Rental Income Tax Calculator

How rental income tax is calculated

Rental income is taxed as ordinary income. On Schedule E you report the rent, subtract the expenses the IRS lets you deduct and a year of depreciation, and the result is added to the rest of your taxable income (IRS Publication 527). The calculator follows the same steps.

When taxable rental income falls below zero, you have a rental loss and the tax on the rental is $0. What happens to the loss is covered under rental losses below.

What each input means

• Purchase price. What you paid for the property, plus closing costs that are added to basis (such as title insurance, recording fees and transfer taxes) and improvements made before you rented it out.
• Land value. The part of the price that is land. Land doesn't wear out, so it can't be depreciated. Your property tax assessment usually splits the value between land and building; apply the same ratio to your price.
• Monthly rent and other rental income. Everything tenants pay you, including pet fees, parking, laundry and late fees. A refundable security deposit isn't income unless you keep it.
• Monthly mortgage interest. Only the interest part of your payment; principal isn't deductible. Divide the yearly total on your Form 1098 by 12.
• Monthly maintenance cost. Repairs and upkeep that keep the property in working order.
• Other monthly expenses. Property taxes, insurance, HOA dues, management fees, utilities you pay, advertising, and legal and accounting fees.
• Marginal tax rate. Your federal bracket plus your state income tax rate. Use the marginal rate, not your average rate, because rental profit is stacked on top of your other income.

Example: a $330,000 single-family rental

A landlord buys a house for $330,000 including closing costs, and the county assessment puts $55,000 of that in the land. It rents for $2,600 a month plus $50 in pet fees. Mortgage interest runs $1,000 a month, maintenance $200, and property taxes, insurance and other costs $450. The landlord is in the 24% federal bracket and lives in a state with no income tax.

Depreciation is a deduction you don't pay for in cash that year, so it turns tax on $12,000 of profit into tax on $2,000.

When depreciation creates a loss

If mortgage interest were $1,250 a month instead, taxable rental income before depreciation would be $9,000, with $2,160 of tax. The $10,000 of depreciation turns that into a $1,000 rental loss, so the tax on the rental drops to $0, a saving of $2,160. The calculator then shows a further $240 ($1,000 × 24%) as possible savings on other income, which you get only if you can deduct the loss.

Depreciation rules for rental property

27.5 years for residential rentals

A residential rental, meaning a building that gets at least 80% of its rent from dwelling units, is depreciated in equal amounts over 27.5 years (IRS Publication 527 and Publication 946). Commercial buildings use 39 years, so this calculator would overstate their depreciation. Depreciation starts when the property is ready and available to rent, not on the day you buy it.

The first year is prorated

The calculator shows a full year of depreciation, which is what you deduct in years 2 through 27. In the first year, the mid-month convention counts the property as placed in service halfway through the month it became ready to rent. On the $275,000 example, a property ready in January gets 11.5 months, about $9,580; one ready in October gets 2.5 months, about $2,080. Improvements you make later, such as a new roof, are depreciated on their own schedule from the month they're finished, so adding them to the price gives a rough combined figure.

Depreciation recapture when you sell

Depreciation lowers your basis in the property. When you sell, the depreciation you took, or were entitled to take, is taxed as unrecaptured section 1250 gain at up to 25% (IRS Publication 544). Skipping depreciation doesn't avoid this. So much of the yearly saving is a deferral, though a valuable one: you keep the cash for years, and a like-kind (1031) exchange can defer the tax again.

Rental losses and the $25,000 allowance

Rental activities are passive, so a rental loss normally offsets only other passive income. Landlords who actively participate get an exception. Active participation means you own at least 10% of the property and make the management decisions, such as approving tenants, setting the rent and approving repairs. You can then deduct up to $25,000 of rental losses a year against wages and other income (IRS Publication 925).

• Modified adjusted gross income (MAGI) up to $100,000: the full $25,000.
• MAGI from $100,000 to $150,000: the allowance drops by $1 for every $2 over $100,000.
• MAGI over $150,000: no allowance; the loss carries forward.
• Married filing separately: $12,500, phasing out between $50,000 and $75,000, if you lived apart all year; none if you lived together at any time during the year.

A loss you can't deduct this year isn't lost. It carries forward to offset rental profit in later years, and whatever is left becomes deductible when you sell the property in a fully taxable sale. Real estate professionals follow different rules. Because the calculator doesn't know your MAGI, it labels savings on other income as possible rather than certain.

How to use your results

• Set the tax aside. Divide the tax on rental income after depreciation by 12 and move that much from each month's rent into a separate account.
• Plan for estimated tax. Nothing is withheld from rent. If you expect to owe $1,000 or more when you file, you may need to make quarterly payments with Form 1040-ES or raise the withholding on your paycheck (IRS Publication 505).
• Check your rate. Higher earners may owe the 3.8% net investment income tax on rental profit once MAGI passes $200,000 (single) or $250,000 (married filing jointly). Add it to your rate for a fuller estimate.
• Compare with your returns. Tax is one cost of owning a rental. The rental property ROI calculator and the rental yield calculator show what you keep.
• Keep records all year. Logging rent and expenses against each property, as RentPost does, makes Schedule E quicker and keeps receipts ready if the IRS asks.

This calculator gives an estimate, not tax advice. State rules, the qualified business income deduction and the rest of your return can change the result, so confirm your numbers with a tax professional before you file.