The IRS treats rental income as ordinary income, but savvy landlords can leverage various deductions like mortgage interest, operating costs, and depreciation to lower their tax bill.  Understanding your tax liability is crucial for effectively managing rental property finances.

How Is Rental Income Taxed When You Have a Mortgage? 

Rental income is taxable, regardless of whether you have a mortgage, and must be reported on Schedule E.

You can reduce your taxable income with deductions for expenses like mortgage interest, property taxes, depreciation, and operating costs.

Personal stays, short-term rental activity, or how long you’ve owned the home can all impact how much tax you owe and what breaks you might qualify for.

In 2024, nearly 10 million Americans reported owning rental property.

Whether you're renting full-time, seasonally, or just dipping a toe into the market, one thing is certain: the IRS expects you to report that income. Even if it feels like you’re just covering the mortgage or barely breaking even, rental earnings are still taxable.

The real question is how to report it and how to reduce what you owe. The good news is there are plenty of ways to ax your tax bill, especially if you run a short-term rental.

If you know what counts as income, which deductions apply, and how personal use affects your tax situation, you're in a better position to file with confidence. This guide covers how rental income is taxed, what you can deduct, and what to know if you use the property yourself or decide to sell.

Mortgage or Not, Here’s How the IRS Taxes Rental Income

Many first-time rental property owners wonder:

“If my rental income just barely covers the mortgage, and I’m not making any money, why do I owe taxes?”

Here’s the key: The IRS doesn’t tax profit. It taxes income.

Even if every rent check goes straight to your mortgage lender, that rent still counts as taxable income. The IRS doesn’t consider how you spend the money. It only looks at how much money you receive.

That can feel frustrating, especially if your rental isn’t generating extra cash. However, you’re not stuck paying tax on the full rental amount. You can deduct eligible expenses to reduce your taxable income. These typically include:

Travel and professional fees related to the rental

These deductions help you calculate net rental income, which is the number the IRS actually taxes you on. In some cases, especially early on, you may even show a loss on paper, meaning you won’t owe any tax and might even use that loss to offset other income, depending on your situation.

The bottom line is that even if your rental "breaks even" or feels like it’s running at a loss, it can still have tax implications. You must keep detailed records and understand how deductions work in order to minimize what you owe.

Once you understand how rental income is taxed and what deductions you can take, the next step is figuring out how much income you're actually working with. That number will help you estimate your potential tax bill, determine if you need to make estimated payments, and understand what tax bracket your rental earnings might push you into.

How you calculate that income depends on the type of property you own.

Long-term rentals tend to be simpler. You likely have a fixed monthly rent and steady occupancy, which makes it easier to project your annual income and expenses.

Short-term rentals, on the other hand, are much more variable. Nightly rates change, bookings fluctuate with the seasons, and personal use can reduce the number of nights you're earning income. Because of that, STR hosts typically estimate their taxable income in one of two ways:

1. Estimate your short-term rental income manually

One of the simplest ways STR hosts estimate income is with a back-of-the-napkin equation:

Average Daily Rate (ADR) × Occupancy Rate × 365

This gives you a rough projection of annual gross revenue.

Using our data from Jackson Hole as an example: if the average occupancy rate is 61% and the average daily rate is $557.97, you'll multiply 557.97 x .61 x 365 for an estimate of $124,232.02 in total annual rental income.

Keep in mind that this formula is based on market averages and assumes your property is available year-round. The calculation doesn’t factor in personal use, seasonal fluctuations, or off-market days for maintenance. If your calendar isn’t fully open or your booking patterns shift throughout the year, this estimate could be higher than what you’ll actually earn.

Still, it’s a helpful baseline, especially when you’re looking at how much money you can make with Airbnb in a specific market. 

2. Estimate income with a vacation rental calculator

Crunching the numbers on your own won’t always account for unexpected shifts in supply or demand that affect your rental income. An Airbnb calculator can offer extremely accurate revenue estimates by:

Integrating critical market metrics like seasonality and occupancy

Comparing your property to similar listings

It'll then project the total annual rental income based on the real performance of similar properties. You can use that estimate to calculate rental income tax for any given tax year. If we look at an actual for-sale property in Jackson Hole, Wyoming, we can see that property-specific revenue estimates can differ significantly from market averages. This 5-bed, 5-bath home, for instance, is projected to earn just shy of $163,000 per year.

AirDNA's Rentalizer also offers a monthly breakdown to help you dig deeper into the real revenue you can expect to earn, which is essential for accurate tax planning and estimated tax payments.

Understand the investment potential of any address in the world.

You’ll report your rental income and expenses using Schedule E (Form 1040). Here’s how to do it in a few straightforward steps:

This includes more than just rent. Add up all payments you’ve received from guests, like cleaning fees, pet charges, and nonrefundable deposits.

Deductible expenses may include mortgage interest, property taxes, insurance, maintenance, utilities, and depreciation. Keep receipts and statements for each one.

List your income and expenses on Schedule E to calculate your net rental income (the amount the IRS will tax).

Accurate documentation is key, especially if you're ever audited. A tax professional can help you determine how your rental is classified and make sure you're maximizing your deductions.

Determine if you need to make estimated tax payments

If you expect to owe $1,000 or more in taxes for the year (after withholding), the IRS may require you to make estimated payments throughout the year. This can be done quarterly, or you can adjust your W-2 withholding to account for the rental income.

See if you qualify you for a bigger tax break

Most rental income is considered passive, which means any losses can usually only offset other passive income. Short-term rentals have an edge in this department. 

If your average guest stay is seven days or less, and you provide substantial services (like guest communication, cleaning between stays, or stocked amenities), the IRS may consider your rental activity active. That could allow you to deduct rental losses against other income, like W-2 wages or business income.

Not every host will qualify, but if your STR is more hands-on, it’s worth checking with a tax advisor. You might be able to unlock a more favorable tax position just by how your activity is classified.

Compare how DIY hosts perform versus professionally managed listings. See whether the revenue differences justify pursuing material participation for STR tax treatment.

When you file your taxes, you’ll choose between taking the standard deduction or itemizing your deductions. The standard deduction is a flat amount that most taxpayers subtract from their income. It’s simple and doesn’t require you to list individual expenses. For many people, it’s the easiest and most beneficial option.

However, if you own a rental property, itemizing could lower your taxable income even more. That’s because rental property owners can often deduct a wide range of operating expenses, and those deductions can add up quickly, especially if you have a mortgage or actively manage the property.

Here are some of the most common expenses that the IRS allows rental property owners to deduct:

There's one thing you have to get right before claiming any deductions: documentation. If you get audited, the IRS will need a paper trail for every item you deduct. Save all receipts, mortgage statements, property tax bills, and invoices so you can verify your rental expenses if the IRS asks.

AirDNA’s Rentalizer shows projected income and allows you to itemize expenses so you can estimate your cash flow. Then, layer in bonus depreciation and other tax benefits to understand your full after-tax ROI.

Depreciation deductions for rental property

Depreciation lets you deduct part of your property’s value each year to account for wear and tear over time. You can start claiming it as soon as the property is available to rent—even if it hasn’t had its first booking yet.

If it meets those criteria, you can typically deduct 3.636% of the building’s value each year over a 27.5-year schedule. This non-cash deduction can make a big difference in lowering your taxable rental income over time.

If you use your rental property for personal stays, even for just a few days, it can change how the IRS treats your income and what deductions you’re allowed to claim.

The IRS considers your property mixed-use if it's used for personal purposes for more than 14 days in a year, or for more than 10% of the total days it’s rented at fair market value—whichever is greater. Once your property crosses that threshold, it’s no longer treated purely as a rental.

That change affects your deductions. You’ll need to split your expenses between personal and rental use, and only deduct the portion tied to rental activity. For example, if you stay there 20 days and rent it for 180, you can deduct about 90% of eligible deductible expenses (like the ones we went through earlier). 

Personal-use days don’t count toward those deductions, even if you're doing small repairs or cleaning.

If you rent the property occasionally but use it mostly for personal reasons, the IRS may classify it as a second home. You’ll still need to report any rental income, but most rental deductions will be off-limits, including the ability to deduct rental losses.

On the other hand, if your personal use stays below the threshold, your property is treated as a rental. You can deduct the full share of eligible expenses and, depending on your income, possibly up to $25,000 in rental losses against other types of income. That benefit phases out once your modified adjusted gross income (MAGI) exceeds $100,000.

Ultimately, the more you use your rental personally, the more restricted your tax benefits become. Tracking rental vs. personal-use days is key to filing correctly and maximizing your deductions.

Selling a rental property can trigger several different taxes, depending on how long you’ve owned it, how you’ve used it, and how much profit you’ve made. If the property has appreciated in value, here are the most common taxes you may face.

This is the most common tax investors encounter when selling a rental. Your capital gain is the difference between the sale price and your adjusted cost basis, which typically includes your purchase price plus improvements and minus depreciation.

If you owned the property for less than one year, the gain is taxed at your ordinary income rate.

If you owned it for more than one year, it’s taxed at a lower long‑term capital gains rate.

If you claimed depreciation while owning the property, the IRS may require you to pay some of that tax benefit back when you sell. This portion of your gain is typically taxed at up to 25%, even if your capital gains rate is lower.

If your income exceeds certain thresholds, you may also owe an additional 3.8% NIIT on your net investment income, including capital gains from a rental sale.

Ways to reduce or defer taxes when you sell

In some cases, you may be able to reduce or delay the taxes triggered by a sale.

Also called a tax‑deferred exchange, this strategy allows you to reinvest the sale proceeds into another qualifying investment property within a specific time frame. If done correctly, you may be able to defer both capital gains tax and depreciation recapture.

If the property was your primary residence for at least two of the last five years, you may be eligible to exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly). Special rules apply if the home was also used as a rental, including short‑term rentals.

Short-term rental investing has a lot of silver linings, but there's also plenty of red tape. 

While we’ve covered how rental income is taxed when you have a mortgage, it’s still a good idea to talk with a tax professional. State rules can vary, and your filing options may depend on how you use the property or what deductions you qualify for.

Knowing your tax liability before you invest is key, but so is understanding your earning potential. The better you can forecast your revenue, the easier it is to decide whether the tax bill is worth it. 

Learn more about investor tools from AirDNA.

Because AirDNA is a business tool used for analyzing, managing, and launching your STR, its cost is usually deductible. Reduce your taxable income while accessing the data that drives stronger ROI.

Rental income includes more than just monthly rent payments. The IRS considers things like nonrefundable deposits, pet fees, cleaning fees, and cancellation charges as rental income and requires them to be reported.

Do I have to pay taxes on a room I rent in my house?

Yes. Even if you’re only renting part of your home (like a basement or spare bedroom), the income is still taxable. You can deduct expenses proportionally (based on square footage or use) if the space is used exclusively as a rental.

What if I only rent my property for a few weeks?

If you rent your home for 14 days or fewer per year, and use it yourself the rest of the time, you generally don’t have to report that income at all. This is sometimes called the “Masters exemption” (after the golf tournament). However, once you pass 14 rental days, all income becomes taxable.

Can I deduct losses from my rental property?

It depends. In most cases, rental income is considered passive, so losses can only offset other passive income. But if you meet certain criteria (like providing substantial services in a short-term rental or qualifying as a real estate professional), you may be able to deduct losses against other income, like W-2 wages.

Do I need to pay estimated taxes on rental income?

Yes, if you expect to owe $1,000 or more in taxes for the year (after withholding). This often applies to rental property owners. You can make quarterly estimated payments or adjust your W-2 withholding if you also have a day job.

How do I report rental income on my taxes?

Use Schedule E (Form 1040) to report income and expenses from rental real estate. You'll list all income earned, deduct allowable expenses, and calculate your net profit or loss for the year.

What happens if I sell a rental property at a loss?

Selling at a loss generally means you won’t owe capital gains tax. In some cases, you may be able to use that loss to offset other capital gains. However, you can’t use a loss on the sale of personal-use property to reduce your taxable income.

The 2% rule suggests your monthly rent should be around 2% of the property’s purchase price for the investment to be potentially profitable. For instance, if you purchase a property for $200,000, you’d aim for at least $4,000 in monthly rent. While it’s a useful guideline, it doesn’t account for every market condition, so local demand and operating costs can affect feasibility. Short-term rental hosts also need to consider variable occupancy rates and seasonal trends, which may not align perfectly with simple percentages.

Completely eliminating tax on rental income is challenging, but advanced strategies can legally minimize or defer the amount owed. Options include using a 1031 exchange to defer capital gains, leveraging mortgage interest and depreciation deductions, and grouping rental activities to meet real estate professional qualifications.

What is the maximum rental income without tax?

In the United States, there’s no absolute cutoff beneath which rental income is entirely tax-free. Even modest rental earnings must be reported and could generate a tax liability depending on your deductions and total taxable income. To understand your exact obligations, consult a professional and review IRS guidelines.

The IRS taxes rental income even if you break even. Learn Schedule E deductions, the 14-day rule, depreciation recapture, and how to reduce your tax bill.

How Is Rental Income Taxed When You Have a Mortgage? | AirDNA

How Is Rental Income Taxed When You Have a Mortgage?

Key Takeaways
Rental income is taxed as regular income by the IRS. Landlords need to report it and include various payments like nonrefundable deposits and cleaning fees.
Landlords can lower their taxable income with deductions for mortgage interest, property taxes, and other operating expenses. It's important to keep all records of these expenses.
Using your rental property for personal reasons or how long you've owned it can greatly affect your taxes. This includes dealing with capital gains tax and special rules for primary residences used as rentals.

Nearly 10 million Americans recorded rental income on their tax returns in 2020, according to the Internal Revenue Service (IRS). How many properties did those people own? An astonishing 17 million.

Whether you’ve recently joined their ranks or plan to do so sometime in the next tax year, there’s a not-so-minor detail you need to know: how the IRS taxes rental income. 

The short answer is that the IRS taxes rental income like ordinary income even if you have a mortgage. The longer answer is that there are several ways to reduce your taxable income from rentals, as well as a few situations that can impact how you file. 

Here’s what you need to know: 

How the IRS Taxes Rental Income

The IRS taxes rental income as ordinary income regardless of whether you have a mortgage. However, how you file those taxes is a little different. While you report your ordinary income on a W2, rental income is categorized as supplemental income. To report rental income, you must file a tax return using Schedule E on Form 1040. The IRS will then tax your rental income at the same rate as your regular income based on your tax bracket. 

Keep in mind, too, that reporting rental income doesn’t end with the rent checks. The IRS defines rental income as any payment you receive for the use of your property and can include: 

Nonrefundable deposits (e.g. security deposits)
Pet or cleaning fees 
Cancellation fees 

When you pay is also critical. If you expect to earn more than $1,000 in rental income, the IRS will require estimated tax payments. You can either pay quarterly (usually on the 15th of the first month of the quarter) or increase your W2 withholding to account for the rental income you expect to earn. 

Try Our Vacation Rental Pricing Tool

Use Smart Rates™ to optimize your pricing strategy.

Try here for free
How To Calculate Rental Income

Calculating rental income is particularly tricky for short-term rental (STR) owners, with fluctuating rates and occupancy and a lack of historical data to draw from. Many hosts calculate income in one of two ways: manually or using a vacation rental calculator.

1. Estimate STR Income Manually

A simple equation many STR hosts use to manually estimate their Airbnb revenue is multiplying the annual occupancy rate by the average daily rate (ADR) by 365 (for the number of days in a year). 

Using our data from Jackson Hole as an example: if the occupancy rate is 36% and the average daily rate is $409.50, you’ll multiply 409.5 x .36 x 365 for an estimate of $53,808.30 in total annual rental income. However, if your property is not available all year round, then you’ll want to take that into consideration.

2. Estimate Income With a Vacation Rental Calculator

Crunching the numbers on your own won’t always account for unexpected shifts in supply or demand that affect your rental income. An Airbnb calculator can offer extremely accurate revenue estimates by: 

Analyzing nearby properties
Creating an index based on relevance
Integrating critical market metrics like seasonality and occupancy 
Comparing your property to similar listings 

It’ll then project the total annual rental income based on the real performance of similar properties. You can use that estimate to calculate rental income tax for any given tax year. AirDNA’s Rentalizer also offers a monthly breakdown to help you dig deeper into the real revenue you can expect to earn.

Boost Your Rental Revenue

Tax Deductions You Can Use to Offset Rental Property Income

Deductions can reduce your tax liability, meaning the amount you’ll owe in taxes. Roughly 90% of taxpayers take the standard deduction, but itemizing your deductions can cut back your taxable income even further. 

This can be especially beneficial for STR hosts who incur any number of costs to operate their rentals. The nine tax deductions hosts most often take are: 

Mortgage interest payments: Your mortgage itself isn’t a deductible expense, but mortgage interest payments are.
Property taxes: Deduct any property taxes associated with your rental property.
Operating costs: This includes property management fees, costs for maintenance and repairs, and utilities. 
Travel: If you own multiple STRs and need to travel to them as part of your rental property business, you can deduct the expense of those trips. 
Home Office Expenses: Some STR hosts are hands-off, but if you’re managing your rental business from a dedicated location in your home, you can deduct a portion of your utilities and home insurance. 
Professional Fees: Many hosts work with lawyers, accountants, property managers, and more. The fees you pay for these types of services are usually deductible expenses. 
Advertising: If you pay to market your STR or list it on a site, those fees are also deductible expenses. 
Insurance: You can deduct the insurance premiums you pay for your rental coverage. 
Depreciation: As your property loses value due to wear and tear, you can deduct a fixed percentage of your taxable income to help with improvements. 

All of the above are acceptable tax deductions, but there’s one thing you have to get right before you can: documentation. If you get audited, the IRS will need a paper trail for every item you deduct. Save all receipts and invoices so you can verify your rental expenses if the IRS asks. 

Depreciation on a Rental Property

Depreciation happens when a rental loses market value. It can happen if the housing market shifts or simply due to the wear and tear of operating a rental. The good news is the IRS allows a depreciation deduction that you can collect as soon as your property is available to rent. 

You’ll meet the IRS’s criteria for depreciation if: 

You’re a property owner
The property is income-producing, e.g. an STR
The property will wear out over time
The property will last more than one year

If you check all the above boxes, you can deduct 3.636% of your taxable income for every year you own and operate your rental property. That deduction is the same amount rental properties tend to depreciate each year, and it covers the cost of improving the property. 

Personal Use of a Rental Property

Many real estate investors buy residential rental properties because they’d like to stay there themselves. While you don’t have to give up your favorite vacation spot to simplify your taxes, whether you personally use your rental property—and how you use it—can impact your taxes. 

The important thing is to determine whether the IRS will define your property as a rental or as a personal residence. To keep it in the rental category, consider: 

Days of Rental Use vs. Personal Use

Whether your property is considered a rental or a personal residence depends on how many days you use it yourself. If you use your STR for more than 14 days or more than 10% of the total days you rent it (whichever is greater), the IRS will tax it as a “mixed-use” property, meaning a property that you both rent out and use personally. 

Personal Residence With Rental Use

It’s not a bad thing if your property is categorized as mixed-use, but you do need to know how to file. Hosts with mixed-use properties must separate the expenses they incur while operating the property as a rental and those that arise while they use it personally. Come tax time, you can only deduct the portion tied to rental expenses.  

Loss Limitations

A net loss happens when your rental expenses exceed your rental income. How that impacts your taxes depends on how your property is classified. Personal residences aren’t eligible to deduct the net loss from their other income, but rental properties are. 

Why? A loss on a rental property is considered a passive activity loss, so you can only deduct it from passive income (e.g. rental property income) and not W2 income. 

Home Office Deductions

What if you don’t use your office to manage your rentals, but you do have a dedicated room or suite in your home that you rent out? You may be able to use that space to qualify for the home office deduction because the IRS often considers renting a room as “business use of home.” 

Market-Informed Pricing Decisions

AirDNA’s vacation rental pricing tool uses data-driven recommendations to propose the best daily rates.

Try it for free
Taxes That Apply When You Sell a Rental Property

New real estate investors often think they can sell a property and walk away with a sizable profit without looking back. However, there are several tax considerations when you sell a rental property. How much you’ll owe in taxes depends on how long you’ve owned the property, whether it’s classified as a rental or a personal residence, and how much you earned from the sale. 

If you sell, you’ll likely encounter:

Capital Gains Tax

This is the most common tax real estate investors face. The capital gain is the difference between the sale price and the adjusted value (usually the home value plus improvements and minus depreciation). 

If you owned the property for less than a year, it’s considered a short-term capital gain, and you’ll pay your normal income tax rate. If you owned the property for more than a year, it’s considered a long-term capital gain and your tax rate will typically be lower.

Depreciation Recapture

If you deduct depreciation from your taxable income, you may also have to pay depreciation recapture once you sell. The “recapture” is the amount of depreciation deductions you claimed or could have claimed. It’s typically taxed at 25%.

Net Investment Income Tax (NIIT)

NIIT is a 3.8% tax that typically applies to people with higher incomes. It applies to certain types of net investment property income (e.g. the net amount you earned from selling your property). Rental property owners that fall in this bracket typically pay an additional 3.8% tax on capital gains. 

1031 Exchange

Also called a tax-deferred exchange, this is a strategy to defer paying taxes. If you use the proceeds from your investment property to purchase another property within a certain period after the sale, you may be able to defer claiming your capital gains and therefore avoid paying both capital gains tax and depreciation recapture. 

Exclusion for Primary Residence

The tax rules are a little different if you’ve been operating your primary residence as a short-term rental. As long as the property was your primary residence for two of the last five years, you may be eligible for a capital gains exclusion, meaning the proceeds aren’t considered a capital gain and you don’t have to pay that tax on them. 

Run the Numbers Before You Invest

Short-term rental investing has a lot of silver linings, but there’s also plenty of red tape. While the above offers an overview of how rental property income is taxed, it’s also important to consult with a tax professional or accountant. Taxation can vary slightly from state to state, and you may be eligible for different deductions or exclusions based on your unique situation. 

Understanding your tax liability before you invest is critical, but so is how much revenue you can expect to earn. Estimate the revenue potential for any property, anywhere, so you can be sure the tax liability is worth it—both when you buy, while you operate, and if and when it’s time to sell. Learn more about investor tools from AirDNA. 

Customize Your Pricing
Try AirDNA for free

Individual Income Tax Returns, Line Item Estimates, 2021

IRS provides tax inflation adjustments for tax year 2024

Jackson, Wyoming Vacation Rental Data & Analytics

Airbnb Calculator

Airbnb Pricing Tool

Best Airbnb Property Management Companies in the US for 2023


7 Tips to Manage Your Airbnb Like a Pro

Topic no. 509, Business use of home

Airbnb Investment Guide: Strategies & Opportunities

Short-Term Rental Investing Tools by AirDNA

Meet AirDNA Adapt. Pricing built on the data you already trust.

Game Changing Money Starts Here.

Calculate potential short term rental earnings

Actionable data and insights to help you optimize and grow

Find great investment opportunities to grow your portfolio

Increase revenue with competitive analysis

Win and retain clients, grow your business.

Build custom comps to benchmark performance

Unlock crucial travel and tourism trends by destination

Invest with confidence using advanced market insights

Grow revenue 20% with local prices, occupancy, and trend data.

How Is Rental Income Taxed When You Have a Mortgage?

ARTICLE SUMMARY

QUICK NAVIGATION