If you rent out a house, condo or apartment, you report the rent and your rental costs on Schedule E (Form 1040), and only the net amount adds to your taxable income. Rent counts when you receive it, including advance rent, and you subtract qualifying costs such as repairs, operating expenses and depreciation.
What counts as rental income?
The IRS counts more than the monthly rent check. Income includes:
- Rent you receive, whether or not it relates to the current month.
- Advance rent. Rent paid ahead is income in the year you receive it, even if it covers a later year, and this holds whatever accounting method you use.
- Lease cancellation payments. If a tenant pays you to end a lease early, that is rental income in the year you get it.
- Expenses the tenant pays for you. If a tenant pays your property tax or a repair bill, the payment is rental income. You may then deduct the same expense if it qualifies.
How are security deposits treated?
A deposit you plan to return is not income when you receive it. It becomes income if you keep it, for example because the tenant leaves early or damages the unit and you do not return the money. If you apply a deposit to the last month's rent, the IRS treats it as advance rent, so it is income when you receive it.
Which form do you use?
For a typical long-term rental of a house, condo or apartment, use Schedule E, which lists the income and the expenses for each property and carries the net result to Form 1040. The IRS says to use Schedule C instead when you provide substantial services mainly for the tenant's convenience, such as regular cleaning and meals in a hotel-style stay. Renting personal property, such as equipment, follows different rules, and the IRS separates a business of renting it from an occasional rental.
If you also use the property yourself, as a vacation home or as part of your main home, special limits apply. The IRS explains them in Topic 415, and our rental property guide covers the main points.
What can you deduct?
| Type of cost | How the IRS describes it |
|---|---|
| Depreciation | Recovers the cost of the building and improvements over time. It starts when the property is placed in service and is reported on Form 4562. Land is not depreciated. |
| Repairs | Costs that keep the property in good working condition and do not add to its value. |
| Operating expenses | Costs of running the rental, including fees for contractors, bookkeepers, accountants or attorneys. |
Costs that improve the property or extend its life are treated differently from repairs, and they are usually recovered through depreciation rather than deducted at once. If you use the cash method, you cannot deduct rent you never collected.
Example
This example uses invented numbers. Priya owns a condo in Naperville and rents it for $1,800 a month for all 12 months of 2025, so her rent is $21,600. She also collects a $1,800 security deposit and returns it in full, so it is not income. During the year she pays $2,400 for a plumber and $900 to an accountant, and she takes $5,000 of depreciation. Her Schedule E shows income of $21,600 and costs of $8,300 before other items such as mortgage interest, property tax and insurance, which she also lists. Only the net figure flows to her Form 1040.
Common mistakes
- Leaving out advance rent or a lease cancellation payment.
- Treating a returned deposit as income, or a kept deposit as not income.
- Deducting an improvement as a repair.
- Forgetting depreciation, which the IRS expects to be taken.
- Mixing personal use and rental use without splitting the costs.
What to do next
- Keep a rent log, the lease, and receipts for every expense, by property.
- Separate repairs from improvements before year end.
- Ask whether your rental loss, if you have one, is allowed against other income, because passive loss rules can limit it. See the rental property guide.
- If you sell the property later, read about capital gains and the home sale exclusion.
We prepare returns for landlords and can review your records. This page is general information for tax year 2025 returns, not advice for your situation. More answers are in our tax questions.
Frequently asked questions
Do I report rental income if I did not get a Form 1099?
Yes. Rent is income whether or not anyone sends you a form.
Is a security deposit taxable?
Not if you must return it. It becomes income in the year you keep it, or if you apply it as rent.
Where does the net rental income go on my return?
Schedule E carries the total to your Form 1040. Net income is added to your other income.
Can I deduct the mortgage payment?
Interest on a mortgage for the rental is a cost of running it, but the principal part is not. Check Publication 527 for how the costs are split.
Do I need Schedule C for a normal rental?
Generally no. The IRS points to Schedule C only when you provide substantial services mainly for the tenant's convenience.
Official sources
- IRS: Topic no. 414, Rental income and expenses
- IRS: Publication 527, Residential Rental Property
- IRS: Instructions for Schedule E (Form 1040)
- IRS: Topic no. 415, Renting residential and vacation property
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.