How Is Rental Income Taxed? Even With a Mortgage (2026 Guide)
Rental income is taxed as part of your regular income: you report the rent and your expenses on Schedule E of Form 1040, and you pay income tax at your normal federal and state rates on the profit that is left. Most small landlords do not pay self employment tax on rent. If you have a mortgage, you deduct the interest (not the principal), plus property tax, insurance, repairs and depreciation, so many landlords owe little or no tax on their rentals in the early years. Below is what counts as rental income, a worked example with a mortgage, how 1099s work for 2026 and the California rules.
Track rent and expenses the way Schedule E wants them. Our free rent ledger template groups every expense by Schedule E line, so tax time is a copy and paste job for you or your tax preparer.
What counts as rental income?
The IRS counts more than the monthly rent check. According to IRS Publication 527 and Tax Topic 414, rental income includes:
| Payment | Is it rental income? |
|---|---|
| Normal monthly rent | Yes, in the year you receive it |
| Advance rent (for example, January rent paid in December) | Yes, in the year you receive it, no matter which period it covers |
| Security deposit you plan to return | No, not when you receive it |
| Security deposit used as the last month’s rent | Yes, it is advance rent |
| Part of a deposit you keep (for damage or a broken lease) | Yes, in the year you keep it |
| Payment from a tenant to cancel the lease | Yes, it is rent |
| Your expenses the tenant pays (for example, they pay your water bill and deduct it from rent) | Yes, and you can usually deduct the expense too |
| Property or services instead of rent (for example, a tenant paints the unit in exchange for a month’s rent) | Yes, at fair market value |
How is rental income taxed?
- Add up all rental income for the year on Schedule E, Part I, one column per property.
- Subtract your expenses: mortgage interest, property tax, insurance, repairs, management fees, advertising, utilities you pay, travel and mileage, and depreciation. See our rental property tax deductions checklist.
- The profit (or loss) flows to Form 1040 and is added to your wages and other income. You pay tax on it at your regular federal rates, and state income tax if your state has one.
No self employment tax in most cases. The IRS says rental real estate income is generally not included in net earnings from self employment. The exception: if you provide significant services to tenants, such as maid service, you report the rental on Schedule C and may owe self employment tax. Normal landlord services like heat, trash pickup and cleaning common areas do not count.
Net investment income tax. Higher earners may owe an extra 3.8% on net rental income when modified adjusted gross income is over $200,000 (single or head of household) or $250,000 (married filing jointly), per IRS Topic 559.
How is rental income taxed when you have a mortgage?
A mortgage lowers your tax, but not by the full payment. The IRS is clear: you deduct the mortgage interest on your rental, but you cannot deduct the principal part of the payment. Your lender’s Form 1098 shows the interest you paid for the year. Points you paid to get the loan are spread over the life of the loan instead of deducted all at once.
Depreciation is the other big deduction. You deduct the cost of the building (not the land) over 27.5 years. Our rental depreciation calculator works out the yearly amount.
Example: James Carter owns a rental house in San Antonio, Texas, rented for $2,100 a month all year. His mortgage payment is $1,450 a month, and his building (not land) cost $250,000.
| Line | Cash in his pocket | On Schedule E |
|---|---|---|
| Rent received ($2,100 x 12) | $25,200 | $25,200 |
| Mortgage interest (from Form 1098) | ($11,900) | ($11,900) |
| Mortgage principal | ($5,500) | Not deductible |
| Property tax | ($3,200) | ($3,200) |
| Insurance | ($1,400) | ($1,400) |
| Repairs | ($1,100) | ($1,100) |
| Depreciation ($250,000 / 27.5) | No cash spent | ($9,091) |
| Result | $2,100 cash left | ($1,491) tax loss |
James keeps $2,100 of cash but shows a $1,491 loss on paper, so he owes no tax on this rental for the year. Can he use that loss against his wages? Rental losses are usually passive, but if he actively participates (approves tenants, sets the rent) he can deduct up to $25,000 of rental losses a year. That allowance shrinks once modified adjusted gross income passes $100,000 and is gone at $150,000 (IRS Publication 925). More in our guide to rental property loss deductions.
How much tax will you pay on rental income?
There is no special rental tax rate. Your net rental profit is taxed at the same rate as your last dollars of other income. A quick way to estimate: multiply your Schedule E profit by your top federal tax bracket, then add your state rate.
Example: Linda Brooks has a $6,000 profit from her rental after all expenses and depreciation. Her wages already put her in the 22% federal bracket, so the rental adds about $6,000 x 22% = $1,320 of federal tax, plus any state income tax. If depreciation and interest had wiped out the profit, she would owe nothing on the rental.
Rent does not come with tax taken out, so if your rental makes a real profit you may need to pay estimated tax during the year or raise the withholding at your job. Your tax preparer can tell you which fits.
Do landlords get a 1099 for rent?
Usually not from regular tenants. A 1099 only comes from people who pay you in the course of their business. Here is how it works for 2026:
| Form | Who sends it | When, for 2026 |
|---|---|---|
| 1099-MISC, box 1 (Rents) | A business that rents from you (for example, a company renting a unit for an employee) or your property manager | $2,000 or more paid to you in the year (it was $600 before 2026) |
| 1099-K | Payment apps and card processors for payments for goods and services | Over $20,000 and over 200 transactions in the year |
| None | A tenant paying rent for their own home | Personal payments are not reportable |
No 1099 does not mean no tax. The IRS says you must report all income on your return whether or not you receive a 1099. Your rent ledger, not the 1099, is your real record of what you collected.
If you pay contractors for work on your rental, you may need to send them a 1099 too, depending on whether your rental counts as a business. Ask your tax preparer, and keep every invoice in your expense spreadsheet either way.
How is rental income taxed in California?
California taxes rental profit too. The Franchise Tax Board says your rental income after expenses is included in your adjusted gross income, and California residents are taxed on all rental income, wherever the property is. Like the IRS, California treats rental activity as passive. If you own a rental in California but live in another state, you may need to file a California nonresident return for that income.
Texas and Florida have no state income tax, so landlords there pay only federal tax on rental profit. New York taxes it as part of your state income. See our California, Texas, Florida and New York landlord guides for the rental rules in each state.
Note: This page is based on IRS publications for 2025 returns and the 2026 changes the IRS has announced. Tax rules change and every situation is different, so check with a tax preparer before you file.
If you paid contractors for work on your rental, see 1099 for landlords for the 2026 rules and deadlines.
Work in real estate full time? See whether you qualify for real estate professional status.
Selling a rental? See capital gains tax on a rental property sale, and estimate the part taxed as depreciation recapture.
Wondering whether an LLC changes how your rental income is taxed? See our plain English guide to an LLC for rental property.
Frequently asked questions
Do you have to pay tax on rental income?
Yes, rental income is taxable, but only your profit after expenses. You subtract mortgage interest, property tax, insurance, repairs and depreciation from the rent. If your expenses are larger than the rent, you may owe no tax on it that year, and the loss itself may be limited by the passive activity rules.
How do you report rental income on your taxes?
List the rent and expenses for each property on Schedule E (Form 1040), Part I. The net profit or loss then carries over to your Form 1040. Keep a rent ledger and your receipts so every number is easy to prove. Our Schedule E guide walks through each line.
Is rental income taxed at a special rate?
No. Your net rental profit is added to your other income on Form 1040 and taxed at your regular federal rates, plus state income tax if your state has one. Higher earners may also owe the 3.8% net investment income tax.
Do I pay tax on rental income if I have a mortgage?
Only on the profit. You deduct the mortgage interest (not the principal), property tax, insurance, repairs and depreciation. Many landlords with a mortgage show little or no taxable profit in the early years.
Is a security deposit taxable income?
Not when you receive it, if you plan to return it. It becomes income if you keep part of it, or if it is meant to be the last month’s rent, in which case it is advance rent and taxable when you receive it.
Do I have to report rental income if I did not get a 1099?
Yes. The IRS requires you to report all income whether or not you receive a 1099. Most tenants who rent a home never send one.
Do I pay self employment tax on rental income?
Generally no. Rental real estate income is generally not subject to self employment tax. The exception is when you provide significant services, such as maid service, which moves the rental to Schedule C.
Sources
- IRS Publication 527, Residential Rental Property
- IRS Tax Topic 414, Rental income and expenses
- IRS Instructions for Schedule E
- IRS Publication 925, Passive Activity and At Risk Rules
- IRS Publication 946, How to Depreciate Property
- IRS Topic 559, Net investment income tax
- IRS Instructions for Forms 1099-MISC and 1099-NEC
- IRS Form 1099-K FAQs
- California Franchise Tax Board, Rental income
