Rental Income Tax Calculator
Rental income is taxable, but Schedule E deductions can dramatically reduce your tax bill — often to the point where a cash-flowing property shows a tax loss on paper. This page explains how the IRS taxes rental income, which expenses you can deduct, and the non-obvious tax rules that catch many investors off guard.
Use the cash flow calculator above to model your rental's income and expenses, then apply the tax framework below to estimate your true after-tax result.
How it's calculated
Rental income is reported on IRS Schedule E and taxed as ordinary income at your marginal rate. But the IRS allows you to deduct all ordinary and necessary rental expenses before calculating taxable income.
Deductible expenses under IRS Publication 527 include: mortgage interest (not principal), property taxes, landlord insurance premiums, depreciation (building only, over 27.5 years), repairs and maintenance costs, property management fees, utilities you pay as the landlord, advertising costs, and professional fees like accounting and legal.
Taxable rental income = gross rent collected − allowable deductions − depreciation. Because depreciation is a non-cash deduction, many rentals show a taxable loss even when they generate positive monthly cash flow. That paper loss can offset other income up to $25,000 per year for active participants earning under $100,000 adjusted gross income (AGI), with a phase-out between $100,000 and $150,000 AGI, per IRS Publication 925.
A worked example
A $280,000 rental collects $2,100 in rent per month ($25,200 annually). After 5% vacancy, effective gross income is $23,940.
The mortgage at 6.75% on a $210,000 loan generates approximately $14,100 in first-year interest. Property taxes are $2,800, insurance $1,200, maintenance $2,016 (8% of rent), and management $2,016 (8% of rent).
The depreciable basis (80% of purchase + closing costs) is approximately $229,600, giving annual depreciation of $8,349. Total deductions: $14,100 + $2,800 + $1,200 + $2,016 + $2,016 + $8,349 = $30,481.
Taxable rental income: $23,940 − $30,481 = −$6,541. This property generates a $6,541 paper loss even while producing positive cash flow, illustrating how depreciation creates a tax shelter.
An investor in the 22% bracket and under the $100k AGI threshold could use this loss to offset $6,541 of ordinary income, saving approximately $1,439 in federal taxes.
Common mistakes to avoid
- Deducting mortgage principal. Only the interest portion of your mortgage payment is deductible — not the principal repayment. Use your year-end Form 1098 from the lender to find the exact interest amount.
- Missing the depreciation deduction. Depreciation is one of the most valuable rental deductions, yet some owners skip it to simplify their returns. The IRS will tax recapture at sale whether or not you claimed it.
- Confusing repairs with capital improvements. Repairs (fixing a broken door) are fully deductible in the current year. Capital improvements (replacing the roof) must be depreciated over time under IRS rules.
- Forgetting the Net Investment Income Tax (NIIT). High-earning landlords owe an additional 3.8% NIIT on rental income above the threshold ($200,000 for single filers, $250,000 for married filing jointly), stacking on top of ordinary income tax.
- Assuming all rental losses are immediately deductible. Passive activity loss rules under IRS Section 469 limit how rental losses offset non-rental income. The $25,000 allowance applies only to active participants, and high-income investors may need to carry losses forward.
Frequently asked questions
How is rental income taxed?
Rental income is taxed as ordinary income at your marginal federal income tax rate and reported on IRS Schedule E. After deducting allowable expenses and depreciation, your taxable rental income is often much lower than the rent you collect — and may even be a net loss on paper.
What expenses can I deduct from rental income?
IRS Publication 527 allows deductions for mortgage interest, property taxes, landlord insurance, depreciation (27.5-year straight-line for residential property), repairs and maintenance, property management fees, utilities you pay, advertising, and professional fees. Capital improvements are not immediately deductible — they must be depreciated.
What is the Net Investment Income Tax on rental income?
The Net Investment Income Tax (NIIT) is an additional 3.8% tax on rental income for individuals with AGI above $200,000 (single) or $250,000 (married filing jointly), per IRS rules. It stacks on top of your regular income tax rate. For a landlord in the 24% bracket who crosses the threshold, effective marginal tax on rental income is 27.8%.
Can a rental property show a tax loss even when I profit each month?
Yes — and this is one of real estate investing's key tax advantages. Depreciation is a non-cash deduction that reduces taxable income without reducing cash flow. A property generating $300 per month in cash flow can simultaneously show a $6,000 annual tax loss on Schedule E. That paper loss may offset other income, subject to passive activity rules.
Can I deduct rental losses against my regular income?
Active participants in rental activity can deduct up to $25,000 in rental losses against ordinary income per year, with a phase-out from $100,000 to $150,000 AGI (IRS Publication 925). Above $150,000 AGI, losses are generally suspended and carried forward to offset future rental income or gains at sale — unless you qualify as a real estate professional.