Rental Income and Taxes: What Landlords Report

Yes, rent you receive is taxable income, and most landlords report it, along with the related expenses, on Schedule E of their federal return.

Renting out a house, a duplex, a room or a vacation property can produce income even when you feel you barely break even.  The tax return looks at the money that came in, subtracts the expenses that the tax law allows and reports the difference.  That difference can be a profit or a loss.

Most income taxable federally is also taxable in Alabama, with exceptions, so rental profit generally appears on the Alabama return too.  We check how it carries over.

You can generally deduct ordinary and necessary costs of keeping the property rented, such as mortgage interest, property tax, insurance, repairs, utilities you pay and management fees.

The key line is repairs versus improvements.  A repair that keeps the property in working order can usually be deducted right away.  An improvement that adds value or extends the life of the property generally has to be capitalized and recovered over time.  A new roof is an improvement; patching a leak is a repair.  Our guide to business expense deductions explains the ordinary and necessary standard in more detail.

If you use the property partly for personal purposes, such as a vacation home you also use yourself, expenses may need to be divided, and special limits can apply.  Keep a calendar showing rental days and personal days.

Sometimes, but rental losses are usually treated as passive, so they may be limited depending on your income and how involved you are in the rental.

A loss that cannot be used this year is generally not lost forever; it can often be carried forward to a year with rental profit or to the year the property is sold.  There are exceptions for people who actively participate, and the allowance depends on income, so we confirm the current rules.

Renting is generally not subject to self-employment tax, which surprises people who assume all income from a side venture is taxed the same way.  Providing significant services, like running a hotel-style stay, can change that.  See self-employment tax explained for the difference.