Where to Report Rental Income and Expenses

Owning rental property creates a requirement to report the resulting income to the government for tax purposes. This process involves tracking money received from tenants and the costs incurred to maintain the property, which are then reported annually.

Information and Documents for Reporting

Before completing tax forms, you must gather all financial records for the property’s income and expenses. Accurate record-keeping ensures correct tax reporting and that you claim all allowable deductions. Maintaining a separate bank account for rental activities can simplify this process.

The primary income figure is the gross rent received during the tax year. This includes standard monthly payments and any advance rent collected. For instance, if a tenant pays January 2025 rent in December 2024, that income must be reported on the 2024 tax return. Security deposits are not included in income if they are returned to the tenant. However, if any portion is kept for damages or unpaid rent, that amount becomes taxable income in the year it is retained.

You must also track all ordinary and necessary rental expenses. Deductible expenses include:

• Advertising costs
• Insurance premiums
• Professional fees for managers or accountants
• Mortgage interest (reported on Form 1098)
• Property taxes
• Utilities paid by the landlord
• Maintenance and repair costs

A distinction exists between repairs and improvements. Repairs, like fixing a leak, are currently deductible expenses as they maintain the property’s condition. Improvements, such as a new roof, add value and are not fully deductible in one year. Instead, these costs are capitalized and recovered over time through depreciation, which requires knowing the property’s cost basis and the date it was placed in service.

Completing Schedule E

The primary document for reporting rental income and expenses is Schedule E (Form 1040), Supplemental Income and Loss. This form guides you through calculating the net rental income or loss for each property. If you own more than three rental properties, you must complete and attach additional Schedule E forms.

The form is structured to report all income first, followed by expenses. You will enter the total gross rents on line 3. The form then provides specific lines for various expense categories, such as advertising on line 5, insurance on line 9, and mortgage interest on line 12. Property taxes are reported on line 16, and repairs on line 14. The sum of all listed expenses is then subtracted from the gross income to determine the net income or loss.

The depreciation expense, entered on line 18, is calculated separately on Form 4562, Depreciation and Amortization. After completing Form 4562 for the property and any capitalized improvements, you transfer the resulting depreciation amount to Schedule E.

Reporting on Other Relevant Federal Forms

The final net income or loss from Schedule E impacts other parts of your federal tax return. This figure is carried over to Schedule 1 (Form 1040), where it is combined with other income sources to determine your adjusted gross income.

If your rental activities result in a net loss, your ability to deduct it may be limited by passive activity loss rules. Form 8582, Passive Activity Loss Limitations, is used to determine the deductible amount of the loss for the current year, with any disallowed loss carried forward.

If the rental activity generates net income and your overall income exceeds certain thresholds, it may be subject to the 3.8% Net Investment Income Tax (NIIT). This tax is calculated using Form 8960, Net Investment Income Tax.

If the rental activity qualifies as a trade or business under Internal Revenue Code Section 162, the net income may be eligible for the Qualified Business Income (QBI) deduction. Calculated on Form 8995, this deduction allows for up to 20% of qualified business income to be deducted. Whether a rental activity qualifies depends on your level of involvement.

State Tax Reporting Considerations

Beyond federal obligations, owning a rental property often creates state-level tax responsibilities. Most states with an income tax require landlords to report this income, but the specific rules for how it is handled can vary significantly from one state to another.

While many states use the federal adjusted gross income as a starting point, they may have different rules for allowable deductions or depreciation. This can result in the taxable rental income for state purposes being different from the federal amount. Property owners should consult the guidance provided by their state’s department of revenue or a tax professional to ensure compliance.