What you can deduct
IRS Publication 527 lists the ordinary and necessary expenses of renting: mortgage interest, property tax, insurance, repairs, management fees, advertising, utilities you pay, and depreciation. Principal payments are not deductible, and improvements are capitalized and depreciated rather than deducted.
Depreciation
Residential rental property is depreciated over 27.5 years using the straight-line method and the mid-month convention: the property is treated as placed in service in the middle of the month. That is why the first-year percentage depends on the month — 3.182% for February, as in Publication 527's example of a $160,000 building giving a $5,091 first-year deduction.
Only the building is depreciated; land is not. Your basis generally includes the purchase price and many settlement costs. Depreciation reduces your basis whether or not you claim it, so skipping it only costs you.
Passive losses and the $25,000 allowance
Rental activities are passive under IRC §469, so a rental loss normally can't offset wages. The exception: if you actively participate (for example, you approve tenants and set rents), you can deduct up to $25,000 of rental losses a year. The allowance falls by 50% of the amount your adjusted gross income exceeds $100,000: $15,000 at $120,000 and nothing at $150,000.
Losses you can't use are suspended. They offset future passive income and are released in full when you dispose of your entire interest in a fully taxable sale.
When you sell
Your gain is the sale price minus selling costs minus your adjusted basis (cost plus improvements, minus depreciation). The part of the gain equal to the depreciation taken is unrecaptured section 1250 gain, taxed at no more than 25% (IRS Topic 409). The rest is long-term capital gain at 0%, 15% or 20%; for 2026 the 15% rate starts above $49,450 of taxable income for single filers (Rev. Proc. 2025-32). The 3.8% net investment income tax can apply on top.
Questions landlords ask
Can I deduct a rental loss if I earn over $150,000?
Not currently, unless you qualify as a real estate professional. The loss is suspended and carried forward, and released when you sell.
Do I have to depreciate my rental?
Your basis is reduced by the depreciation allowable even if you don't claim it, so not claiming only increases your tax.
Is rental income subject to self-employment tax?
Generally not for a typical long-term rental reported on Schedule E; substantial services (like a hotel) change that.
Tax rules: US registry v1.0.0, last reviewed 2026-09-30. Figures in the text use the default inputs above. Sources and method.