Rental property income

Rental property income is reported on IRS Schedule E (Form 1040), titled "Supplemental Income and Loss." This form captures all income received from residential rental properties and offsets it against allowable expenses, depreciation, and losses. The net result flows through to your Form 1040, where it is combined with your other income.

57 steps across 12 sections

1. Apply Passive Activity Loss Rules

  • Use Form 8582 to calculate allowed passive losses
  • Apply the $25,000 special allowance if eligible (see Passive Activity Loss Rules below)
  • Carry forward any disallowed losses to future years

2. Mortgage Interest (Schedule E, Line 12)

  • Interest on acquisition debt for the rental property
  • Interest on home equity loans used for the rental property
  • Points paid on the loan (amortized over the life of the loan for rental property, unlike a primary residence)
  • Interest on credit cards or personal loans used exclusively for rental expenses

3. Property Taxes (Schedule E, Line 16)

  • Real estate / property taxes assessed by local government
  • Note: The $10,000 SALT cap does NOT apply to rental properties — it only limits personal residence taxes on Schedule A
  • Special assessments for maintenance (not improvements) may be deductible

4. Insurance (Schedule E, Line 9)

  • Landlord / dwelling fire insurance
  • Liability insurance
  • Umbrella policy premiums (rental-allocated portion)
  • Mortgage insurance premiums (PMI) — deductible as rental expense if on a rental property
  • Title insurance (amortized or added to cost basis)
  • Workers' compensation insurance for employees

5. Repairs vs. Improvements -- The Critical Distinction

  • Fixing leaky faucets, running toilets, broken pipes
  • Patching drywall holes
  • Repainting (same scope as before)
  • Replacing broken windows (same type)
  • Fixing or replacing a garbage disposal
  • Repairing appliances
  • Fixing HVAC issues (not full replacement)
  • Replacing broken light fixtures (same type)
  • Re-caulking, re-grouting
  • Pest control treatments

6. Depreciation (Schedule E, Line 18 / Form 4562)

  • Annual depreciation of the building (27.5 years residential)
  • Depreciation of capital improvements (27.5 years for structural, 5-15 years for components)
  • Depreciation of appliances and furnishings (5-7 years)
  • Cost segregation study components (5, 7, 15 years — see Depreciation section below)
  • Bonus depreciation on qualifying assets (40% in 2025, phasing down)
  • Section 179 expensing for qualifying personal property (up to $1,220,000 in 2025)

7. Travel Expenses (Schedule E, Line 6)

  • Mileage to/from rental property for management, maintenance, or rent collection
  • 2025 standard mileage rate: $0.70/mile
  • Alternative: actual vehicle expenses (gas, insurance, maintenance) prorated by rental-use percentage
  • Airfare, hotel, and meals for out-of-town property management (must be primarily business-related)
  • Tolls and parking related to rental activities

8. Property Management (Schedule E, Line 11)

  • Property management company fees (typically 8-12% of rent collected)
  • Leasing fees / tenant placement fees
  • HOA fees and condo association dues
  • On-site manager salary

9. Legal and Professional Fees (Schedule E, Line 10)

  • Attorney fees for lease preparation, evictions, tenant disputes
  • CPA / accountant fees for rental tax preparation
  • Cost segregation study fees
  • Bookkeeping and accounting software subscriptions
  • Fees for tax advice related to rental activities

10. Advertising (Schedule E, Line 5)

  • Online listing fees (Zillow, Apartments.com, Craigslist, Facebook Marketplace)
  • Yard signs, flyers, newspaper ads
  • Photography and virtual tour costs
  • Tenant screening service fees

11. Cleaning and Maintenance (Schedule E, Line 7)

  • Turnover cleaning between tenants
  • Regular landscaping and lawn care
  • HVAC filter replacement and seasonal tune-ups
  • Common area maintenance (for multi-unit)

12. Utilities (Schedule E, Line 17)

  • Water, sewer, trash (if landlord-paid)
  • Electric and gas (if landlord-paid or between tenants)
  • Internet/cable (if provided as amenity)

Common Mistakes

  • Not claiming depreciation:
  • Misclassifying improvements as repairs:
  • Misclassifying repairs as improvements:
  • Not separating land from building:
  • Forgetting to issue 1099s:

Pro Tips

  • Always claim depreciation
  • Use the de minimis safe harbor election
  • Consider a cost segregation study
  • Bunch income and expenses strategically
  • Aggregate your rental activities

Sources

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