Do Rental Expenses Actually Reduce Taxable Income? Avoid this Mistake + FAQs

Yes, rental expenses reduce taxable income – often dramatically.

Over 50% of U.S. rental property owners actually report a taxable loss on their returns thanks to these write-offs. But to benefit fully (and legally), you need to know the rules. In this in-depth guide, we’ll cover everything you must know about deducting rental expenses while steering clear of costly mistakes.

Here’s what you’ll learn:

• How rental expenses can directly lower your tax bill under key IRS guidelines (immediate answer).

• Common deduction pitfalls that catch landlords off-guard (and how to avoid them 🚫).

• Plain-English definitions of critical tax terms (like depreciation, passive loss) so you’re never confused.

• Real-life examples and scenarios showing how much 💵 you can save with rental deductions (and what happens if you do it wrong).

• Federal vs. state tax differences (with a 50-state breakdown) plus expert insights, pros and cons, and answers to FAQs that real landlords ask.

Immediate Answer with Key IRS Guidelines

Rental expenses do reduce taxable income. The IRS allows landlords to deduct “ordinary and necessary” expenses for managing and maintaining rental property.

In practice, the costs you incur for your rental—mortgage interest, property taxes, insurance, maintenance and repairs, utilities you pay, advertising, management fees, legal fees, and even depreciation of the property’s value—can all be subtracted from your rental income. These deductions lower the net income from your rental business, thereby reducing the amount of income that is subject to tax.

For example, if you collect $20,000 in rent for the year and have $15,000 in deductible expenses, you only pay tax on the remaining $5,000 of profit. In fact, as long as your rental activity is run for profit, the IRS expects you to list all rental income and then subtract all related expenses on Schedule E of your tax return. If your expenses are higher than your rental income (a rental loss), you typically won’t owe any tax on that rental at all for the year.

Key IRS guidelines to remember:

• Report all rental income. You must declare every dollar of rent you receive (including advance rent, and even the fair market value of any goods or services you accept as rent).

• Deductible rental expenses must be ordinary and necessary. “Ordinary” means common and accepted in the rental business, and “Necessary” means helpful and appropriate. Virtually all typical landlord expenses meet this test.

• Improvements vs. repairs. Costs that maintain the property (like fixing a leaky faucet or repainting a wall) are deductible in the year you pay them. But improvement costs that add value or extend the life of the property (like adding a new room or a new roof) cannot be deducted all at once. Instead, improvements are added to the property’s basis and written off slowly through depreciation (more on that later).

• Depreciation is a powerful deduction. Each year, you can depreciate (write off) a portion of the purchase price of the building and improvements. Residential rental buildings are depreciated over 27.5 years. Depreciation often creates a large paper expense that significantly reduces taxable income—even though you aren’t paying cash for it each year.

• Passive activity limits. Rental real estate is usually considered a passive activity for tax purposes. This means if your rental expenses are so high that they create a net loss, your ability to use that loss to offset other income (like your salary) may be limited. (We’ll cover these limits in detail in a moment.) The key point: yes, rental expenses reduce taxable income, but extremely high losses might not all be usable immediately depending on your situation.

Under U.S. tax law rental expenses absolutely reduce your taxable income from rentals. The IRS’s own guidance emphasizes that you can subtract all of your ordinary rental costs from rent received. By doing so, many landlords only pay tax on a small fraction of their rental earnings—or none at all if expenses exceed income.

Avoid These Rental Write-Off Pitfalls 🚫

While rental deductions are a landlord’s best friend, there are also pitfalls and “tax traps” to avoid. A deduction claimed incorrectly can lead to lost tax savings or IRS troubles. Here are the top rental write-off mistakes and how to steer clear of them:

• Mixing personal and rental expenses: Keep a clear line between rental property costs and personal expenses. If you use something for both personal and rental purposes (for example, your cell phone or your car), you should only deduct the portion related to the rental. Claiming personal expenses as rental write-offs is a big red flag. Pitfall: Some landlords try to deduct 100% of expenses like home internet or vehicle costs that are only partially used for the rental—this can be disallowed in an audit.

• Not differentiating repairs vs. improvements: As mentioned, repairs (fixing something broken or worn) are fully deductible now, but improvements (enhancing or replacing major components) must be capitalized and depreciated. If you mistakenly expense a big improvement in one year, the IRS can deny that deduction. Pitfall: A new HVAC system or roof must be depreciated, not deducted all at once. Misclassifying it could not only lose the deduction now but also complicate your taxes when you sell the property.

• Forgetting to depreciate (or doing it wrong): Depreciation isn’t optional—if your property is in service as a rental, you’re entitled to deduct depreciation each year. Some new landlords don’t realize this and fail to claim it, missing out on a major tax break. Even worse, when you sell, the IRS will pretend you did take depreciation (this is called “allowed or allowable” depreciation) and still charge you tax on it (depreciation recapture). Pitfall: Not claiming depreciation means you lose yearly tax savings and face a tax bill later on sale. Always depreciate correctly (typically using the IRS’s straight-line method for 27.5 years on residential rentals).

• Breaking the vacation home rules: If you rent out a vacation home or second home part of the year and also use it yourself, be careful. The IRS has special rules to prevent personal enjoyment from generating big tax losses.

• If you use the property for personal use more than 14 days or 10% of the rental days (whichever is greater), your deductions are limited to your rental income (no loss allowed). Pitfall: Suppose you spend all summer in your beach house and rent it for a few weeks—you likely can’t deduct more expenses than the rent you earned. Always track personal vs. rental days for mixed-use properties, and don’t try to write off the personal portion.

• Ignoring the passive loss limits: As noted, rental losses are considered passive. If your rental expenses exceed your rental income, you have a loss—but you might not be able to use that loss against your other income if you don’t meet certain criteria. In general, if your adjusted gross income (AGI) is above $150,000 and you’re not a real estate professional, your rental losses become suspended (carried forward to future years) rather than deducted currently. Even if your income is lower, the maximum rental loss you can actively subtract from other income is usually $25,000 per year (and less as your income goes above $100,000).

• Pitfall: Many high-earning landlords are surprised that they can’t deduct a large rental loss to offset their salary. Plan for passive loss restrictions: either aim to at least break even, or understand that excess losses will carry over until you have future rental profits (or sell the property).

• Poor recordkeeping and missing proof: The IRS expects you to keep receipts, invoices, mileage logs, and other records to substantiate your rental expenses. If you get audited and can’t prove an expense, the IRS can deny the deduction. Pitfall: Don’t toss those Home Depot receipts or utility bills. Keep a dedicated folder or use accounting software for your rental. Good records not only protect your deductions but also help you remember expenses at tax time so you don’t overlook any.

• Deducting mortgage principal or land costs: Remember, you can deduct mortgage interest and property taxes, but not the principal portion of your mortgage payments. The principal is just paying back your loan, which increases your equity in the property—it’s not an expense. Similarly, the cost of land is not depreciable (only the building is). Pitfall: If your total mortgage payment is $1,500 and only $1,000 is interest, you can’t deduct the full $1,500 as an expense. Overstating your deductions by including principal will raise flags. Always separate interest (deductible) from principal (not deductible) on loan payments, and allocate your purchase price between land and building for depreciation correctly.

By avoiding these pitfalls and following the rules, you can safely maximize your rental expense deductions without stepping on an IRS landmine.

Know These Key Tax Terms (Simplified)

Taxes can feel like alphabet soup. Here are essential tax terms related to rental income, explained in plain English:

• Taxable Income: The portion of your income that’s subject to tax after all deductions. For a rental, your taxable rental income = rental revenue minus all allowable expenses and deductions. If expenses are higher, you have no taxable income (and instead have a loss).

• Deduction: An amount you subtract from your income to reduce how much is subject to tax. Rental expenses are deductions against rental income. For example, a $500 repair expense is a $500 deduction that lowers your taxable income by $500.

• Rental Expense: Any cost that is ordinary and necessary for renting out the property. This includes things like repairs, maintenance, insurance, mortgage interest, property taxes, advertising, utilities (if you pay them), HOA fees, property management fees, and depreciation. These are all deductible.

• Depreciation: A non-cash deduction that lets you recover the cost of long-term property over time. For rentals, you generally depreciate the building (not the land) over 27.5 years. Depreciation is powerful because it reduces taxable income each year even though you’re not spending money each year (you spent it when you bought the property). However, when you sell, the IRS will “recapture” the benefit by taxing your past depreciation deductions at up to 25%.

• Capital Improvement vs. Repair: A repair keeps the property in good condition (fixing something broken or worn out) and is deductible immediately. A capital improvement adds value, prolongs its life, or adapts it to a new use (like remodeling a kitchen or building an addition). Improvements are not deducted in the year incurred; instead, they are added to the property’s basis and depreciated over many years. Knowing the difference is crucial for correctly claiming deductions.

• Passive Activity: An activity in which you do not materially participate. Rental real estate is usually deemed a passive activity by default (even if you actively manage it day-to-day). Income from passive activities is “passive income” and losses are “passive losses.”

• Passive Loss Limitations: Tax rules that generally prevent passive losses (like losses from rental properties) from offsetting non-passive income (like wages or business income). The key exception: if you actively participate in the rental (which most mom-and-pop landlords do) and your income is within certain limits, you can deduct up to $25,000 of rental losses per year against other income. Otherwise, excess losses get carried forward. (Notably, if you qualify as a Real Estate Professional by IRS standards—meaning you spend the majority of your working time and at least 750 hours a year in real estate activities—your rentals aren’t passive and losses can fully offset other income. This is a special case for full-time real estate folks.)

• Adjusted Gross Income (AGI): Your income from all sources (wages, interest, rentals, etc.) minus certain adjustments, but before itemized deductions or the standard deduction. AGI is important because the passive loss allowance ($25K rule) starts phasing out when your AGI exceeds $100,000 and is completely gone at $150,000.

• Schedule E: The tax form (part of Form 1040) where you report rental property income and expenses. Each rental property’s income and expenses are listed here. The total net profit or loss from Schedule E flows into your Form 1040 and affects your overall taxable income.

• At-Risk Rules: Rules that limit losses you can claim to the amount of money you actually have “at risk” in the investment. For most typical landlords who own and are personally liable on their mortgage, this isn’t a problem—your at-risk amount is your cash invested plus debt you’re personally responsible for. It mainly matters if you have certain types of financing where you aren’t personally liable (non-recourse loans) or special arrangements. Essentially, you can’t deduct losses beyond what you could actually lose economically.

• Real Estate Professional: A tax status (not an official license) that, if you qualify, exempts you from the passive activity loss limits on rental properties. To qualify, you generally must spend at least 750 hours a year and over half your total working time in real estate trades or businesses in which you materially participate. This is mostly used by people whose primary job is managing properties or real estate investing full-time. It’s a complex topic, but worth knowing the term because it’s how some high-income landlords legally deduct large rental losses.

• Fair Rental Days / Personal Use Days: Terms used for vacation home rules. Fair rental days are days the property is rented at a fair market rate. Personal use days are days you (or family or friends using it for free or at a token rent) occupy the property. These counts determine if your property is considered a personal residence or a rental and how expenses are allocated or limited. Keep a log if you have a dual-use property.

Understanding these concepts will help you navigate your tax return and conversations with your CPA with confidence. Next, let’s see these principles in action with real-life examples.

Real-Life Rental Deduction Examples That Save You 💵

Nothing beats examples to illustrate how rental expenses can save money on taxes. Below are three common landlord scenarios and how the numbers play out for each. See how the deductions reduce taxable income (and where limits might kick in):

In Scenario 1, John still had a small profit, but you can see how his $17,500 of expenses shielded most of his rent from taxes. In Scenario 2, Susan’s expenses not only wiped out her rental income, they created a loss that cut her other taxable income, giving her an immediate tax saving beyond her rental activity. And in Scenario 3, David’s big loss shows the effect of the passive loss rules: despite a large paper loss, he gets no current-year tax benefit because of his high income. The loss isn’t wasted, but it’s deferred.

These examples show that rental expenses absolutely reduce taxable income and tax liability in practice, whether by shrinking a profit or creating a loss. The tax savings can be substantial. However, as seen with David, high earners have to navigate the special rules so they’re not caught off guard by suspended losses.

What the IRS, Courts, and CPAs Say (With Proof)

Don’t just take our word for it. Tax authorities and experts consistently affirm how rental expenses work:

• IRS Guidance: The IRS explicitly states that you can deduct all ordinary and necessary expenses for managing and maintaining your rental. Their publications (like IRS Publication 527, Residential Rental Property) spell out that expenses such as mortgage interest, property taxes, insurance, repairs, utilities, and depreciation are deductible against rental income. The IRS also cautions that if expenses exceed income, the resulting loss may be subject to passive loss limits (Form 8582 helps calculate this). In short, the IRS’s own rules empower landlords to reduce taxable income with expenses, as long as you follow the qualification and documentation requirements.

• Tax Court Rulings: U.S. Tax Court cases have reinforced these principles. The courts have allowed landlords to claim a broad range of expenses—from cleaning supplies to travel to the property—provided the expenses are properly documented and truly related to the rental activity. Conversely, the courts have upheld IRS decisions to disallow deductions that don’t meet the rules. For example, the Tax Court has denied overly aggressive deductions like personal vacations written off as “rental travel” or bogus management fees paid to family members without proof of services. The takeaway from court cases is clear: legitimate rental expenses are protected by law, but you must be honest and keep records. When you have evidence (receipts, logs, etc.), the courts often side with taxpayers in allowing deductions.

• CPA Insights: Practicing accountants and tax professionals emphasize maximizing deductions while staying compliant. Many CPAs note that depreciation is one of the most significant rental deductions and often the one most frequently overlooked by landlords unfamiliar with tax rules. They stress not to miss out on it. CPAs also warn about the passive loss limitations for higher-income clients—ensuring those clients know a big paper loss might not reduce their taxes immediately. Another piece of advice from professionals: segregate your rental finances. Use a separate bank account or credit card for rental expenses so it’s easier to track and prove them. And of course, work with a tax professional if you’re unsure, since real estate has lots of nuances (like the optional safe harbor for a 20% Qualified Business Income deduction if your rental qualifies as a business, or the specifics of short-term rentals potentially being treated as non-passive).

All agree that properly claimed rental expenses are a valid and often substantial means of lowering taxable income.

How Rental Deductions Compare to Other Tax Breaks

Rental expense deductions are just one piece of the tax puzzle. How do they stack up against other tax breaks? Let’s compare:

• Deductions vs. Credits: Rental expenses are tax deductions. A deduction reduces your taxable income. The actual dollars saved equal the deduction amount times your tax rate. For instance, a $1,000 repair saves a taxpayer in the 22% bracket about $220 in tax. By contrast, a tax credit (like a $1,000 solar credit) would cut your tax bill by the full $1,000. In short, deductions (like rental expenses) reduce income before tax; credits reduce tax after it’s calculated. Both are valuable, but a dollar of credit is more potent than a dollar of deduction. That said, rental losses (deductions) can be very large, which in aggregate might yield big tax savings over time.

• Above-the-Line vs. Below-the-Line: Rental expenses effectively reduce your Adjusted Gross Income because they are subtracted on Schedule E, which flows into the first page of the 1040. This means they reduce not just taxable income but can also help you qualify for other breaks that have AGI thresholds. For example, a lower AGI from a rental loss might help you stay eligible for certain credits or avoid Medicare surcharge taxes. By contrast, something like the itemized deduction for mortgage interest on your personal home is a below-the-line deduction (after AGI) and doesn’t affect AGI. Rental deductions thus have an advantage: they’re like business deductions — taken earlier in the tax calculation.

• Rental Losses vs. Capital Losses: The tax code limits different losses in different ways. With stocks, for example, you can only deduct capital losses up to $3,000 per year against other income (excess carries forward). With rentals, the passive loss rules limit most people to $25,000 per year against other income (if they qualify), which is much higher. And if you can’t use the loss, it carries forward without an annual cap and can fully be used in the future against rental income or upon sale. So the rental loss break is potentially more immediately useful (for moderate-income landlords) than stock losses, but it has its own qualification requirements.

• Comparison to Business Deductions: Rental property ownership is similar to running a small business when it comes to deductions. If you had a side business, you’d deduct your business expenses from business income on Schedule C. One key difference: self-employment tax. Rental income is generally not subject to Social Security/Medicare taxes (self-employment tax), whereas active business income is. This means that reducing your rental income with expenses not only lowers your income tax but also you’re typically not facing a separate 15.3% self-employment tax on that income. That’s a significant advantage of rental income compared to, say, freelance income.

• Standard Deduction vs. Rental Deductions: The standard deduction (or itemized deductions) is something every taxpayer gets to reduce personal income, but it doesn’t affect your rental income calculations at all. Rental expenses are separate and in addition to your standard or itemized deductions. For example, you might take a standard deduction of say $27,700 (for a married couple in 2023) to reduce your wage income, and also use rental expenses to reduce your rental income. They operate in different lanes, so you don’t have to choose one or the other. In a way, rental deductions are like an extra set of deductions on top of the standard deduction, which is a nice perk of owning rental property.

• Other Real Estate Tax Breaks: Rental expenses work alongside other real estate tax benefits. For instance, if you sell a rental property and make a profit, you might use a 1031 exchange to defer capital gains tax — separate from annual expenses but another break to know. Or consider if your rental property produces income: since 2018, you may qualify for a Qualified Business Income (QBI) deduction, which can potentially deduct 20% of your net rental income if the rental rises to the level of a trade or business. This effectively acts like an extra deduction on top of your expenses (though the rules are a bit complex and you must meet certain criteria or use a safe harbor). The interplay of QBI means rental income can sometimes enjoy an additional tax cut beyond expenses, something other investments like stock dividends wouldn’t get.

In summary, rental deductions are a powerful tax reduction tool, especially when compared to other deductions and losses. They can be sizable (due to big-ticket expenses like depreciation and interest) and they reduce your AGI, which is beneficial. While a tax credit might offer a more direct dollar-for-dollar reduction, few credits can match the cumulative effect of well-managed rental deductions year after year. And unlike many personal deductions, rental expenses aren’t capped by law (though losses have that passive cap) — so in a year where you have major repair costs or a big depreciation expense, you could potentially zero out a lot of income. The key is that rental deductions work within a unique framework (business-like treatment, passive loss rules) that you should understand to maximize their value.

Federal vs. State: Who Lets You Deduct What?

Federal tax law is what we’ve discussed so far — it applies to your U.S. federal income taxes. But what about state taxes on your rental income? State income tax rules often parallel the federal rules, but there are important differences in some cases. Below, we’ll explain the general landscape and provide a 50-state breakdown of how rental deductions are treated:

Federal (IRS) Rules Recap: On your federal return, you report rental income and deduct expenses on Schedule E. Any net profit is taxed as ordinary income by the IRS. Any net loss is subject to the passive loss limitations (which we described) but can carry forward if unused. All the rules we’ve covered (what’s deductible, what’s not, depreciation schedules, etc.) are part of federal law.

State Income Tax – General Concept: If your state has an income tax, typically you will also have to report your rental income on your state tax return. Most states start their tax calculation with your federal Adjusted Gross Income (AGI) or federal taxable income, then make certain adjustments. This means that in many states, if you claimed deductions for your rental expenses on your federal return (reducing your AGI), that carries through to your state taxable income as well. In other words, if you didn’t have to pay federal tax on $5,000 of rental profit because expenses wiped it out, you generally wouldn’t pay state tax on it either — because it never showed up in the income that flows to the state return.

However, states can have their own twists:

• A few states have no income tax at all on individuals. If you live (or your property is located) in one of these states, you don’t pay state income tax on rental income, period. (You might still pay local property taxes, of course, but that’s separate.)

• Some states don’t fully conform to all federal rules. For instance, some require you to recalculate depreciation for state purposes (especially if federal had special bonus depreciation or Section 179 deductions). This can cause your state rental income or loss to differ slightly from your federal.

• Some states treat losses differently. A notable example is Pennsylvania, which does not allow a rental loss to offset other kinds of income on the state return, and it doesn’t let you carry forward rental losses to future years either. So in PA, rental losses are basically usable only against rental income of the same year (excess is lost for state purposes). This is stricter than federal rules.

• States also have varying rules if you’re an out-of-state landlord. Typically, the state where the property is located will tax the income from that property (if they have income tax), and your home state will either also tax it but give you a credit for taxes paid to the other state, or not tax it if they don’t tax out-of-state income — this gets into the weeds of multi-state taxation but is worth noting if you own property in a different state.

• A few states offer unique tax breaks or credits related to rental properties, but these are not common. (Some states have incentives for affordable housing or historic property rehab that can indirectly benefit certain landlords, but those are special programs beyond normal deductions.)

The table below summarizes each state’s stance on taxing rental income and allowing rental expense deductions. Assume that in all cases, normal rental expenses are deductible from rental income to arrive at taxable income — except as noted for special cases (because almost no state taxes gross rental income without allowing expenses). The real differences are whether the state even taxes the income, and whether any special adjustments apply.

That’s a lot to digest, but here are the key takeaways from the state comparison:

• If you live in or have rental property in one of the nine states with no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming), you won’t pay state income tax on that rental income at all. Your tax planning is purely at the federal level (and maybe local, like city taxes if applicable).

• In the majority of states with income tax, the rules for rental expenses are very similar to the federal rules. If an expense was deductible on your federal return, it will be for state too, because they start with federal income figures.

• Differences mainly show up in how depreciation is handled (many states don’t allow special federal depreciation write-offs like bonus depreciation) and in how rental losses are treated. Pennsylvania and New Jersey are two examples where a rental loss won’t help you on the state return the way it might federally. So in those states, you might pay state tax on other income even if your rentals had a loss (since the loss doesn’t offset other income for state purposes).

• Always check your own state’s instructions or talk to a tax pro for any unique quirks. But rest assured that nowhere are you taxed on the gross rent without getting to subtract expenses. Every state that taxes rental income allows the basic expenses to be deducted to determine the net taxable rental income.

Pros and Cons of Rental Deductions

Like any tax strategy, writing off rental expenses has its advantages and disadvantages. Here’s a quick overview of the pros and cons of rental property deductions:

Overall, the pros of being able to deduct rental expenses usually far outweigh the cons, as long as you comply with the rules. The tax system is generally favorable to landlords, but it does require diligence.

Related Entities and How They Interact

Understanding rental deductions also means understanding the key entities and tax concepts that interact in the process. Here are some related parties and items and their roles:

• Internal Revenue Service (IRS): The IRS is the federal tax authority that defines what expenses are deductible and enforces the rules. It provides publications and guidelines (like Pub. 527 and Schedule E instructions) to help landlords comply. The IRS also may challenge deductions if you’re audited. Essentially, the IRS is the rule-maker and referee—following its guidelines (and keeping proof) is crucial to keep your rental deductions safe.

• Landlords (Property Owners): That’s you (if you own rental property). As the taxpayer, you are responsible for keeping records, filing the appropriate forms, and accurately reporting income and expenses. Your interactions include gathering receipts, tracking mileage, calculating depreciation, and possibly working with tax professionals. Landlords benefit from deductions but also bear the responsibility to substantiate them.

• Schedule E: This is the tax form where the magic happens. It’s part of your Form 1040 and is specifically for supplemental income or loss, including rentals. Each rental property’s income and expenses are listed on Schedule E. This form interacts with Form 8582 (Passive Activity Loss Limitations) if you have losses, to determine how much of a loss is allowed. Schedule E’s totals ultimately flow into page 1 of your 1040 (into the calculation of total income). Understanding Schedule E is key to knowing where to put each expense and how it all adds up.

• LLCs and Other Business Entities: Many landlords hold property in an LLC (Limited Liability Company) or similar entity for legal protection. For tax purposes, a single-member LLC is “disregarded,” meaning you still report the rental on your Schedule E just like if you owned it personally. A multi-member LLC or partnership will file its own return (Form 1065) and issue you a K-1, but ultimately that K-1 income or loss flows to your personal return and usually still is passive rental income for you. The main point: using an LLC typically does not change how deductions work or what you can deduct; it just changes the reporting mechanism slightly. (It can, however, provide a liability shield, which is a legal benefit, not a tax one.)

• Airbnb and Short-Term Rentals: Platforms like Airbnb, VRBO, etc., have made short-term renting common. If you rent out property on these platforms, the tax treatment can vary. Generally, rental income via Airbnb is still rental income and you can deduct expenses the same way. However, if you provide substantial services (for example, daily cleaning, breakfast, concierge services akin to a hotel) or the average rental period is very short (seven days or less on average), the IRS might deem it an active business rather than a passive rental. In that case, you’d report income on Schedule C (or a business return) and potentially owe self-employment tax, but you’d also not be subject to passive loss limits, meaning you could deduct losses without the $25k cap. Navigating this line is important for hosts. Airbnb and similar sites also issue 1099-K forms to hosts if payments exceed certain thresholds, so the IRS gets a copy. This means you must report the income, but you also can and should report the expenses to offset it.

Frequently Asked Reddit + Forum Questions (With YES/NO First)

• Q: Do rental expenses really reduce taxable income?
  A: Yes. If you have rental income, you subtract all your rental expenses from it. You’re only taxed on the net amount. If expenses exceed income, you have a loss that may reduce your other income (subject to limitations).

• Q: Can I deduct a rental property loss against my regular job income?
  A: Yes, up to a point. If you “actively participate” in the rental and your AGI is under $150K, you can use up to $25,000 of rental losses per year against other income (like your salary). If your income is too high or the loss is bigger, the excess loss carries forward instead of reducing your current regular income.

• Q: What if I rent out my house for just two weeks a year?
  A: In that case, the income is actually tax-free (and no, you can’t deduct the expenses either). The IRS has a 14-day rule: rent your personal residence for 14 or fewer days in the year, and you don’t have to report the income at all. But you also then can’t deduct rental expenses (other than maybe property tax and mortgage interest as part of your personal itemized deductions). This rule is a unique exception; beyond 14 days, normal taxation applies.

• Q: Is the entire mortgage payment deductible?
  A: No. Only the interest portion of your mortgage payment is a deductible expense (along with property taxes and insurance, etc.). The principal portion is not deductible; it’s paying down your loan, which builds your equity in the property, not an expense. However, the property’s building value is deducted over time via depreciation, which is separate from the loan.

• Q: Should I form an LLC for my rental to deduct expenses?
  A: For taxes, forming an LLC usually doesn’t change your deductions.** A single-member LLC is ignored for tax purposes (you still file the same Schedule E). The main benefit of an LLC is legal protection. All the same expenses are deductible whether you have an LLC or not. Just be sure to keep business finances separate for clarity. If you have partners, an LLC or partnership is how you’d collectively own and file taxes, but again expenses remain deductible either way.

• Q: I made a big renovation on my rental – can I write it off this year?
  A: No, large renovations are typically capital improvements, which means you can’t deduct the whole cost in the year paid. Instead, you add the cost to your property’s basis and depreciate it (for residential real estate, generally over 27.5 years, or sometimes there are ways to depreciate certain components faster). Only routine repairs are immediately deductible. That renovation will reduce your taxable income slowly via depreciation.

• Q: What if my rental property was vacant all year with no tenants – can I deduct expenses?
  A: Yes, as long as you were actively trying to rent it (and not using it personally). If a property is “available for rent” but just didn’t get a tenant that year, you still report the expenses on Schedule E, resulting in a loss. That loss is subject to the same passive loss rules, but it doesn’t vanish. You cannot deduct expenses for periods when the property wasn’t available for rent (say you took it off the market to renovate for six months – the expenses during that time might need to be capitalized or not deducted as rental expenses because the property wasn’t in service).

• Q: My rental income all goes to paying the mortgage and bills – do I still owe taxes?
  A: Possibly, it depends on the numbers. What matters is the tax calculation: rental income minus deductible expenses. If your mortgage payment (interest portion) plus other expenses equals or exceeds the rent, then you have little to no taxable profit. But if the rent is higher than all those expenses, the leftover is taxable income even if you feel like you aren’t “making money” because you’re paying debt. Remember, paying down principal on the mortgage doesn’t count as an expense for tax. So even if all your rent cash goes into the property (mortgage, maintenance, etc.), you need to see how much of that was actually deductible (interest, taxes, repairs, etc.) versus nondeductible principal or capital costs. Only if the deductible expenses zero it out will you owe no tax. If there’s a positive net, that part is taxable.

• Q: Are there any tax benefits if I rent to a family member at a discount?
  A: Be careful here – renting to family below fair market rent can make it a “not-for-profit rental” or personal residence in the eyes of the IRS. If you charge a token rent that’s far below market to a relative, the IRS may treat it as personal use. In that case, you can only deduct expenses up to the amount of rent received (and you can’t create a loss). So heavily discounted family rentals lose most tax benefits. To keep it a bona fide rental, charge a fair rent and document everything like a business transaction.

• Q: Do I need receipts for every expense?
  A: Ideally, yes. You should keep documentation for each expense in case of an audit. Receipts, invoices, canceled checks, or bank/credit card statements – keep them organized. For mileage or travel, keep a log of dates, distance, and purpose (e.g. visiting the rental for repairs or showing it to prospective tenants). While you don’t send receipts with your tax return, you need them if the IRS asks. Without proof, deductions can be denied.

• Q: Is rental income considered passive even if I manage everything myself?
  A: Generally, yes, it’s still passive for the purposes of the passive loss rules (unless you qualify as a real estate professional). The tax code specifically calls all rental activities passive by default, even if you are an active landlord, to restrict loss usage. Managing it yourself does let you take advantage of the $25K loss allowance (which requires active participation), but it doesn’t make the income non-passive. Only by meeting the real estate professional criteria (or using the exception for very short-term rentals) would it be treated as non-passive (active).