Rental Income Tax Calculator 2026

Q: How is rental income taxed in 2026?

Rental income is reported on Schedule E of your federal tax return and taxed as ordinary income at your marginal rate. If your gross rent is $30K, expenses are $22K, and you're in the 22% bracket, your tax on the $8K net income is roughly $1,760. Depreciation (typically $8,727/yr on a $300K property) can create a paper loss even with positive cash flow.

Q: How do I calculate depreciation on a rental property?

Residential rental property is depreciated over 27.5 years using the straight-line method. Deduct the land value (not depreciable -- typically 15-30% of purchase price) from the purchase price to get the depreciable basis. Divide by 27.5. Example: $300K purchase, 20% land = $240K basis / 27.5 = $8,727/year. Under OBBBA (2026), 100% bonus depreciation is permanently restored for cost segregation components.

Q: Can I deduct rental losses against my W-2 income?

Yes, up to $25,000 if you actively participate and your AGI is $100,000 or less. The allowance phases out between $100K and $150K ($1 lost for every $2 over $100K), reaching zero at $150K. Real Estate Professionals (750+ hours/year) can deduct unlimited rental losses. Suspended losses are released when you sell.

Q: What is depreciation recapture and how much tax will I owe?

When you sell a rental property, the IRS recaptures all depreciation previously claimed at a maximum 25% rate (Section 1250 unrecaptured gain). If you claimed $87,270 in depreciation over 10 years, you could owe up to $21,818 in recapture tax at sale -- regardless of whether the property appreciated. A 1031 Exchange defers this tax by rolling into a replacement property.

Q: What expenses are deductible on Schedule E?

Deductible Schedule E expenses include: mortgage interest (from Form 1098), property taxes, landlord insurance, repairs and maintenance (not improvements), property management fees, HOA fees, utilities paid by landlord, advertising, professional fees (CPA, attorney), and travel to the property. Capital improvements (new roof, HVAC) are not immediately deductible -- they must be depreciated.

Schedule E tax, 27.5-year depreciation, and passive loss rules -- all in one place.

Schedule E -- Rental Income & Expenses

Gross rental income (annual)

Total rent collected before any expenses

Schedule E Expenses

Mortgage interest

From your Form 1098 -- interest only, not principal

Property taxes

Insurance

Landlord/dwelling policy premium

Repairs and maintenance

Must be ordinary, necessary, not capital improvements

Management fees

Utilities (if landlord-paid)

HOA fees

Other expenses (advertising, legal, etc.)

Your Tax Situation

Filing status

W-2 / other ordinary income

Used to determine your marginal tax bracket

Depreciation is not included here -- calculate it in the Depreciation tab and factor it into the Passive Loss Rules tab.

How to Use This Calculator

Tab “Schedule E Tax”

Enter your gross rental income, itemized expenses (mortgage interest, property tax, insurance, repairs, management, utilities, HOA), your filing status, and W-2 income. The calculator finds your net rental income, identifies your marginal federal bracket on that income, and shows the tax owed and effective rate. Expenses flow to Schedule E of your federal return — they reduce rental income dollar-for-dollar before tax is applied.

Tab “Depreciation”

Enter your purchase price, land value percentage (typically 15–30% — check your county appraisal), and years in service. The calculator applies the 27.5-year straight-line method for residential rental property and shows your depreciable basis, annual deduction, accumulated depreciation, years remaining, and a recapture estimate at the 25% Section 1250 rate. Under OBBBA (2026), 100% bonus depreciation is permanently restored for cost segregation components — only the straight-line portion is shown here.

Tab “Passive Loss Rules”

Enter your AGI, filing status, participation level (active, passive, or Real Estate Professional), rental income, expenses, and depreciation. The calculator applies the $25,000 passive activity loss allowance with the $100K–$150K phase-out, shows how much of a rental loss you can deduct against W-2 income this year, and how much is suspended to carry forward. Real Estate Professionals (750+ hours/year) bypass PAL rules entirely — their losses are unlimited.

The Formulas

Schedule E — Net Rental Income:
Net Rental Income = Gross Rent − (Mortgage Interest + Property Tax + Insurance + Repairs + Management + Utilities + HOA + Depreciation)

Tax on Rental Income:
Rental income is stacked on top of ordinary income (W-2 wages, etc.)
Marginal rate = bracket that applies to the last dollar of (W-2 + net rental)
Tax on rental = Net Rental Income × Marginal Rate
Effective rate on rental = Tax on rental / Gross Rent

2026 Federal Brackets (OBBBA — permanent TCJA rates):
Single: 10% to $11,925 | 12% to $48,475 | 22% to $103,350 | 24% to $197,300 | 32% to $250,525 | 35% to $626,350 | 37% above
MFJ: 10% to $23,850 | 12% to $96,950 | 22% to $206,700 | 24% to $394,600 | 32% to $501,050 | 35% to $751,600 | 37% above

Depreciation (Residential Rental, IRS Publication 527):
Depreciable Basis = Purchase Price × (1 − Land%)
Annual Depreciation = Depreciable Basis ÷ 27.5
Accumulated Depreciation = Annual × Years in Service
Recapture Tax Estimate = Accumulated × 25% (§1250 unrecaptured gain)

Passive Activity Loss (PAL) Rules — IRC §469:
Net Rental Result = Rental Income − All Expenses (including depreciation)
If Net < 0 and you “actively participate”:
  Allowed Loss = min($25,000, |Net Rental Result|) — reduced by phase-out
  Phase-out: $1 lost for every $2 of AGI over $100,000 (→ zero at $150K)
  Suspended Loss = |Net Rental Result| − Allowed Loss (carries forward)
Real Estate Professional (750+ hrs/yr, majority of work time): no PAL limit

Note: Depreciation is a paper deduction — you don’t write a check, but it reduces taxable rental income. A property with $8K net cash income and $8,727 in depreciation shows a tax loss of $727 while generating positive cash flow.

Example

Sarah — Teacher, Age 41, Nashville, $80K Salary, First Rental Property

Renting out a condo she purchased for $300,000 (20% land). Gross rent $30,000/year, total expenses $22,000. Files single. She actively participates in management.

Gross rental income$30,000

Mortgage interest$12,000

Property tax$4,000

Insurance$2,000

Repairs & maintenance$2,000

Property management (5%)$1,500

HOA fees$500

Total cash expenses$22,000

Net rental income (pre-depreciation)$8,000

Marginal bracket (W-2 $80K + $8K rental = $88K single)22%

Federal tax on $8K rental income~$1,760

Depreciable basis ($300K × 80%)$240,000

Annual depreciation ($240K ÷ 27.5)$8,727/yr

Net rental after depreciation ($8K − $8,727)−$727 (tax loss)

AGI for PAL test$80,000 → full $25K allowance

Loss deductible against W-2$727 (full amount)

Tax savings from $727 loss at 22%~$160

Sarah collects $8,000 in net cash from the rental but owes zero federal tax on it — depreciation creates a paper loss that wipes out the income. She also deducts the $727 paper loss against her teaching salary, saving another $160. The real win: over 10 years she accumulates $87,270 in depreciation deductions. When she sells, $87,270 is recaptured at 25% (~$21,818) — but by then the property may be worth $100K more, making the tax entirely worthwhile.

Frequently Asked Questions

How is rental income taxed in 2026?▼

Rental income is reported on Schedule E of your federal tax return and taxed as ordinary income at your marginal rate. It’s stacked on top of your other income (W-2, 1099, etc.) — so if you’re already in the 22% bracket, your rental profit is taxed at 22%. If your gross rent is $30K, expenses are $22K, and you’re in the 22% bracket, your tax on the $8K net income is roughly $1,760. Depreciation (typically $8,727/yr on a $300K property) can create a paper loss even when you have positive cash flow — potentially reducing your rental tax to zero.

How do I calculate depreciation on a rental property?▼

Residential rental property is depreciated over 27.5 years using the straight-line method. First, subtract the land value (not depreciable — typically 15–30% of purchase price, check your county appraisal) from the purchase price to get the depreciable basis. Divide by 27.5. Example: $300K purchase, 20% land = $240K basis ÷ 27.5 = $8,727/year. Under OBBBA (2026), 100% bonus depreciation is permanently restored for cost segregation components (appliances, fixtures, landscaping, parking) — these are typically 15–25% of building value and can be deducted in year 1. A cost seg study costs $3,000–$7,000 and can generate $20K–$60K in first-year deductions.

Can I deduct rental losses against my W-2 income?▼

Yes, up to $25,000 if you actively participate and your AGI is $100,000 or less. The allowance phases out between $100K and $150K ($1 lost for every $2 over $100K), reaching zero at $150K. If your AGI is $120K, your allowance is $15,000 (not the full $25K). Losses above the allowance are suspended and carry forward to future years — they’re released when you sell the property. Real Estate Professionals (750+ hours/year in real property trades, more than half of all working hours) can deduct unlimited rental losses. This is why many high-income investors’ spouses pursue REP status — especially powerful combined with a cost segregation study.

What is depreciation recapture and how much tax will I owe?▼

When you sell a rental property, the IRS recaptures all depreciation previously claimed at a maximum 25% rate (Section 1250 unrecaptured gain). If you claimed $87,270 in depreciation over 10 years, you could owe up to $21,818 in recapture tax at sale — regardless of whether the property appreciated. The remaining gain (above your adjusted basis plus recapture) is taxed at long-term capital gains rates (0%/15%/20%) plus potentially 3.8% NIIT if your MAGI exceeds $200K/$250K. A 1031 Exchange defers ALL of this tax by rolling proceeds into a replacement property within 180 days (preserved under OBBBA, no changes).

What expenses are deductible on Schedule E?▼

Deductible Schedule E expenses include: mortgage interest (from Form 1098), property taxes, landlord insurance, repairs and maintenance (not improvements), property management fees, HOA fees, utilities paid by landlord, advertising, professional fees (CPA, attorney), and travel to the property. Capital improvements — new roof, HVAC, kitchen remodel — are NOT immediately deductible. They must be added to your basis and depreciated. The distinction: a repair restores something (fix a leaking faucet = deductible), an improvement adds value (replace entire plumbing = capitalize). When in doubt, consult a CPA — the wrong categorization is one of the most common rental tax errors.

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