Rental income tax calculator

Depreciation: the deduction you never spend

A rental property is treated as wearing out over 27.5 years, whatever the building is actually doing. Each year you deduct the building's value divided by that figure — $10,909 on a $300,000 building — against the rent it produced. No money leaves your account.

This is why a property can pay you and show a loss at the same time. Here the rent is $26,400, cash expenses are $12,000, so $14,400 actually arrives — and after depreciation the return shows $3,491 of taxable income. Both figures are correct; they measure different things.

Land is not depreciable and this is the split that gets done wrong most often. Only the building wears out, so a $400,000 purchase where the land is worth $100,000 depreciates $300,000. The county's own assessment usually apportions the two, and using it is both the easiest method and the easiest to defend.

The first and last years are prorated by month rather than taken in full, using a mid-month convention for residential property. It is a small effect but it is the commonest reason a first-year figure computed by hand does not match the one a preparer produces.

And it is not optional. The tax code reduces your basis by the depreciation you were *allowed*, whether or not you claimed it — so skipping the deduction does not avoid the consequence at sale, it just forfeits the benefit. A property owned for years with no depreciation claimed is a correction worth making, not a simplification.

Why a loss on paper may not reduce your tax this year

Rental activity is passive by default, and passive losses can generally only offset passive income. Without a special rule, the loss above would sit unused while your salary was taxed in full.

The special rule is § 469(i): up to $25,000 of rental loss can offset ordinary income if you actively participate — which is a low bar, meaning genuine involvement in decisions like approving tenants and authorising repairs, not day-to-day management.

The allowance phases out on income, and this is the part that surprises higher earners. It falls by $1 for every $2 of income above $100,000 and reaches zero at $150,000. At the $95,000 of other income in this example the allowance is $0; at $160,000 it would be nothing at all, and the entire loss would be suspended.

Suspended is not lost, which is the reassuring half. The loss carries forward indefinitely, offsets rental profit in later years, and is released in full against the gain when you sell the property. The cost is timing, not the deduction itself — but for someone counting on a loss to reduce this year's tax, timing is the whole question.

The exception that changes everything is real estate professional status, which takes rental activity out of the passive category entirely and removes the cap. Its requirements are demanding — more than half your working time and over 750 hours a year in real property trades, with material participation — and it is heavily scrutinised. It is not available to someone with a full-time job elsewhere, whatever a seminar may have implied.

What is deductible against rent, and what is not

Everything ordinary and necessary to producing the rent: mortgage interest, property tax, insurance, repairs, maintenance, utilities you pay, management fees, HOA dues, advertising, legal and accounting costs, and travel to the property for genuine business reasons.

The distinction that decides the most money is repair versus improvement. A repair keeps the property in working order and is deducted in full this year; an improvement betters it, restores it or adapts it to a new use, and must be capitalised and depreciated. Replacing a broken window is a repair. Replacing every window with better ones is an improvement, deducted over 27.5 years rather than immediately.

Mortgage principal is not deductible, only the interest. This trips up almost every first-time landlord, because the payment leaving the account each month is mostly principal in later years and the deductible portion shrinks as the loan amortises — which is why a property's taxable income tends to rise over time even when the rent does not.

Your own labour is not deductible either. Time spent painting, repairing or managing has real value and produces no deduction, because you were never taxed on it as income. A management company's fee is deductible precisely because it is income to somebody else.

Vacancy is not a deduction. Rent you did not receive was never income, so there is nothing to deduct — the expenses during the vacant period are deductible as normal, but the missing rent is simply absent from the top line rather than subtracted from it.

Whether rental income qualifies for the 20% deduction

Section 199A can give a 20% deduction on qualified business income, and rental income sometimes qualifies. Whether it does turns on whether the activity rises to the level of a trade or business rather than a passive investment, which is a judgement rather than a threshold.

There is a safe harbour with specific requirements: separate books for the activity, a minimum number of hours of rental services per year, and contemporaneous records of what was done and by whom. Meeting it is a documentation exercise more than an activity one, and the records have to exist at the time rather than be reconstructed.

On $3,491 of qualifying rental profit the deduction is worth up to $698, subject to the same taxable-income ceiling that applies to any other qualified business income and to the thresholds of $201,750 single and $403,500 joint.

A triple-net lease generally does not qualify, because a landlord who has contracted away maintenance, insurance and tax has few of the activities that make something a trade or business. That is worth knowing before structuring a lease that way for simplicity.

What rental income never attracts is self-employment tax. Rents are excluded from net earnings from self-employment, so a landlord pays income tax on the profit and none of the 15.30% that the same profit from a service business would carry. That exclusion is worth more than the QBI deduction for most owners, and it disappears if the arrangement starts to look like a hotel rather than a tenancy.

What happens when you sell, and the bill that comes back

Every dollar of depreciation you deducted reduces your basis in the property, which increases the gain when you sell. That portion is taxed as unrecaptured § 1250 gain at up to 25.00% — higher than the long-term capital gains rate that applies to the rest of the appreciation.

So depreciation is a deferral rather than a gift. Deducting $10,909 a year against income taxed at a marginal rate above 25.00% is still a good trade, because you are deducting now at a higher rate and repaying later at a capped one, with the time value of the money in between. But it is not free, and the recapture arriving in a year when several years of it land at once is a genuine shock.

The rest of the gain is long-term capital gain if you held over a year, taxed on the capital gains schedule and potentially subject to the 3.80% net investment income tax. Suspended passive losses are released in full against the gain, which is why a property that never produced a usable loss can suddenly produce a large deduction in the year of sale.

A 1031 exchange defers the whole of it by rolling into another investment property, under strict timing rules — 45 days to identify a replacement and 180 days to close — and with an intermediary who must hold the proceeds. It defers rather than eliminates, and the deferred gain follows you into the new property's basis.

The exclusion that does eliminate gain is for a primary residence, not a rental — and converting a rental into a residence to reach it only shelters a proportion, based on how long it was each. Depreciation taken along the way is recaptured regardless of the exclusion.

Property tax is the expense you cannot renegotiate

Every other cost of a rental is somewhat controllable. Property tax is set by authorities you have no individual standing to challenge, it rises with assessment cycles and district budgets, and it continues whether the property is let or empty.

The national median effective rate is 0.84%, but the range across counties is 0.08% to 3.64% and the middle eighty percent falls between 0.46% and 1.57%. On a $400,000 property that is a spread of $4,446 a year between an ordinary cheap county and an ordinary expensive one — which is several months of rent, decided before you have a tenant.

It is fully deductible against rental income, which softens it: at a marginal rate of 24% a $6,000 bill costs $4,560 after tax. That is genuinely better treatment than a homeowner gets, since a landlord deducts it in full against rent while a homeowner needs to itemise and faces a cap.

Two things landlords specifically should watch. Homestead exemptions and assessment caps generally apply to owner-occupiers, so converting a home into a rental can release a cap and raise the bill substantially — sometimes by more than the exemption was ever worth. And some jurisdictions assess non-owner-occupied property at a higher ratio outright.

Before buying, the number to model is the county's effective rate applied to your actual purchase price — not the tax figure on the listing, which is the seller's bill shaped by their tenure and their exemptions. Where a sale triggers reassessment, the first full-year bill can exceed it substantially, and it arrives after closing when the budget is already set.

Five ways a rental tax estimate goes wrong

Deducting the whole mortgage payment. Only the interest is deductible. The principal portion is repayment of a loan, not an expense, and it grows every year as the loan amortises — which is why taxable income rises over time on a property whose rent has not moved.

Forgetting depreciation. $10,909 a year on this building, and it is not optional: your basis is reduced by what you were allowed to deduct whether or not you claimed it. Skipping it forfeits the deduction and keeps the consequence.

Depreciating the land. Land does not wear out and cannot be depreciated. Using the full purchase price rather than the building portion overstates the deduction, and it is an error the county's own assessment split will correct in two minutes.

Assuming a paper loss reduces this year's tax. The $25,000 allowance phases out between $100,000 and $150,000 of income. Above that the loss is suspended — carried forward, not lost, but no help at all this April.

Ignoring recapture at sale. Every dollar of depreciation comes back as unrecaptured § 1250 gain at up to 25.00%. A return that shows years of losses and a sale that produces an unexpectedly large bill are the same arithmetic seen from both ends.

Short-term rentals follow different rules entirely

A property let by the night rather than by the year can fall outside the rental rules altogether. Where the average period of customer use is seven days or less, the activity is generally not a rental for passive-loss purposes — which changes both the loss rules and, potentially, whether self-employment tax applies.

That cuts both ways. It can allow losses to offset ordinary income without the $25,000 cap where the owner materially participates, which is the basis of a widely promoted strategy. It can also bring the income within self-employment tax where substantial services are provided — cleaning between guests, meals, concierge — because at that point the activity resembles a hotel rather than a tenancy.

Material participation is the pivot, and it has specific tests measured in hours. Meeting them requires genuine ongoing involvement and contemporaneous records of it. A property managed entirely by an agent does not meet them, whatever the marketing of the strategy implies.

The 14-day rule sits at the other end and is genuinely generous: a residence let for fewer than 15 days in the year produces no reportable rental income at all. No income, and correspondingly no deductions. For someone letting a home during a local event, the money is simply not taxable.

Local rules are the other half and often the binding one. Registration requirements, occupancy taxes collected and remitted by the host, and outright prohibitions vary by city and change frequently — and the tax analysis is academic where the letting is not permitted in the first place.

What the property actually returns after tax

The figure that matters is not the rent and not the taxable profit — it is what remains after tax, financing and the costs that do not appear in either calculation.

On this example the rent is $26,400 and cash expenses are $12,000, leaving $14,400 before tax. Depreciation of $10,909 then shelters part or all of that from tax without reducing the cash, which is why an after-tax return on a rental commonly exceeds its pre-tax return — the opposite of most investments.

Against that sit the costs that models leave out. Vacancy, which is not a deduction but is absent rent. Turnover costs between tenants. Maintenance that arrives in lumps rather than annually. And capital expenditure — a roof, a boiler, a repipe — which is not deductible in the year it is spent but depreciated over years.

A realistic model reserves for all of them rather than treating a fully let, fully maintained year as typical. A property that produces $14,400 in a good year and needs $12,000 of roof in year seven has a different return from the one the spreadsheet showed.

And the largest component of return for most rental property is not the rent at all — it is appreciation and the amortisation of the loan, neither of which is taxed until sale, and both of which are what the depreciation deduction is quietly being paid back against when that sale happens.

Where the rental tax figures come from

Everything computed here rests on IRC § 168(c), IRC § 469(i), IRC § 1250, read off the law and the IRS revenue procedure rather than off a summary of either. Where a figure is indexed to inflation it comes from Rev. Proc. 2025-32, the same document that sets the brackets used across this site.

The indexed figures on this page are the federal brackets applied to the resulting profit — all published for 2026 and all checked on 2 September 2026. Each carries that date because a tax figure without one is unverifiable, and the commonest error in this category is a correct figure from the wrong year.

The 27.5-year recovery period, the $25,000 passive-loss allowance and its $100,000 to $150,000 phase-out are statutory and have not been indexed since 1986. Thresholds that are not indexed are the ones compiled sources most often present as though they were current when they have simply never moved — which is a different kind of staleness and harder to spot.

What this page does not model is stated in full under the calculator rather than buried here: it computes straight-line depreciation and the passive-loss allowance, and does not model short-term rental rules, cost segregation, 1031 exchanges or depreciation recapture on sale. Where a case falls outside what the engine handles, we would rather say so than return a confident number for a situation we did not compute.

The arithmetic itself is deterministic — rates in, result out, with no model deciding anything. The AI explanation available on this site describes figures it was given and never produces one, which is the only arrangement in which a language model belongs anywhere near a tax calculation.

Questions

How is rental income taxed?

As ordinary income at your marginal rate, on the profit after expenses and depreciation — not on the rent received. On $26,400 of rent with $12,000 of expenses and $10,909 of depreciation, the taxable figure is $3,491. Rents are not subject to self-employment tax, which is a significant advantage over service income.

How does rental property depreciation work?

Residential rental property is depreciated straight-line over 27.5 years on the building only — land is not depreciable. It is a deduction you never spend, which is how a property can produce cash and show a loss. At sale it comes back as unrecaptured § 1250 gain taxed at up to 25.00%.

Can I deduct a rental loss against my salary?

Up to $25,000 a year if you actively participate, and the allowance phases out between $100,000 and $150,000 of income. Above that the loss is suspended — it carries forward and is released against future rental profit or against the gain when you sell.

Is the mortgage payment deductible?

Only the interest, not the principal. Repaying a loan is not an expense. This is the single most common error in a landlord's own arithmetic, and it gets worse over time: as the loan amortises, more of each payment is principal and less is deductible.

Do landlords pay self-employment tax on rent?

No. Rents are excluded from net earnings from self-employment, so a landlord pays income tax on the profit but none of the 15.30% a service business would pay on the same money. The exclusion can be lost where the arrangement provides substantial services and starts to resemble a hotel rather than a tenancy.

Does rental income qualify for the 20% QBI deduction?

Sometimes. It depends on whether the activity rises to a trade or business rather than a passive investment. There is a safe harbour requiring separate books, a minimum number of hours of rental services and contemporaneous records — which is a documentation exercise, and the records must exist at the time. A triple-net lease generally does not qualify.