Rental Property Taxation FAQ
1. How is rental income taxed?
Rental income is taxed as ordinary income based on your IRS tax bracket. For instance, if your rental income is $10,000 and you fall within the 22% tax bracket, you’ll owe $2,200 in taxes on that income.
2. What deductions can I claim for a rental property?
You can deduct a variety of expenses related to owning and managing your rental property, including:
- Advertising
- Auto and travel expenses
- Cleaning and maintenance
- Homeowners association (HOA) dues
- Insurance
- Legal and professional fees
- Mortgage interest
- Property management fees
- Property taxes
- Utilities and other services
Additionally, you can depreciate the cost of the building over 27.5 years and potentially claim the Qualified Business Income (QBI) deduction, which allows for a deduction of up to 20% of your qualified rental income.
3. How do I calculate depreciation on a rental property?
- Determine the property’s basis: This includes the purchase price, settlement fees, and closing costs.
- Separate land and building costs: Land is not depreciable. Use fair market value or assessed tax values to determine the building’s value.
- Calculate your basis in the building: This is the depreciable amount. For example, if the building represents 90% of the total property value, your basis in the building is 90% of your total basis.
- Depreciate over 27.5 years: Using the Modified Accelerated Cost Recovery System (MACRS).
4. What are capital gains and depreciation recapture taxes?
- Capital gains tax: Applies to the profit you make from selling your rental property. The rate depends on how long you owned the property (short-term vs. long-term).
- Depreciation recapture tax: Reclaims a portion of the depreciation deductions you took during ownership. It is taxed at your ordinary income tax rate, capped at 25%.
5. What is a 1031 exchange?
A 1031 exchange allows you to defer capital gains and depreciation recapture taxes by swapping your investment property for a similar one. This delays the tax payment until the eventual sale of the replacement property.
6. What is the 14-day or 10% rule?
This rule determines the tax treatment of your property based on how much time it is rented out:
- 14 days or less: Considered a personal residence, rental income is not taxable.
- More than 15 days, used for less than 14 days: Treated as a rental property, income is reported and expenses are deductible.
- Used for more than 14 days or 10% of rental days: Considered a personal residence, but rental expenses are deductible only up to the amount of rental income.
7. How do I report rental income and expenses?
Rental income and expenses are reported on:
- Form 1040 (or Form 1040-SR for seniors)
- Schedule E (Form 1040), Supplemental Income and Loss
8. Should I consult a tax professional?
Taxes related to rental properties can be complex. Consulting with a qualified tax professional can ensure you understand the rules, maximize deductions, and minimize your tax liability.
Resources
Internal Revenue Service. “Publication 527, Residential Rental Property,” Pages 9, 11.
Internal Revenue Service. “IRS Releases Tax Inflation Adjustments For Tax Year 2025.”
Internal Revenue Service. “Tips on Rental Real Estate Income, Deductions and Recordkeeping.”
Internal Revenue Service. “Publication 527, Residential Rental Property,” Page 4.
Internal Revenue Service. “Topic No. 704 Depreciation.”
Internal Revenue Service. “Publication 946, How to Depreciate Property,” Pages 26, 31.
Internal Revenue Service. “Publication 527, Residential Rental Property,” Page 6.
Internal Revenue Service. “Publication 946, How to Depreciate Property,” Page 6.
Internal Revenue Service. “Publication 527, Residential Rental Property,” Pages 7-8.
Internal Revenue Service. “Qualified Business Income Deduction.”
Internal Revenue Service. “Topic No. 415 Renting Residential and Vacation Property.”
Internal Revenue Service. “Find Out If Net Investment Income Tax Applies to You.”
Internal Revenue Service. “Topic No. 409 Capital Gains and Losses.”
Internal Revenue Service. “About Form 4797, Sales of Business Property.”
Internal Revenue Service. “Like-Kind Exchanges — Real Estate Tax Tips.”
Internal Revenue Service. “Topic No. 414 Rental Income and Expenses.”
Internal Revenue Service. “Schedules for Form 1040 and Form 1040-SR.”