property is used personally.
Landlords can deduct the cost of travel expenses to inspect or manage their rental properties, but trips that combine business and personal use must be carefully documented.
Landlords can claim a deduction for "qualified business income" (QBI) of up to 20% of their net rental income, subject to certain income thresholds and limitations.
Rental losses can be carried forward indefinitely to offset future rental income, but "passive activity losses" may have additional restrictions.
The IRS provides simplified "safe harbor" rules for landlords to deduct certain rental expenses without the need for extensive recordkeeping.