Rental Income Tax Calculator
Rental income from residential or commercial property must be reported on Schedule E of Form 1040 and is subject to federal income tax, but landlords can offset that income with a range of deductible expenses. Allowable deductions include mortgage interest, property taxes, landlord-paid utilities, insurance premiums, property management fees, advertising costs, repairs and maintenance, and annual depreciation calculated over 27.5 years for residential rental property using the straight-line MACRS method. The difference between gross rent received and total deductible expenses produces your net rental income, or a rental loss if expenses exceed income. Under the passive activity rules of IRC Section 469, rental losses are generally passive and can only offset passive income. However, if you actively participate in managing the property and your modified adjusted gross income is below $100,000, you may deduct up to $25,000 of net rental losses against ordinary income. This special allowance phases out by 50 cents for every dollar of MAGI above $100,000, and fully disappears at $150,000. This calculator computes gross rental income, itemises each deductible expense category, calculates annual depreciation based on property value and land portion, determines net rental income or loss, applies the passive loss limitation and special allowance, and shows the allowable deduction for the current year alongside any carryforward loss.
Annual rental income of $24,000 with total expenses -- and depreciation of -- yields a net rental -- after passive loss limitations.
How rental income and depreciation are calculated
Rental income is all rent received minus deductible operating expenses (mortgage interest, taxes, insurance, repairs, management fees, and utilities). Depreciation is calculated separately. Annual depreciation for residential property is (property value minus land value) divided by 27.5 years. The passive loss limitation applies if you do not actively participate in property management and your MAGI is over $100,000.
Taxable income (before depreciation) = gross rent - operating expenses
Annual depreciation = (property value - land value) / 27.5
Net rental income = taxable income - depreciation
Passive loss limit = min($25,000, loss) - 0.5 x max(0, MAGI - $100,000)
Allowable loss = max(0, passive loss limit)
Carryforward loss = loss - allowable loss
Worked example
Rent $24,000, expenses total $9,320, property value $320,000, land $64,000, MAGI $85,000:
- Taxable income = $24,000 - $9,320 = $14,680
- Depreciation = ($320,000 - $64,000) / 27.5 = $9,309
- Net income = $14,680 - $9,309 = $5,371
- MAGI is $85,000 (below $100,000), so no loss limitation applies
- If net were a loss, allowable loss would be the full loss amount
Understanding passive activity limitations
Rental activities are passive activities under IRC Section 469. If you do not actively participate in rental management (making decisions about tenants, rents, and repairs), and your MAGI exceeds $100,000, you cannot deduct rental losses against other income. Losses instead carry forward to offset future rental income or until you dispose of the property.
The active participation exception allows up to $25,000 of losses to be deducted if you manage the property and your MAGI is below $100,000. For MAGI above $100,000, the deduction phases out by $0.50 per dollar above $100,000, completely phasing out at $150,000 MAGI. Keep documentation of all management decisions to substantiate active participation.
If you are a real estate professional (more than 750 hours in real estate) and more than half your personal service hours are in real property, rental activities are not passive. You may deduct all losses against ordinary income without limitation. This requires careful hourly documentation and may require professional advice.
Rental income and depreciation: frequently asked questions
What is considered rental income?
Rental income includes all rent received, advance rent, security deposits used as rent, and services received in lieu of rent. You must report all rental income received, even if received in cash. Do not deduct bad debts from uncollected rent in the current year; instead, report rent as income when received and adjust in following years if the debt becomes uncollectable. Rental income goes on Schedule E (Form 1040).
What rental expenses can I deduct?
Deductible rental expenses include mortgage interest, property taxes, insurance, utilities paid by you (not the tenant), repairs and maintenance, property management fees, advertising for tenants, and depreciation of the building. Repairs are deductible, but capital improvements (like a new roof or addition) are not; they must be depreciated over their useful life. Land is never depreciable.
How is depreciation calculated for rental property?
Residential rental property (excluding land) is depreciated over 27.5 years using straight-line depreciation. Annual depreciation equals (property value minus land value) divided by 27.5. For example, a property worth $320,000 with land value of $64,000 means depreciable basis of $256,000, yielding $9,309 annual depreciation. First-year depreciation is calculated based on the month the property was placed in service.
What are passive activity rules and how do they affect rental losses?
Rental activities are passive activities by default under IRC Section 469. This means you cannot deduct rental losses against ordinary income unless you qualify for an exception. The active participation exception allows deduction of up to $25,000 of rental losses if you actively manage the property and your MAGI is below $100,000. The deduction phases out by 50 cents per dollar of MAGI above $100,000, fully phasing out at $150,000.
What is the active participation exception?
You qualify for the active participation exception (allowing up to $25,000 of rental losses to offset ordinary income) if you make management decisions regarding the rental property (such as approving tenants, setting rents, and approving repairs), and your MAGI is below $100,000. Active participation requires direct involvement; merely owning the property or hiring a property manager does not qualify. If you use the exception, you must continue to use it consistently.
What if I am a real estate professional?
If you spend more than 750 hours in real estate trades or businesses and more than half of your personal service hours in real property trades, your rental activities are not passive. This means you can deduct all rental losses against ordinary income without limitation. Real estate professionals must carefully track hours worked and document their real estate involvement. Consult IRS Publication 527 and Schedule C guidance for details.
Official sources
- Rental income and expenses: IRS Publication 527.
- Depreciation and property basis: IRS Publication 946.
- Passive activity rules: IRS Publication 925.
- Schedule E instructions: IRS Schedule E (Form 1040).
Reviewed by the CalculatorHub team, edited by James Graham, 13 June 2026. See our methodology. General information, not tax advice.