Rental Income Taxes: What Landlords Must Know in 2026

Rental real estate has one of the most tax-favorable treatment of any investment — but only for landlords who understand how to use depreciation, expense deductions, and the passive activity rules correctly.

What rental income you must report

All amounts received from tenants: rent payments, advance rent, security deposits kept, payment for canceling a lease, services provided instead of rent. Report on Schedule E (Supplemental Income and Loss).

The deductions that offset rental income

• Mortgage interest (only the interest portion, not principal)
• Property taxes
• Depreciation (the most powerful — explained below)
• Insurance premiums
• Repairs (not improvements)
• Property management fees
• Travel for rental property management
• Professional services (accountant, attorney)
• Advertising and tenant screening

Depreciation: the tax shelter most landlords underuse

The IRS allows you to deduct the cost of the building (not land) over 27.5 years as if it's wearing out. On a property where the building is worth $300,000: you deduct $10,909/year regardless of whether the property appreciates. This non-cash deduction frequently turns taxable rental income into a paper loss — even when the investment is profitable in cash terms.

Passive activity loss rules

Rental losses are "passive" and generally can only offset passive income. Exception: Real estate professionals (750+ hours/year in real estate materially participating) can deduct unlimited losses against ordinary income. For most W-2 employees: up to $25,000 of rental losses can offset ordinary income if MAGI is under $100,000 (phases out to $150,000).

The 1031 exchange: defer taxes indefinitely

Sell a rental property, reinvest proceeds into a "like-kind" property within 180 days: defer all capital gains taxes and depreciation recapture. Done repeatedly, real estate investors can defer millions in taxes across a lifetime of property sales.