RENTAL PROPERTY TAX GUIDE

Rental Property Income & Deductions

Owning a rental property can create taxable income even when your cash flow looks different from your tax return. Here are the federal basics.

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What counts as rental income?

Rent generally includes payments received for the use of property. Advance rent is generally included when received. A refundable security deposit generally is not income when received if you intend to return it, but amounts retained or applied as rent may be taxable.

Which expenses may be deductible?

Common rental expenses may include mortgage interest (not mortgage principal), property taxes, insurance, property management fees, advertising, utilities, maintenance, and eligible repairs. Expenses must be properly allocated when a property is also used personally.

Repairs versus improvements

A repair that maintains a property in ordinarily efficient operating condition may be deductible, while an improvement that betters, restores, or adapts the property generally must be capitalized and recovered through depreciation. The facts and applicable safe-harbor rules matter.

How does depreciation work?

Residential rental buildings generally are depreciated over time, while land is not depreciable. Depreciation generally starts when the property is ready and available for rent. Improvements may have their own recovery periods. Depreciation can affect gain when the property is sold.

Can a rental loss reduce my other income?

Not always. Passive activity, at-risk, personal-use, and other limitations may restrict deductions. Certain exceptions can apply based on participation and income. Rental real estate is generally reported on Schedule E, although different reporting may apply to some activities.

Records to keep

Retain closing documents, dates placed in service, rental income records, mortgage-interest statements, invoices, receipts, mileage logs where relevant, and separate records of improvements versus repairs.

Educational overview of U.S. federal tax rules; not individualized tax or legal advice. Tax rules and filing requirements can change, and exceptions may apply. North Carolina and other state rules may differ. Last reviewed October 2026.

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