.png)
Rental Property Taxes 2026: Depreciation and Deductions
Updated: Oct 6
Short answer: All State Tax Resolution, led by Sabih Shafi, an IRS Enrolled Agent, helps landlords report rental income and set up depreciation the right way. The costly rental tax mistakes are skipping depreciation, deducting improvements as repairs, and ignoring the passive loss rules, and each one gets harder to fix the longer it sits.
Key takeaways
You generally report rental income on Schedule E and depreciate the building, not the land, over 27.5 years.
Depreciation lowers your basis whether or not you claim it, so skipping it only costs you.
Rental losses are generally passive. The special allowance of up to $25,000 phases out between $100,000 and $150,000 of modified AGI.
A real estate professional needs more than 750 hours of services and more than half of all personal services in real property businesses.
On a sale, the part of your gain caused by depreciation is taxed at up to 25%.
Facts on this page were checked against IRS.gov on October 6, 2026.
Rental income and Schedule E
Cash or the fair market value of property or services you receive for the use of real estate is rental income. Advance rent counts in the year you receive it. If a tenant pays one of your expenses, that payment is rental income too. A security deposit is not income if you may have to return it, but any part you keep is income in that year.
Most individuals use the cash method, counting rent when received and deducting expenses when paid. You generally report on Schedule E, or on Schedule C if you provide substantial services mainly for your tenant's convenience.
Deductions, and the repair-or-improvement line
The Schedule E instructions say you can deduct ordinary and necessary expenses, such as taxes, interest, repairs, insurance, management fees, agents' commissions and depreciation. A few details trip up landlords.
Mortgage interest on the rental is deductible. If you refinance for more than the old balance and use the extra cash for something unrelated to the rental, that part of the interest generally is not.
Insurance paid for more than 1 year in advance is deducted a year at a time.
Travel counts when the main purpose is to collect rent or manage the property, not to improve it.
Your own labor is not deductible, and a cash basis landlord cannot deduct rent never collected.
A repair keeps the property in working order and is deductible when you pay for it. An improvement is a betterment, a restoration, or an adaptation to a new use, and you must capitalize it. Publication 527 lists a new roof, a furnace and central air conditioning as improvements. Capitalized costs can generally be depreciated as if the improvement were separate property.
Depreciation: the deduction landlords underuse
Depreciation lets you recover the cost of the building over time. For residential rental property you use the straight line method over 27.5 years.
Start with basis. Your cost includes closing costs such as legal fees, recording fees, surveys, transfer taxes and title insurance.
Remove the land. You cannot depreciate land. If the contract does not split the price, divide it by fair market value, or by assessed values if you are not certain.
Start early. Depreciation can begin when the property is ready and available for rent, even before you have a tenant.
Publication 527 says that if you did not claim all the depreciation you were entitled to, you must still reduce your basis by the full amount you could have deducted. Skipping depreciation saves nothing later. It only gives up the deduction while your basis still goes down.
If you deducted an incorrect amount, you may be able to correct it with Form 1040-X. If an amended return is not allowed, you may be able to change your accounting method. Publication 946 explains how.
Bonus depreciation and Section 179
The building itself is 27.5-year property, so it does not qualify for bonus depreciation. Publication 946 says the special depreciation allowance applies to tangible property depreciated under MACRS with a recovery period of 20 years or less. Under Publication 527, appliances, carpets and furniture in a rental are 5-year property, and roads, shrubbery and fences are 15-year property, so those items may qualify. Publication 527 says the 100% special depreciation allowance is restored for qualified property acquired and placed into service after January 19, 2025.
Section 179 is narrower than many landlords think. Publication 946 says that generally you cannot claim a section 179 deduction based on the cost of property you lease to someone else, and land and land improvements do not qualify. Check with a preparer before you rely on either one.
Passive loss rules
Rental losses are usually passive
Publication 925 says a rental activity is passive even if you materially participated, unless you materially participated as a real estate professional. You generally cannot offset other income with a passive loss, and the excess is carried forward to the next tax year. You report the limit on Form 8582.
The special allowance
If you or your spouse actively participated, you may deduct up to $25,000 of rental loss against nonpassive income, such as wages. You actively participate if you own at least 10% of the property and make management decisions, such as approving tenants, setting rental terms and approving expenditures.
The allowance is reduced by 50% of your modified AGI over $100,000, and at $150,000 or more you generally cannot use it.
Real estate professionals
You must pass both tests. More than half of the personal services you perform in all trades or businesses must be in real property trades or businesses in which you materially participate, and you must perform more than 750 hours of services in them. If you qualify, rental real estate activities in which you materially participate are not passive. Each rental is generally its own activity unless you elect to treat all as one.
Short-term rentals
Publication 925 says an activity is not a rental activity if the average period of customer use is 7 days or less. The passive rental rules then work differently, depending on whether you materially participate and what services you provide. Have the facts reviewed before you file.
A worked example
This example is hypothetical, not a client, and covers federal income tax only. Maya is single and buys a rental house for $330,000. Its assessed value of $200,000 splits into $160,000 for the building and $40,000 for the land. The building is $160,000 of $200,000, so her building basis is $264,000 and her land basis is $66,000.
Depreciation is $264,000 divided by 27.5 years, or $9,600 in a full year. This year she collects $24,000 of rent and pays $18,000 of expenses: $9,000 mortgage interest, $3,600 property tax, $1,400 insurance, $2,000 repairs and $2,000 management fees. That leaves $6,000 before depreciation, and a $3,600 loss on paper after $9,600 of depreciation.
Maya actively participates, and her modified AGI is $120,000 before this loss. The $25,000 allowance is reduced by 50% of $20,000, which is $10,000, leaving $15,000. That covers the $3,600 loss. At $150,000 the allowance would be $0 and the loss would carry forward.
Now fast forward. To keep the math simple, assume 10 years at $9,600, or $96,000 of depreciation. If Maya sells, the gain tied to that depreciation is taxed at up to 25%, which is up to $24,000.
Selling: depreciation recapture
Depreciation reduces your basis, so it raises your gain when you sell. Publication 544 says unrecaptured section 1250 gain is generally the part of a long-term capital gain on real property that is due to depreciation. That portion is taxed at a maximum 25% rate.
1099s and records
Schedule E asks whether you made payments that require Forms 1099. For 2025, its instructions say Form 1099-NEC applies if you paid at least $600 for services by someone who is not your employee. For tax years beginning after 2025, the Form 1099-NEC threshold rises to $2,000. Ask whether your rental counts as a business for this purpose.
Keep the closing statement, mortgage interest statement, leases, rent records and receipts. Publication 527 says to separate repair and improvement costs and keep accurate records, because you need them when you sell or depreciate.
How we help
I am Sabih Shafi, an IRS Enrolled Agent, federally licensed to represent taxpayers before the IRS in all 50 states. We work by phone and video, in English or Spanish, with clients nationwide.
Depreciation review: we check your closing statement, a year of income and expenses, and past returns, and confirm depreciation is set up correctly.
Returns: Schedule E for one rental or several, including the passive loss limits.
Missed depreciation: if earlier returns left it out, we look at whether a correction is possible.
A flat fee quoted in writing before work starts.
Call or text (323) 900-0305, or book your free 20-minute tax review.
Frequently Asked Questions
Can I deduct a rental loss against my salary?
Sometimes. If you actively participated, you may deduct up to $25,000 of loss, an amount that shrinks once modified AGI passes $100,000 and is generally gone at $150,000. Unused losses carry forward.
Can I depreciate the land?
No. Land does not wear out, so split your purchase price between land and building.
What if I never claimed depreciation?
You still must reduce your basis by the full amount you could have deducted. You may be able to fix it with Form 1040-X, or with an accounting method change if an amended return is not allowed.
Is a new roof a repair or an improvement?
Publication 527 lists a new roof as an improvement, so it is generally capitalized and depreciated. A small fix that keeps the roof working is usually a repair you deduct.
How many hours do I need to be a real estate professional?
More than 750 hours of services in real property trades or businesses in which you materially participate, plus more than half of all your personal services.
Do I owe tax on depreciation when I sell?
Often, yes. The part of your gain caused by depreciation is taxed at a maximum 25% rate, including depreciation you could have claimed.
General information, not tax advice for your situation.
Related Reading
Talk to an Enrolled Agent
This article is general information, not individual tax advice. If you want to talk through your own IRS or state balance, book a free 20-minute review or call or text us directly.
Comments