Rental Property Taxes: What the IRS Says Landlords Should Know

Is rental income taxable?

Yes. The IRS says in Topic no. 414: “Cash or the fair market value of property or services you receive for the use of real estate or personal property is taxable to you as rental income.” Publication 527 says it another way: “In most cases, you must include in your gross income all amounts you receive as rent.”

This page covers federal income tax only, and it uses the IRS as its only tax source. It is general information, not tax advice. Real Property Management Gold is not a tax adviser, and its own guide tells owners to consult an accountant for specific questions about their home.

What counts as rental income?

More than monthly rent. The IRS lists several items. Most individuals use the cash method, which means they count rental income when they actually or constructively receive it, and deduct expenses when they pay them.

What happens to a security deposit I keep?

The IRS gives three cases:

1. If you keep part or all of the deposit because the tenant breaks the lease by vacating early, include what you keep in income that year.
2. If you keep it because the tenant damaged the property and you must make repairs, include it that year if your practice is to deduct the cost of repairs as expenses.
3. If the deposit is to be used as the final month’s rent, it is advance rent and counts as income when you receive it.

For Maryland deposit limits and return deadlines, see our security deposit guide and the security deposit entry.

What expenses can a landlord deduct?

The IRS says that in general you can deduct expenses of renting property from your rental income. Topic no. 414 gives examples:

• Depreciation. An allowance for the wear and tear of the property. You begin to depreciate your rental property “when you place it in service for the production of income.” Use Form 4562 to report it.
• Repair costs. “Expenses to keep your property in good working condition but that don’t add to the value of the property.”
• Operating expenses. Other expenses necessary to operate the rental, “such as the salaries of employees or fees charged by independent contractors (groundkeepers, bookkeepers, accountants, attorneys, etc.) for services provided.”

The IRS also notes that you cannot deduct uncollected rents as an expense if you use the cash method, because you did not include those rents in income.

Management fees paid to a property manager may fall under operating expenses, because the IRS lists fees charged by independent contractors for services. A tax professional can confirm how that applies to you. Real Property Management Gold’s fee page lists what a managed owner pays.

What is the difference between a repair and an improvement?

It affects when and how you deduct a cost. Publication 527 says: “Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.” And: “You must capitalize any expense you pay to improve your rental property.” The IRS advises you to “separate the costs of repairs and improvements, and keep accurate records.”

In practice, this means you should keep invoices that describe the work. A line like “fixed the leak under the kitchen sink” and a line like “installed new kitchen cabinets” may be treated differently. Our rent ready guide and wear and tear guide describe common repair work. See the make ready entry for turnover costs.

Which form do landlords use?

The IRS says you can generally use Schedule E (Form 1040), Supplemental Income and Loss, to report income and expenses from real estate rentals. If you provide substantial services that are primarily for your tenant’s convenience, you may report on Schedule C instead. The IRS also notes that rental profit may be subject to the net investment income tax. Your tax professional will pick the right forms.

Can rental expenses be more than rent?

Sometimes. The IRS says that if you do not use the property as a home and you rent to make a profit, your deductible rental expenses can be more than your gross rental income, “subject to certain limits.” The IRS points to Publication 925 (Passive Activity and At-Risk Rules) and Topic no. 425 for those limits.

Because of those limits, do not assume a loss on a rental offsets your other income. The size of any allowed loss depends on your facts. Ask a tax professional before you rely on it.

What does a property manager provide at tax time?

Real Property Management Gold’s current guide says that when you work with the firm, you receive a 1099 form at the end of the year showing the rent income, and a profit and loss statement itemizing the expenses. It adds that an owner who manages alone needs to keep every receipt and invoice through the year. The fee page lists year-end income and expense documents among the services in the Silver plan, and Gold includes the Silver services. These documents help your tax professional, but they are not tax advice.

What records should I keep?

The IRS says to keep accurate records, and a tidy file makes tax time easier. Build one folder per property and add to it all year:

1. The lease and every rent payment.
2. Receipts and invoices for each repair, with the date and a plain description.
3. Records of improvements, kept apart from repairs.
4. Closing documents and the date the property was placed in service, for depreciation.
5. Insurance bills. See our rental property insurance guide.
6. Management statements and year-end documents.

Good records also show your true cash flow, which is the money left after expenses. Ask your tax professional which records they want. If you are also weighing management, see our guide to the cost of self-managing.

This page is general information, not legal advice. Laws change; check the linked official source or talk to a Maryland attorney. It is also not tax advice; talk to a tax professional.

Next step

For help organizing a rental’s income and expense records, request a free assessment at /contact-us or call (301) 392-2172.