What Is the Tax Form for Rental Income?

Rental income is subject to taxation, requiring property owners to accurately report all related financial activities. Understanding tax regulations and maintaining diligent records helps ensure compliance.

The Primary Tax Form for Rental Income

Schedule E (Form 1040), Supplemental Income and Loss, is the primary tax form for reporting rental real estate income and expenses. This form is specifically designed to capture the financial details associated with rental properties, royalties, and income or loss from partnerships, S corporations, estates, and trusts. It is an integral part of Form 1040, the U.S. Individual Income Tax Return.

Information Needed to Report Rental Income

Before completing Schedule E, gather specific financial information related to the rental property. This includes records of income received, expenses paid, and details necessary for calculating depreciation. Organizing this data streamlines the tax reporting process.

Rental income includes regular rent payments from tenants. It also includes advance rent received, which must be reported in the year it is received. Security deposits are generally not considered income if they are refundable, but any portion retained for damages or unpaid rent becomes taxable income in the year it is kept. Payments received from a tenant for canceling a lease are also considered rental income. If services or property are received instead of money as rent, the fair market value of those services or property must be included as rental income.

Expenses incurred in managing and maintaining a rental property can be deducted, provided they are ordinary and necessary. Mortgage interest paid on loans used to acquire or improve the property is a substantial deduction, often reported to the taxpayer on Form 1098 by the lending institution. Property taxes are also deductible, though state and local tax deductions may be subject to a $10,000 annual limit for combined income, sales, and property taxes.

Deductible expenses include insurance premiums for fire, theft, flood, and landlord liability. Utilities paid by the landlord, such as electricity, gas, or water, are also deductible. Repair costs, which keep the property in good working condition without adding to its value, are immediately deductible. Improvements that add value or extend the property’s useful life must be depreciated over time rather than expensed in a single year.

Deductible expenses include advertising to find new tenants, cleaning and maintenance fees, and property management fees. Supplies, legal and professional fees (such as those for tax preparation or eviction proceedings), and travel expenses related to managing the property are also deductible. For vehicle expenses, taxpayers can choose between deducting actual expenses or using the standard mileage rate, which was 67 cents per mile for 2024.

Depreciation is a non-cash expense that allows property owners to recover the cost of the property over its useful life. For residential rental properties, the Internal Revenue Service (IRS) allows the cost of the building to be depreciated over 27.5 years using the straight-line method. The value allocated to the land is not depreciable. Depreciation begins when the property is placed in service, ready for rent. Form 4562, Depreciation and Amortization, is used to calculate and report depreciation.

Completing Schedule E

After gathering income, expense, and depreciation information, transfer this data onto Schedule E. The form allows detailed reporting for up to three separate rental properties. If an individual owns more than three rental properties, additional Schedule E forms are needed.

For each property, enter its address, type, and the number of days it was rented at fair rental value during the year. Gross rental income for each property is entered on Line 3. Deductible expenses are itemized on lines 5 through 19, including:
Advertising
Auto and travel expenses
Cleaning and maintenance
Insurance
Legal and professional fees
Management fees
Mortgage interest
Repairs
Supplies
Taxes

Depreciation, calculated on Form 4562, is entered on Line 20 of Schedule E. After listing all expenses, the total expenses for each property are summed. The net income or loss for each property is determined by subtracting the total expenses and depreciation from the gross rental income. This net figure is reported on Line 21 for each property. The totals from all properties are combined for the overall net rental income or loss, reported on Line 26 of Schedule E.

Other Rental Income Scenarios

Several situations can impact how rental income is reported, influencing deductions and tax treatment.

Properties used for both personal and rental purposes have specific rules. If a dwelling unit is rented for fewer than 15 days during the tax year, the rental income is not reported, and associated rental expenses are not deductible. However, if the property is used personally for more than 14 days or more than 10% of the total days it is rented at fair rental value, whichever is greater, it is considered a mixed-use property. In such cases, expenses must be allocated between personal and rental use, and rental expense deductions may be limited to the amount of rental income, preventing a rental loss.

Most rental activities are classified as passive activities by the IRS. This means that losses from rental activities can only be used to offset income from other passive activities.

However, an exception exists for taxpayers who actively participate in their rental real estate activities. Individuals may deduct up to $25,000 of passive losses against non-passive income, like wages. This special allowance begins to phase out for taxpayers with a modified adjusted gross income (AGI) above $100,000 and is completely eliminated when AGI reaches $150,000. Any disallowed passive losses can be carried forward to future tax years.

For multi-unit properties, expenses must be allocated between the personal and rental portions. Common expenses like mortgage interest and property taxes are entered in the rental property section, with the personal portion allocated to Schedule A. Expenses specific to a rental unit, such as repairs or cleaning between tenants, are attributed solely to that unit.

Filing Your Return with Rental Income

After completing Schedule E, the net income or loss from your rental activities transfers to your overall tax return. The total income or loss from Schedule E, from Line 26, transfers to Schedule 1 (Form 1040), Additional Income and Adjustments to Income, and then to Line 8 of Form 1040.

Taxpayers have options for submitting their completed tax returns. Many e-file through commercial tax software or with a tax professional. Alternatively, taxpayers can print and mail a paper return directly to the IRS. Ensure all forms are accurately completed and submitted by the tax deadline.