Rental Property Taxes

If you own a house, condo or apartment and rent it to others, the income is taxable, but many costs of owning it are deductible. Depreciation can reduce taxable income further, and special rules limit when a rental loss can offset your other income. This guide covers the main rules for individuals who own residential rental property, with the numbers that apply for 2025 returns.

What counts as rental income

Rental income includes rent you receive, advance rent (taxed in the year received), payments for canceling a lease, and expenses your tenant pays for you. A security deposit you plan to return is not income when received, but it becomes income if you keep it, for example for unpaid rent. If you rent a home you also use personally for fewer than 15 days in the year, you do not report the rent and you cannot deduct rental expenses.

Deductible expenses

Ordinary and necessary costs of renting the property are deductible, including mortgage interest, property taxes, insurance, repairs and maintenance, utilities you pay, management and legal fees, advertising and travel to the property. For 2025, business mileage is 70 cents per mile.

Repairs vs. improvements. A repair keeps the property in good working order, such as fixing a leak, and is deducted in the year paid. An improvement adds value, extends the useful life or adapts the property to a new use, such as a new roof, and must be depreciated. The cost of the loan principal is never deductible.

Property taxes on rental property are deducted on Schedule E, not on Schedule A, so they are generally not subject to the SALT cap. See SALT deduction and property taxes. Landlords who pay contractors should note the information return threshold increases to $2,000 for payments made after December 31, 2025.

Depreciation

You recover the cost of the building over time through depreciation, even if its market value rises. Residential rental property is depreciated straight-line over 27.5 years using a mid-month convention. Land cannot be depreciated, so you split your purchase price between land and building. Depreciation begins when the property is ready and available for rent.

Appliances, carpets and certain other components have shorter recovery periods. The 100% special depreciation allowance was restored for qualified property acquired and placed in service after January 19, 2025, which can allow a first-year deduction for eligible components. See depreciation, Section 179 and bonus and cost segregation.

Depreciation is allowed or allowable, which means that if you fail to claim it, your basis is still reduced when you sell.

Passive loss rules

Rental activities are generally passive, and passive losses can offset only passive income, not wages. There is an exception for smaller landlords. If you or your spouse actively participated, meaning you owned at least 10% and made management decisions like approving tenants and repairs, you can deduct up to $25,000 of rental loss against other income ($12,500 if married filing separately and living apart all year). The special allowance is reduced by 50% of the amount your modified AGI is above $100,000, and it disappears at $150,000. Married people who file separately and lived together at any point in the year cannot use it.

Losses you cannot use are suspended and carried forward to future years, or released when you sell the property in a fully taxable transaction. Form 8582 tracks them. Real estate professionals who materially participate can treat rentals as nonpassive, but the tests are demanding.

Example: A landlord's rental produces $24,000 of rent and $28,000 of expenses including $8,000 of depreciation, for a $4,000 loss. At modified AGI of $90,000 the full loss is deductible. At $130,000 the allowance is 50% x ($150,000 - $130,000) = $10,000, so the full loss is still allowed. At $148,000 the allowance is only $1,000, so $1,000 is deducted and $3,000 is carried forward.

Vacation homes and mixed use

If you use a dwelling for personal purposes more than the greater of 14 days or 10% of the days it is rented at fair rates, it is treated as a home, and rental deductions are limited to rental income. Days you spend repairing the property do not count as personal use. Expenses must be divided between rental and personal days.

Selling a rental

When you sell, you owe tax on gain over your adjusted basis, which is cost plus improvements minus depreciation. Gain attributable to depreciation is taxed at a maximum 25% federal rate, and the rest at long-term capital gains rates. See capital gains and losses. A like-kind exchange can defer the tax. See like-kind exchanges. The sale may also trigger the net investment income tax. If you converted a former home to a rental, see home sale exclusion.

State differences

Rental income is part of federal AGI, which Illinois uses as its starting point. Illinois requires an addition for special depreciation under federal rules and a matching subtraction later, reported on Form IL-4562, so your Illinois depreciation may differ from the federal amount. The Illinois property tax credit applies only to your principal residence, not rental property. See our Illinois guide.

How we can help

We prepare Schedule E, set up depreciation schedules, test the passive loss rules, and plan purchases, repairs and sales. See our page for real estate investors and real estate investor tax services, or contact us.

Frequently asked questions

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.