How rental income is taxed
Rental income is taxed as ordinary income, but only after deductible expenses. Common deductions include mortgage interest, property tax, insurance, repairs, management fees, professional services, HOA dues and depreciation. Because depreciation is a non-cash expense, many rentals that produce positive cash flow show a small profit — or a loss — on the tax return.
Rental income is generally not subject to self-employment tax, which is one reason it is attractive compared with active business income.
Passive activity losses and the $25,000 allowance
Rental activities are generally passive, so rental losses can normally offset only passive income. There is an important exception: if you actively participate in managing the rental, you may deduct up to $25,000 of rental losses against other income such as wages.
The $25,000 allowance phases out by $1 for every $2 of modified adjusted gross income above $100,000 and is gone at $150,000. Losses you cannot use are suspended and carried forward to future years or until you sell the property.
Real estate professionals who meet the IRS hour tests and materially participate are not limited by these passive rules. The calculator gives an estimate; consult a tax professional for your situation.
Frequently asked questions
Is rental income taxed as ordinary income?
Yes, net rental income is taxed at your ordinary federal income tax rate. It is generally not subject to self-employment tax.
Can rental losses offset my W-2 income?
Up to $25,000 if you actively participate and your MAGI is $100,000 or less. The allowance phases out between $100,000 and $150,000 of MAGI. Unused losses carry forward.
Which expenses are deductible?
Ordinary and necessary rental expenses: mortgage interest, property tax, insurance, repairs and maintenance, management fees, utilities you pay, professional services, HOA dues and depreciation. Improvements are depreciated rather than deducted all at once.
More real estate calculators
For informational purposes only. Tax rules change and depend on your situation — consult a tax professional or financial advisor before making investment decisions.