Rental Income and Schedule E Basics

If you own a home, an apartment, or other property that you rent to others, the rent is generally taxable income. The IRS uses Schedule E (Form 1040), Supplemental Income and Loss, to report income and losses from rental real estate. IRS: About Schedule E

What counts as rental income

Rental income is cash, or the fair market value of property or services, that you receive for the use of your property. It includes advance rent, and any payment a tenant makes to cancel a lease. IRS: Topic no. 414, Rental income and expenses

Most individuals use the cash method. You count rent in the year you receive it. You deduct expenses in the year you pay them. IRS: Topic no. 414

A security deposit is not income if you may have to return it at the end of the lease. If you keep part of it, for example because the tenant leaves early, include the amount you keep in income that year. IRS: Topic no. 414

Expenses you may deduct

You can generally deduct expenses needed to run and keep the rental. Common examples are:

Repairs that keep the property in good working condition
Operating costs, such as fees paid to a bookkeeper or a contractor
Depreciation, which you report on Form 4562 over several years

An improvement that adds value to the property is not a repair. It is depreciated instead. IRS: Publication 527, Residential Rental Property

When a rental loss is limited

A rental loss can be limited by the passive activity rules. These rules can limit how much of a loss you deduct in one year. Some people who actively take part in managing a rental may be able to use a special allowance, but income limits apply. IRS: Publication 925, Passive Activity and At-Risk Rules

If the limits apply, you may need Form 8582 to figure the allowed loss. IRS: 2025 Instructions for Schedule E

If you also live in the home

Special rules apply when you rent a home you also use personally. Your expenses depend on whether the unit was used as a home. The unit is treated as a home if your personal use is more than the greater of 14 days or 10% of the days it was rented at a fair price. IRS: 2025 Instructions for Schedule E

Why the totals can look odd

A property can show positive cash flow and still show a loss on Schedule E. Depreciation is a deduction that does not use cash in the year you claim it. Read the totals with that in mind.

Keep your records by month, not only as a year-end total. Monthly records make it easier to check each figure before you file.

Records to keep

Keep leases, rent receipts, bank deposits, repair bills, and a list of property you depreciate. These records support each number you put on Schedule E.

Common mistakes

Some people leave out a security deposit they kept, or advance rent paid in December. Others deduct a cost that was really an improvement. Compare each expense with the lists in Publication 527 before you deduct it.

Each rental property needs its own information on Schedule E. Do not combine two properties into one row of totals. Also check that the rent you report matches the amounts in your bank records for the year.

Steps to take

List each rental property and the rent you received in 2025.
Add any advance rent and lease cancellation payments.
Total your expenses for each property.
Figure depreciation on Form 4562 if you own the property.
Report the totals on Schedule E. Check whether Form 8582 applies if you have a loss.

Rules differ for short-term and personal-use rentals. Read the instructions for your case.

General information, not advice about your return.

Sources: Sources: IRS, About Schedule E (https://www.irs.gov/forms-pubs/about-schedule-e-form-1040); IRS Topic no. 414 (https://www.irs.gov/taxtopics/tc414); IRS Publication 527 (https://www.irs.gov/forms-pubs/about-publication-527); IRS Publication 925 (https://www.irs.gov/forms-pubs/about-publication-925); IRS 2025 Instructions for Schedule E (https://www.irs.gov/pub/irs-pdf/i1040se.pdf) This is general information, not advice about your specific return.

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