Rental income goes on Schedule E — avoiding self-employment tax — but passive activity loss rules cap how much of a rental loss you can use against ordinary income. Here is what landlords need to know for 2026.
Rental income is taxable in the year received and goes on Schedule E — not Schedule C — so it is not subject to self-employment tax. Most rental losses are passive and can only offset other passive income, but the active participation rule lets you deduct up to $25,000 in rental losses against ordinary income if your AGI is under $100,000 (phased out to zero by $150,000). Depreciation is typically your largest deduction: residential rental property depreciates over 27.5 years. Personal use of more than 14 days or 10% of rental days shifts the property to vacation-home rules that block net-loss deductions.
IRS Publication 527 and IRS Topic 414 define rental income broadly. All of the following are taxable in the year you receive them:
Days you use the property personally do not generate rental income or deductible rental losses. The line between rental and personal use drives the rules below.
Rental income and expenses go on Schedule E (Form 1040) — not Schedule C. That distinction matters: Schedule C income is subject to self-employment tax (15.3% combined Social Security and Medicare), while Schedule E rental income is not. Most landlords save thousands in self-employment tax by correctly classifying rental activity on Schedule E.
One page of Schedule E covers up to three rental properties. Additional pages handle more properties. Net income or loss from all properties flows to Form 1040.
Most ordinary and necessary costs to rent and maintain a property are deductible against rental income. Per IRS Publication 527, deductible expenses include:
Depreciation is also deductible and is typically the largest single deduction on a landlord’s Schedule E.
Whether a cost is a repair or a capital improvement determines whether you deduct it this year or over many years.
Repairs restore the property to its original working condition without substantially adding value or extending its useful life. Fixing a broken window, patching a roof leak, repainting walls — these are repairs. Deduct them in full in the year you pay.
Capital improvements add value, extend useful life, or adapt the property to a new use. A new roof, a kitchen remodel, a room addition — these must be capitalized and depreciated, not deducted immediately.
A practical safe harbor: under IRS regulations, amounts of $2,500 or less per item or invoice can generally be expensed immediately rather than capitalized, provided you don’t have an applicable financial statement. Routine maintenance — cleaning, servicing HVAC units, inspecting fire safety systems — also qualifies for immediate deduction.
Residential rental property depreciates over 27.5 years using the straight-line method — an annual deduction of roughly 3.64% of the building’s cost basis (excluding land, which cannot be depreciated). This deduction applies every year you hold the property, whether or not you spend money on it that year.
For a property with a $275,000 cost basis allocated to the structure, annual depreciation is approximately $10,000. That deduction reduces your taxable rental income on Schedule E every year for 27.5 years.
When you sell, accumulated depreciation is recaptured and taxed at a maximum federal rate of 25% — lower than ordinary income rates, but real. Accurate records of cost basis and annual depreciation claimed are essential for a clean exit. The IRS assumes you took the maximum allowable depreciation even if you didn’t actually claim it, so unclaimed depreciation doesn’t escape recapture. For the full mechanics of depreciation schedules, component depreciation, and bonus depreciation options, see our rental property depreciation guide.
Rental activities are passive by default. IRS Publication 925 explains that passive losses can only offset passive income — not wages, salary, or active business income — unless a specific exception applies.
The most important exception for individual landlords is the active participation rule under §469(i). You qualify if you:
Under this rule, you can deduct up to $25,000 of net rental losses against ordinary income each year.
The $25,000 allowance phases out between $100,000 and $150,000 of adjusted gross income: for every dollar above $100,000, the allowance shrinks by 50 cents, reaching zero at $150,000 AGI. Losses that cannot be used in the current year are “suspended” and carry forward, available to offset passive income in future years or fully deductible when you dispose of the property in a taxable sale.
A separate exception removes the passive-activity cap entirely. If you qualify as a real estate professional for a tax year, your rental activities are non-passive and rental losses are fully deductible against any income.
The two-part threshold: you must spend more than 750 hours per year in real property trades or businesses in which you materially participate, and more than half of your total personal services for the year must be in real property activities.
For a spouse who works in real estate full-time, 750 hours represents roughly 15 hours per week across the year. Time spent managing your own rental properties counts toward the threshold — but only if you own them directly and materially participate in their management (not through a limited partnership where you are passive).
Section 280A applies different rules when you also use a rental property personally. If personal use exceeds the greater of 14 days or 10% of the days rented at fair market value in a year, the IRS classifies the property as a vacation home:
The flip side: if you rent a property for fewer than 15 days in a tax year, you exclude the rental income from gross income entirely. The tradeoff is that rental expenses are also not deductible. You may still claim mortgage interest and property taxes as personal itemized deductions on Schedule A.
When the average rental period is 7 days or less, the rental activity may be treated as a business rather than a passive rental. Two consequences follow:
1. Losses are not constrained by the passive activity rules — you may deduct them against ordinary income without the $25,000 cap 2. If you provide substantial services similar to a hotel (regular cleaning, meals, daily maid service), profits become subject to self-employment tax
Most traditional landlords renting by the month are unaffected by this rule. Property owners listing on short-term platforms who provide concierge-level services should determine their classification before filing — the consequences affect both deductions and self-employment tax liability.
A rental property sale triggers two separate tax calculations:
1. Depreciation recapture — taxed at a maximum federal rate of 25% on accumulated depreciation taken over your ownership period 2. Capital gain on appreciation above your adjusted cost basis (original cost plus improvements, minus accumulated depreciation), taxed at long-term capital gains rates of 0%, 15%, or 20% depending on your income
A 1031 exchange can defer both taxes if you reinvest proceeds into a qualifying replacement property within IRS-prescribed timelines. See our 1031 exchange guide for the rules, and our overview of capital gains taxes for how rates are determined.
For insurance coverage questions on rental and vacation properties, our rental and vacation property insurance guide covers the policy types landlords need to protect their investment.
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*This content is for educational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.*
No. Rental income reported on Schedule E is not subject to self-employment tax — the 15.3% combined Social Security and Medicare tax that applies to Schedule C business income. The exception is if you provide substantial personal services with the rental (such as daily maid service or regular meals), in which case the IRS may treat the activity as a business rather than a passive rental.
If you actively participate in managing your rental (approving tenants, authorizing repairs, setting rental terms) and own at least 10% of the property, you can deduct up to $25,000 of rental losses against ordinary income each year under IRC §469(i). This allowance phases out at a rate of $1 for every $2 your adjusted gross income exceeds $100,000, reaching zero at $150,000 AGI. Unused passive losses carry forward to future years to offset passive income or are fully deductible when you sell the property in a taxable transaction.
Repairs restore the property to working condition without substantially adding value or extending its useful life — a broken window, a leaky pipe, repainting a room. Deduct repairs in full in the year you pay. Capital improvements add value, extend useful life, or adapt the property to a new use — a new roof, a kitchen remodel, a room addition. Improvements must be capitalized and depreciated, typically over 27.5 years for residential property. One safe harbor: amounts of $2,500 or less per item or invoice can generally be expensed immediately under IRS regulations.
No. If you rent your home for fewer than 15 days during the tax year, rental income is excluded from gross income and does not need to be reported. The tradeoff: you cannot deduct any rental expenses for those days, though you may still deduct allowable personal deductions like mortgage interest and property taxes on Schedule A.
IRS Publication 527 recommends keeping records of all rental income (receipts, bank deposits) and every expense (receipts, cancelled checks, invoices) for each property. Depreciation records should be kept for as long as you own the property plus three years after you file the return for the year of sale, because accumulated depreciation affects your taxable gain calculation and is subject to 25% recapture tax when you sell. The IRS assumes maximum allowable depreciation was taken even if you failed to claim it.