So, you finally did it. You bought a rental property! Welcome to the world of passive income, appreciation, and… complicated tax rules.
If you’ve started researching rental property taxes, you might already feel overwhelmed.
“Do I have to pay self-employment tax on rental income?”
“What can I deduct to lower my tax bill?”
“How does depreciation work?”
If this sounds familiar, you’re not alone. Most first-time landlords go through the same confusion. But don’t worry, we’ve got you covered.
At Insogna CPA, a trusted Austin, Texas CPA firm, we help real estate investors like you maximize deductions, stay IRS-compliant, and keep more of your hard-earned rental income. Let’s break it all down in simple, no-BS terms so you can handle tax season like a pro.
How Rental Property Income is Taxed (Without the Confusion)
First things first: Yes, rental income is taxable. But it’s not the same as getting taxed on your paycheck.
Key things to know:
- Rental income is considered passive income, so it’s NOT subject to self-employment tax.
- You’re taxed on your profit, not just total rent collected, which means deductions are your best friend.
- You report rental income and expenses on Schedule E of your tax return.
The key takeaway? The IRS wants their cut, but they also give landlords plenty of tax breaks if you know how to use them.
The Best Rental Property Tax Deductions (AKA, How to Pay Less in Taxes)
Owning rental property comes with a lot of deductible expenses—which means more tax savings for you.
Here are the top deductions every landlord should know about:
✔ Mortgage Interest – Your biggest tax write-off. Interest on your rental loan? Fully deductible.
✔ Property Taxes – State and local property taxes can be written off on your return.
✔ Repairs & Maintenance – Fixing a broken AC, patching up leaks, or replacing an appliance? Deductible.
✔ Insurance Premiums – Rental property insurance, liability coverage, and even umbrella policies can be deducted.
✔ Property Management Fees – If you hire someone to handle tenants and maintenance, their fees are a write-off.
✔ Utilities (If You Pay Them) – If you cover water, gas, or electricity, those expenses are deductible too.
✔ Travel Expenses – If you drive or fly to check on your rental, you can deduct mileage, flights, and even lodging—if the trip is business-related.
Pro Tip: Keep receipts for everything. The IRS loves documentation, and a simple spreadsheet (or using an app like QuickBooks) can make tax time way easier.
Depreciation: The Secret Tax Advantage of Owning Rentals
One of the biggest tax benefits of real estate? Depreciation.
What is Depreciation?
Depreciation allows you to spread out the cost of your property over 27.5 years, lowering your taxable income every single year.
What Can You Depreciate?
- The cost of the building (not the land).
- Big improvements (new roof, HVAC, flooring).
- Appliances and furniture used for the rental.
Example: Bought a rental for $275,000? If the building is worth $200,000, you can deduct about $7,272 per year in depreciation. That’s a major tax break.
Mistake to avoid: Not claiming depreciation. It’s required, and if you don’t claim it now, the IRS will still tax you later when you sell the property.
How Insogna CPA helps: As an experienced CPA in Austin, Texas, we make sure you get every depreciation deduction you’re entitled to without IRS headaches.
Passive vs. Active Income: What It Means for Your Taxes
Not all rental income is taxed the same. Your classification as a passive or active investor impacts how much you can deduct.
Passive Income (Most Landlords)
- Rental income is passive by default (which is a good thing—it avoids self-employment tax).
- Passive losses (like depreciation) can only offset passive income not your W-2 salary.
- If your total income is under $150,000, you may be able to deduct up to $25,000 in passive losses per year.
Active Income (Real Estate Professionals)
If you spend 750+ hours per year managing properties, you may qualify as a real estate professional—which means you can deduct rental losses against ALL income (including W-2 earnings).
How Insogna CPA helps: Not sure where you fall? We’ll analyze your situation and ensure you’re using the best tax strategy.
How to Report Rental Income (Without Screwing It Up)
You’ll report all rental income and expenses on Schedule E (Form 1040).
What you’ll need:
- Total rent collected
- Expense records (utilities, repairs, insurance, etc.)
- Depreciation calculations
- Mortgage interest and property tax statements
Common mistakes to avoid:
- Forgetting to report all rental income (yes, that includes security deposits used for repairs).
- Misclassifying repairs vs. improvements (repairs = immediate deduction, improvements = depreciated over time).
- Not tracking travel costs (visiting your rental for business? Deductible).
How Insogna CPA helps: As a leading Austin accounting service, we handle the complex reporting for you, ensuring no deductions are missed and no IRS mistakes happen.
Rental Property Tax Checklist for First-Time Landlords
✔ Keep organized records of all income and expenses.
✔ Claim every deduction possible (mortgage interest, insurance, repairs, etc.).
✔ Use depreciation to lower taxable income.
✔ Know if your rental income is passive or active.
✔ File your rental property taxes properly on Schedule E.
Want to pay less in taxes and avoid IRS headaches? Let’s make sure you’re set up for success.
Need Help with Rental Property Taxes? We’ve Got You.
Real estate investing should build your wealth not drain it with unnecessary taxes. Let Insogna CPA handle the tax side, so you can focus on growing your investments...
Schedule a consultation today with Insogna CPA, your go-to Austin, TX accountant, and start maximizing your rental tax savings!