Rental Property Taxes: A Practical Guide for Landlords

Where it's reported

Rental income and expenses go on Schedule E (passive rental). If you provide substantial services (short-term rental like a hotel), it might be Schedule C instead — that triggers self-employment tax.

Deductible expenses

• Mortgage interest (full amount — not subject to the $750K personal-residence cap)
• Property tax (not capped by SALT)
• Insurance, property management fees, HOA
• Repairs (immediately deductible) vs improvements (depreciated)
• Utilities you pay
• Travel to the property
• Advertising and tenant screening
• Legal, accounting, and professional fees

Depreciation is the magic

Residential rental property is depreciated over 27.5 years using straight-line (commercial: 39 years). You deduct ~3.6% of the building's basis each year, even though no cash leaves your pocket. This often creates a paper loss on a cash-flow-positive property.

Cost segregation accelerates the benefit

A cost segregation study splits the property into shorter-life components (5/7/15-year) that depreciate faster. Combined with bonus depreciation, this can create massive paper losses in year one — useful if you qualify as a real estate professional.

Passive activity loss rules

Rental losses are 'passive' by default. They can only offset passive income — unless:

• $25,000 active participation exception — landlords with MAGI under $100K can deduct up to $25,000 of losses against ordinary income (phased out by $150K)
• Real Estate Professional status — 750+ hours and more than 50% of working time in real estate; rental losses become non-passive
• Short-term rentals with average stay ≤ 7 days are not 'rental' by code — different rules apply

QBI deduction for landlords

The 20% Qualified Business Income deduction can apply to rentals if they rise to a 'trade or business' (safe harbor: 250+ hours of services per year, separate books). Worth thousands for serious landlords.

On sale: depreciation recapture

When you sell, the depreciation you took is recaptured at up to 25%. The remaining gain is long-term capital gain. Section 1031 exchange can defer the entire tax — see our 1031 guide.