When Is Rental Income Taxed?

Tax law requires you to report all rental income and related expenses in the year they occur. Here’s how that works:

• Rent Received: Any rent you receive in a tax year must be reported as income for that year.

• Late Rent: If December’s rent is paid in January, it’s taxed the following year.

• Advance Rent: If a tenant prepays a year’s rent, the entire amount is taxed in the year you receive it.

• Expenses: Expenses like repairs, travel, and property management fees are deducted in the year they’re paid—even if they cover a future period.

What Counts as Rental Income?

The IRS considers the following as rental income:

• Monthly Rent: All rent received, even if you only own part of the property.

• Advance Rent: Includes first and last month’s rent.

• Security Deposit Repairs: If you use a tenant’s deposit for repairs, that amount is taxable.

• Lease Termination Fees: Fees collected for breaking a lease early are taxable.

• Tenant-Paid Owner Expenses: If a tenant pays expenses you’re normally responsible for (e.g., utilities), that’s income.

• Non-Cash Income: If tenants do work in exchange for rent, the fair market value of that service is taxable.

• Lease-Option Payments: Any payment made toward a lease-to-own agreement is rental income until the option is exercised.

How Is Rental Income Taxed?

Your rental income is taxed at your regular income tax rate. Federal tax brackets for 2024 are:

Your rental income can push you into a higher tax bracket. In addition to federal taxes, you may owe state or local taxes depending on where you live.

Rental Income Tax Formula

Here’s the basic formula for calculating rental income taxes:

Total Rental Income − Deductible Expenses = Taxable Income
Taxable Income × Tax Rate = Taxes Owed

Example:

• Rental Income: $12,000

• Deductible Expenses: $3,800 (insurance, taxes, repairs, etc.)

• Taxable Income: $8,200

• Tax Rate: 32%

$8,200 × 32% = $2,624 in taxes owed

Note: This doesn’t include depreciation or other potential deductions.

Taxes When Selling a Rental Property

When you sell a rental, you’ll face additional taxes:

Capital Gains Tax

• Short-Term (owned <1 year): Taxed as ordinary income.

• Long-Term (owned >1 year): Taxed at lower capital gains rates.

Depreciation Recapture

• If you’ve claimed depreciation over the years, the IRS “recaptures” it when you sell.

• Example:

  • Property Value (minus land): $175,000

  • Annual Depreciation: $6,363

  • Over 10 years: ~$64,000 depreciation

  • Tax Rate: Up to 25% on recaptured amount

How to Reduce Taxes on Rental Income

You can lower your taxable income by taking advantage of legal deductions. Common strategies include:

Depreciation

• Residential property: depreciated over 27.5 years

• Commercial property: depreciated over 39 years

• Only the building (not the land) is depreciable

• Plan for depreciation recapture upon sale

Property Expenses

• Deduct operating costs like:

  • Repairs & renovations

  • Property management fees

  • Utilities (if you pay them)

  • Marketing, travel, and prep costs between tenants

  • Short-term rental costs (e.g., furniture, lawn care)

QBI Deduction (Section 199A)

• Deduct up to 20% of qualified business income (QBI)

• Must qualify as a business (e.g., sole proprietor, partnership, S corp)

• 2024 Income Limits:

  • Single: up to $191,950

  • Married: up to $383,900

Mortgage Interest

• Deduct interest on rental property loans

• Includes mortgage insurance and HOA fees

• Use Form 1098 to find how much interest was paid

The 14-Day Rule

If you rent your property for 14 days or less per year, you don’t have to report the income—and you also can’t deduct any expenses. If you rent for 15+ days, you must report the income and can take deductions.

The Bottom Line

Rental income is taxable, but smart planning and careful tracking of deductions can reduce what you owe. Understanding the rules can help you plan for tax season and protect your profits. For tailored advice, especially on depreciation or QBI qualifications, consult a tax professional.