Rental income is calculated by taking your gross rental income (rent, taxable fees, and deposits you keep) and subtracting allowable expenses and depreciation. The result is your net rental income (or loss).

Core formula:

Gross Rental Income − Deductible Expenses − Depreciation = Taxable Net Rental Income

​

What Counts as Gross Rental Income

Most payments you receive for use of the property are taxable, including:

• Monthly rent payments

• Advance rent (rent paid before it’s due)

• Security deposits you keep (for damage or unpaid rent)

• Tenant-paid expenses made instead of rent

​

Common Deductible Expenses (Schedule E)

Expenses must be ordinary and necessary to operate the rental. Common deductions include:

• Mortgage interest

• Property taxes

• Insurance (property, liability, flood if applicable)

• Repairs and maintenance

• HOA dues and utilities paid by the landlord

• Property management fees

• Travel related to managing or maintaining the property

​

Depreciation: A Major Tax Benefit

Depreciation allows you to deduct the cost of the rental building over time.

• Residential rental property is generally depreciated over 27.5 years

• Only the building is depreciated, land is excluded Simple concept:

Building value ÷ 27.5 = annual depreciation deduction

​

Where Rental Income Is Reported

Rental income and expenses are typically reported on
Schedule E (Form 1040).

​

Bonus Depreciation & Cost Segregation (Advanced Strategy)

Certain parts of a rental property may qualify for faster depreciation when properly identified.

• Bonus depreciation may apply to qualified shorter-life components

• Timing and documentation matter

• Professional analysis is strongly recommended

This strategy can significantly increase first-year deductions when done correctly.

​

Simple Example

Annual rent received: $24,000

Expenses:

• Property taxes: $3,000

• Mortgage interest: $4,000

• Repairs: $2,000

Depreciation: $3,636

Taxable rental income:
$24,000 − ($3,000 + $4,000 + $2,000) − $3,636 = $11,364

​

Net Investment Income Tax (NIIT)

In some cases, rental income may be subject to an additional 3.8% Net Investment Income Tax if your income exceeds IRS thresholds.

​

​

Why Work With a Rental Property Tax Specialist

• Accurate Schedule E reporting

• Proper depreciation treatment

• Maximized legitimate deductions

• Clean documentation and compliance

​

​

​

Disclaimer: This information is for general educational purposes only and is not tax advice. Individual tax situations vary.