Rental Property Tax Deductions 2026: IRS Rules for Landlords

What counts as rental income

Rental income includes more than monthly rent. Two rules catch landlords most often:

• Advance rent is taxable in the year you receive it, whatever period it covers. January rent paid in December is income for December's year.
• Security deposits aren't income when you receive them if you plan to return them at the end of the lease. If you keep part of a deposit, for example for damage or unpaid rent, that part becomes income in the year you keep it.

IRS Pub. 527

Rental income and expenses for individual landlords go on Schedule E (Form 1040). Form 4562 is needed for depreciation on property first placed in service that year and for vehicles. Schedule E instructions

Deductible rental expenses

IRS Publication 527 lists the common rental expenses. Here they are grouped the way most landlords think about them.

IRS Pub. 527

Property tax and the SALT cap

The cap on itemized deductions for state and local taxes is $40,000 for 2025 and $40,400 for 2026. By law it doesn't apply to taxes paid in a trade or business or in an activity held for the production of income, such as a rental. Property tax on the rental-use part of your property is generally deducted on Schedule E without the SALT cap, although personal-use allocation and the loss limits below can still affect when it produces a tax benefit. Property tax on your own home stays on Schedule A and counts toward the cap. 26 U.S.C. § 164(b)

Driving to the rental

Local transportation to collect rent or to manage, maintain or protect the property is deductible. Commuting between your home and the rental generally isn't, unless your home is your principal place of business. Travel away from home is deductible when the main purpose is rental-related, but not when the main purpose is improving the property; those costs are added to the property's basis. IRS Pub. 527

The standard mileage rate for business use in 2026 is 72.5 cents per mile from January 1 to June 30, and 76 cents per mile from July 1, 2026. IRS: Standard mileage rates Keep a mileage log with dates, destinations and purpose.

Repairs vs improvements

This distinction decides whether a cost is deducted this year or capitalized and recovered under the applicable depreciation rules.

• Repair: keeps the property in its normal operating condition. Fixing a leak, patching drywall, replacing a broken window pane, repainting between tenants. Deductible in the year paid.
• Improvement: a betterment, a restoration or an adaptation to a new use. A new roof, a kitchen remodel, an added bathroom, replacing the whole HVAC system. Capitalized and depreciated.

IRS Pub. 527

Three safe harbors that help small landlords

The tangible property regulations provide three safe harbors that may allow current deductions for costs that might otherwise be capitalized:

• De minimis safe harbor: deduct items costing up to $2,500 per invoice or item if you don't have an applicable financial statement (AFS), or $5,000 if you do. The amounts must be expensed on your books under an accounting policy in place at the start of the year. A $1,800 refrigerator bought on its own invoice can then be expensed instead of depreciated.
• Routine maintenance safe harbor: recurring work that keeps the property operating efficiently, if for a building you reasonably expect to do it more than once in a 10-year period.
• Small taxpayer safe harbor: for taxpayers with average annual gross receipts of $10 million or less and a building with an unadjusted basis of $1 million or less. If total repairs, maintenance and improvements on that building for the year don't exceed the lesser of 2% of its unadjusted basis or $10,000, you can deduct them all.

The de minimis and small taxpayer safe harbors are annual elections, made with a statement attached to a timely filed original return, including extensions. The routine maintenance safe harbor isn't an election; changing an established accounting method to use it may require Form 3115. IRS: Tangible property regulations

Depreciation: 27.5 years and bonus depreciation

Depreciation lets you deduct the cost of the building over its recovery period, even though you didn't spend that cash this year. It is often the largest single deduction on a rental.

The building, not the land

Land can't be depreciated. When you buy a property, you split the purchase price between land and building in proportion to their fair market values. If you aren't sure of the values, you can use the ratio from your property tax assessment. IRS Pub. 527

When depreciation starts

Depreciation starts when the property is placed in service, meaning ready and available for rent, not necessarily when the first tenant moves in. In the IRS example, a house ready for rent and advertised in July but occupied in September is placed in service in July. IRS Pub. 527

Recovery periods

GDS is the regular system; ADS applies in specific cases, including property used predominantly outside the United States. Residential buildings use the mid-month convention: in the first year you get half a month for the month the property is placed in service. IRS Pub. 527 26 U.S.C. § 168

Bonus depreciation after the 2025 law

The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. For the first tax year ending after that date, you can elect 40% instead. BDO on IRS Notice 2026-11

Qualified property generally means MACRS property with a recovery period of 20 years or less. Treas. Reg. § 1.168(k)-1 So the rental building itself (27.5 years) doesn't qualify. Appliances, carpets and furniture (5 years) and fences or landscaping (15 years) can. Other requirements apply: in particular, property that must be depreciated under ADS, such as most property used predominantly outside the United States, isn't eligible for bonus depreciation. 26 U.S.C. § 168(k)(2)(D)

Depreciation you skip still counts

When you sell, your basis is reduced by depreciation you deducted or could have deducted. Skipping depreciation doesn't preserve your basis: depreciation allowed or allowable generally reduces basis and can increase your taxable gain when you sell. IRS Pub. 527 If depreciation was missed in past years, there are ways to correct it; talk to your tax preparer before filing.

Worked example: a California rental

Simplified illustration with assumed figures, not a specific property. Assumptions:

• a single-family home bought for $500,000 and rented out all of 2026 at $3,000 a month;
• the property tax assessment splits the value 80% building and 20% land, so the depreciable basis of the building is $400,000;
• the home was placed in service as a rental in an earlier year, so 2026 is a full depreciation year;
• no personal use, no bonus depreciation items this year;
• all expenses shown are deductible, and no basis, at-risk or other limits apply except the passive loss rules discussed below.

The property brings in $36,000 and costs $26,880 in deductible cash expenses, leaving $9,120 before mortgage principal, capital spending and income taxes. Yet it shows a $5,425 tax loss because of depreciation. Whether that loss reduces tax on your other income depends on the passive loss rules in the next section.

If the home had been placed in service in July 2026 instead, the mid-month convention would give 5.5 months of depreciation for the first year: $14,545 × 5.5 ÷ 12 = $6,667 (rounded).

Passive loss rules

Rental activities are generally passive, even if you are closely involved. A passive loss can only offset passive income, with two main exceptions. IRS Pub. 925

The $25,000 allowance for active participation

If you actively participate, for example by approving tenants, setting rent and approving repairs, you can deduct up to $25,000 of rental loss against wages and other nonpassive income. Active participation also requires an ownership interest of at least 10% by value, counting your spouse's interest. The allowance drops by 50% of modified AGI above $100,000 and is generally gone at $150,000. Married filing separately: $12,500, phasing out between $50,000 and $75,000 of modified AGI, and only if you lived apart all year; if you lived together at any time during the year, the allowance isn't available. IRS Pub. 925

Suspended losses aren't lost. They carry forward to future years and are generally released when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated person. If several properties are grouped as one activity, selling one of them may not be a disposition of your entire interest. 26 U.S.C. § 469(g) IRS Topic 425

Real estate professionals

Rental losses aren't limited by the passive rules if you qualify as a real estate professional and materially participate. You must meet both tests: more than half of your personal services in all trades or businesses during the year were in real property trades or businesses in which you materially participated, and more than 750 hours of such services. A full-time W-2 job usually makes the first test hard to meet. Nonpassive treatment doesn't remove basis or at-risk limits, and California doesn't follow this exception (see California differences). IRS Pub. 925

The 20% QBI deduction

Rental income may qualify for the qualified business income deduction of up to 20% if the rental rises to the level of a trade or business. The IRS safe harbor in Rev. Proc. 2019-38 requires, among other things, separate books and records, at least 250 hours of rental services a year (or in three of the last five years for enterprises that have existed at least four years), contemporaneous records and a statement attached to a timely filed original return.

The services can be performed by owners, employees, agents or independent contractors. Hours spent on financing, investment management, improvements or travel to the property don't count. Triple net leases and property used as a residence under section 280A(d) are excluded from the safe harbor. Failing the safe harbor doesn't automatically rule out the deduction: the rental may still qualify as a trade or business under the general rules. Rev. Proc. 2019-38 IRS: QBI deduction

Vacation homes, short-term and foreign rentals

A home you also use yourself

You used a dwelling unit as a home if your personal use was more than the greater of 14 days or 10% of the days it was rented at fair rental value. In that case rental expenses are limited and must be split between rental and personal days. If you used it as a home and rented it out for fewer than 15 days, you don't report that rent and don't deduct rental expenses. Schedule E instructions

Short-term rentals

Under the passive activity rules, an activity where the average period of customer use is 7 days or less isn't treated as a rental activity. IRS Pub. 925 That can change how losses are treated, and the answer depends on your participation. Reporting is a separate question: rentals where you provide substantial services for guests' convenience, as a hotel does, go on Schedule C rather than Schedule E; a short average stay alone doesn't make it Schedule C. If you run short-term rentals, have the classification reviewed before you file.

An apartment abroad

U.S. citizens and residents report rent from a property abroad on Schedule E too, converted to U.S. dollars. Residential property used predominantly outside the United States is depreciated under ADS over 30 years, not 27.5 (40 years if placed in service before 2018). The same mandatory ADS rule generally rules out bonus depreciation on appliances and furnishings in the foreign rental. 26 U.S.C. § 168(g)

Foreign income tax on that rent can usually be claimed as a foreign tax credit, but California gives no credit for it. We explain the mechanics, with examples, in double taxation for U.S. residents.

When you sell: recapture and suspended losses

• Depreciation recapture. The part of your gain that comes from depreciation on the building (unrecaptured section 1250 gain) is taxed at a maximum 25% rate. Gain attributable to depreciation on section 1245 assets, such as appliances and furniture, can be recaptured as ordinary income. The rest of a long-term gain gets regular capital gains rates. IRS Topic 409
• Basis. Your adjusted basis is reduced by depreciation allowed or allowable, whether or not you claimed it.
• Suspended passive losses. Losses carried forward under the passive rules are generally released when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated person.
• NIIT. Rental income and gains can be subject to the 3.8% net investment income tax for higher-income taxpayers.

Planning a sale or an exchange is part of our tax planning services.

California differences

• No bonus depreciation. California doesn't conform to the federal 100% bonus depreciation. You calculate California depreciation separately on Form FTB 3885A and adjust on Schedule CA. FTB Pub. 1001
• Lower section 179 limits. California allows a section 179 expense election of up to $25,000, with a phaseout starting at $200,000. FTB Pub. 1001
• Rentals held in an LLC. An LLC that owns your rental generally owes California's $800 annual tax on top of the property's own taxes; see the California LLC $800 tax.
• No real estate professional exception. California doesn't conform to the federal real estate professional exception in IRC section 469(c)(7). A rental real estate activity that is nonpassive federally solely because of that exception may remain passive for California, with a separate passive loss calculation on Form FTB 3801. Short-term operations and activities with substantial services need their own classification analysis. FTB 3801 instructions
• No credit for foreign tax on a rental abroad. FTB Schedule S instructions

Because of these differences, a California landlord who takes bonus depreciation federally keeps two depreciation schedules for the same property, one federal and one state. Keep both: they matter again in the year you sell.

Checklist before you file

• Rent received, including advance rent and any security deposit amounts you kept.
• Form 1098 for mortgage interest and the property tax bills for the rental.
• Receipts for repairs, sorted from improvements, with invoice amounts for the de minimis safe harbor.
• Closing statement from the purchase and the land/building split, if the property is new.
• Depreciation schedules from prior years, federal and California.
• Mileage log and travel records.
• Personal-use days, if you or family used the property.
• Prior-year suspended passive losses.
• For a property abroad: foreign rent and expenses in U.S. dollars, proof of foreign tax paid.
• De minimis and small taxpayer safe harbor election statements, if you use them.

Need help with the return itself? See our individual tax preparation.

FAQ

What expenses can I deduct on a rental property in 2026?

Common deductible rental expenses include mortgage interest (points are generally deducted over the loan term), property tax, insurance, repairs and maintenance, management fees and commissions, utilities you pay, legal and professional fees, advertising, local transportation and depreciation of the building and improvements. Improvements and the building itself are depreciated rather than deducted all at once.

Is property tax on a rental limited by the SALT cap?

No. The state and local tax cap ($40,000 for 2025, $40,400 for 2026) applies to itemized deductions on Schedule A. Property tax paid on a rental property is an expense of an activity held for the production of income and is deducted on Schedule E without that cap.

Is a new roof a repair or an improvement?

A full roof replacement is generally an improvement, so it is capitalized and depreciated. Fixing a leak or replacing a few damaged shingles is generally a repair you can deduct in the year paid. The small taxpayer safe harbor may let smaller costs be deducted if the yearly total stays within its limit.

Can I deduct a rental loss against my salary?

Up to $25,000 a year if you actively participate in the rental, but this allowance shrinks by 50% of modified AGI above $100,000 and is generally gone at $150,000. Losses you can't use are carried forward and generally released when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated person. California doesn't recognize the federal real estate professional exception, so a separate California passive loss calculation may be required.

Can I use 100% bonus depreciation on a rental property?

Not on the building, which has a 27.5-year recovery period. Items with a recovery period of 20 years or less, such as appliances, carpets, furniture and fences, can qualify for federal 100% bonus depreciation if acquired and placed in service after January 19, 2025. Property required to use ADS, including most tangible property used predominantly abroad, generally doesn't qualify. California doesn't allow bonus depreciation.

What happens to depreciation when I sell a rental?

Depreciation reduces your basis, which increases your gain. The portion of the gain from depreciation on the building is taxed at a maximum 25% rate as unrecaptured section 1250 gain. Depreciation on appliances and furniture can be recaptured as ordinary income. Basis is reduced by depreciation you could have taken even if you didn't claim it.

Do I have to report rent from an apartment abroad?

Yes. U.S. citizens and residents report worldwide rental income on Schedule E in U.S. dollars. Residential property used predominantly outside the United States and placed in service after 2017 is depreciated over 30 years under ADS, and foreign income tax on the rent can usually be claimed as a foreign tax credit on the federal return.