Before you total anything, separate the deposits out of your rent column. A security deposit you intend to return is not income in the year you receive it. Landlords who skip that step overstate income by a full month of rent per new tenancy, and the fix is a five-minute sort, not a tax strategy.
Rental income is taxed as ordinary income. There is no special rate. What makes it feel complicated is that three separate questions all have to be answered before you know what you owe: what counts as income, which schedule it goes on, and whether a loss is usable.
What counts as income
Rent, obviously. Beyond that:
- Advance rent is income in the year you receive it, whatever period it covers. A tenant who prepays January and February in December gave you December income.
- A deposit applied to unpaid rent is rent, in the year you apply it.
- A deposit you keep for damage becomes income in the year you keep it. The repair you spend it on is an expense in that same year, so the two often wash.
- A lease cancellation payment is income.
- Expenses the tenant pays for you are income, at the amount paid, and you deduct the expense. A tenant who fixes the furnace and deducts it from rent produced both.
- Property or services instead of rent count at fair market value.
What is not income: a deposit you are holding and expect to return. It is the tenant’s money sitting in your account, which is also why many states set rules for where and how you hold it.
Which schedule
Almost every small landlord reports on Schedule E, Part I. Publication 527 puts the line here: if you rent buildings, rooms, or apartments and provide basic services such as heat and light and trash collection, that is Schedule E.
Schedule C is different territory. It applies when you provide substantial services primarily for the tenant’s convenience, and the publication names regular cleaning, changing linen, and maid service as the examples. Cleaning of public areas and trash collection do not count as substantial.
The distinction matters because Schedule C income can carry self-employment tax. Schedule E rent generally does not. That is a meaningful difference in the rate, and it is why short-term rental operators who provide hotel-style services get very different advice from long-term landlords.
One more structural note, since it comes up constantly: forming a single-member LLC does not change where you file. The Schedule E instructions say a single-member domestic LLC is generally not treated as a separate entity, and the sole member files Schedule E. The LLC may do real work for you on liability. It is not doing tax work.
Personal use changes the math
If you also use the unit yourself, the deductible share of your expenses can be limited. The test in Publication 527 is whether personal use exceeded the greater of 14 days or 10 percent of the days the unit was rented at a fair rental price. Rent-free use by family counts as personal use.
Schedule E asks for fair rental days and personal use days per property on line 2, so this is not a question you can leave for later. Count the days as they happen.
Why a profitable unit can show a loss
Depreciation. It is a deduction with no cash behind it, so a unit that put $3,000 in your bank account can produce a taxable loss once the building’s annual slice comes off. How depreciation works covers the mechanics.
That loss is where the rules get restrictive.
Whether the loss is usable
Rental real estate is generally a passive activity, and passive losses generally offset only passive income. Left there, a paper loss on a rental would do nothing for a landlord whose other income is a salary.
There is an exception, and for most small landlords it is the whole ballgame. If you actively participate in the rental, you may be able to deduct up to $25,000 of loss against nonpassive income. Active participation is a lower bar than material participation; approving tenants, setting rents, and approving repairs is the sort of thing it describes.
The allowance is means-tested. Publication 527 sets the maximum at $25,000, or $12,500 for a married person filing separately who lived apart from their spouse all year. If your modified adjusted gross income is $100,000 or less you can use the full amount. Above that, the allowance is cut by half of the difference between $150,000 and your MAGI, so it phases out completely at $150,000.
Losses you cannot use are not lost. They carry forward.
The order to do this in
- Sort deposits out of rent, before anything else.
- Count fair rental days and personal use days per property.
- Total rents received on a cash basis, in the year received.
- Sort expenses onto the Schedule E lines. The deductions checklist has them.
- Apply depreciation, then see whether you have a loss and whether you can use it.
Steps one and two are the ones nobody can reconstruct in April. They depend on knowing what each payment was when it arrived. Rent collection in LeaseRooster keeps rent, deposits, and credits as separate things on the ledger, which is the whole reason step one takes five minutes instead of an afternoon. When it is time to file, the tax season checklist runs the sequence end to end.
This is general information, not legal or tax advice. Rules change and local ordinances vary. Confirm current requirements with your city, county, or an attorney before you act, and talk to a CPA about your own return.