Tax on Rental Income in 2026: The Code and IRS Data

What the IRS counted for 2023: 9.2 million returns, 47% with a rental loss

Most pages on this topic explain the rules and stop. The IRS publishes what landlords actually reported. Table 1.4 of its Statistics of Income (SOI) individual complete report, released in March 2026 for tax year 2023 (returns filed in 2024), has a “Rent” column pair: returns with net income and returns with a net loss, by size of adjusted gross income (AGI). The loss column is labeled “Net loss (includes nondeductible loss)”, so it counts losses the passive rules later disallowed.

Source: IRS Statistics of Income, Individual Complete Report, Table 1.4, tax year 2023 (file 23in14ar.xls). The IRS publishes 19 AGI bands; we added bands together for the rows above (our sums, which can differ from the IRS total by a return or two because of rounding), and computed the shares (our arithmetic). Money is in thousands of dollars in the source.

Five readings (our arithmetic on the table):

• Rental income is not a rich person’s side line only, but it grows with income. 2.5% of returns with $1 to under $50,000 of AGI report a rental result; at $200,000 to $500,000 it is 17.0%; at $1 million or more, 31.2%.
• The loss share barely moves. From $50,000 of AGI up to $1 million or more it sits between 46.5% and 49.1%. The one outlier is returns with no AGI at all: 69.2%, which is where large losses show up.
• Above $200,000 of AGI, 1,255,072 returns reported a net rental loss totaling $32.02 billion (our sum of the three top rows). That is the income range where the section 469(i) allowance is zero (below). The table does not say which of those losses were deducted, carried forward or used by a real estate professional; the next section gives the IRS’s count of the disallowed part.
• One year earlier looks different. For tax year 2022 the same table shows net income of $97.31 billion on 4,925,212 returns and net loss of $94.66 billion on 4,345,158 returns, a net of $2.65 billion against $21.88 billion in 2023. The loss amount fell 16.9% while the number of loss returns was almost unchanged (our arithmetic). The IRS gives no cause. Tax-law timing, such as how much depreciation could be taken on property bought in each year, is one candidate (our reading, not tested here); our bonus depreciation guide covers that schedule.
• A net loss is common even among very high earners. At $10 million or more of AGI, 4,915 of 10,631 returns with a rent result (46.2%) reported a loss.

Where $100 of rent went: Schedule E, line by line

The same IRS products publish Schedule E Part I line items for 2023 (Publication 4801, Rev. 6-2026). Line 3 is rents received, line 20 total expenses and line 21 the difference; the IRS’s own line 21 figure of $21,884,747 thousand equals Table 1.4’s net income minus net loss, so the two products describe the same rental population (our arithmetic).

Source: IRS Statistics of Income, Publication 4801, 2023 Individual Income Tax Returns Line Item Estimates (Rev. 6-2026), Schedule E Part I, extracted by a saved script. Estimates based on samples.

• 81.3% of returns with rent claimed depreciation (7,243,667 of 8,914,988), against 49.9% that claimed mortgage interest (our arithmetic). Depreciation is a deduction with no cash cost, which is why a property with positive cash flow can still show a tax loss.
• Of every $100 of rent, about $26 was depreciation, more than either property taxes or mortgage interest.
• What the passive rules did to the losses. On Form 8582, 1,932,628 returns reported $35.79 billion of nondeductible rental loss (an average of $18,520 each, our arithmetic) and 962,759 carried $13.40 billion of suspended loss forward. In the same year 3,925,866 returns deducted $61.53 billion of rental real estate loss on line 22. Our real estate professional guide reads more of this IRS table.

The map: nine provisions, in the order they reach your return

Every number a landlord pays traces to one of these. The wording in the middle column is verbatim from the 2024 edition of the Code (U.S. Government Publishing Office) except where marked.

What counts as rent, and in which year

Section 61(a)(5) names “Rents” as one of the items of gross income; IRS Publication 527 (2025) turns it into a list of what landlords actually receive. It says rental income “is any payment you receive for the use or occupation of property” and “isn’t limited to amounts you receive as normal rental payments.”

Two filing points come from the same publication and the 2025 Schedule E instructions. Most individuals use the cash method, so rent counts when received or made available. Rent from buildings with basic services such as heat, light and trash collection goes on Schedule E, Part I; if you provide substantial services mainly for the tenant’s convenience, such as regular cleaning or changing linen, “you report your rental income and expenses on Schedule C,” and you may owe self-employment tax (Publication 527). Ordinary landlord income is not subject to it: for the qualified joint venture election Publication 527 says rental real estate income “generally isn’t included in net earnings from self-employment.”

What comes off: operating costs, depreciation and the repair line

Operating costs. Publication 527 lists the common ones: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, repairs, taxes and utilities. A deduction is allowed for them under section 162(a) when the rental is a trade or business and under section 212 when it is held for the production of income (our reading).

Depreciation. Section 168(c) fixes the recovery period for residential rental property at 27.5 years, and the straight line method applies to it (168(b)(3)(B)) with a mid-month convention (168(d)(2)). “Residential rental property” means a building where “80 percent or more of the gross rental income” is from dwelling units (168(e)(2)(A)(i)). Land is not depreciable: Publication 527 says “You can’t depreciate the cost of land because land generally doesn’t wear out, become obsolete, or get used up.” Its own worked example: a house bought for $185,000 of which $160,000 is building, placed in service in February, takes 3.182% in year one, or $5,091. Depreciation is taken for as long as the property is available for rent, even when it is temporarily idle (Publication 527).

Section 1016(a)(2) is the part many landlords miss: the basis you will use on a sale is reduced by depreciation “allowed” and by the amount “allowable.” Skipping the deduction does not save the later tax (our reading of 1016(a)(2)). What happens on the sale is in our depreciation recapture guide and our capital gains tax on real estate guide.

Repair or improvement. Section 263(a)(1) allows no deduction for permanent improvements or betterments, and the regulation under it (26 CFR 1.263(a)-3) sorts the cases into betterment, restoration and adaptation to a new use. Three thresholds a landlord can check against the eCFR text as of October 12, 2026:

• De minimis safe harbor. The regulation, 26 CFR 1.263(a)-1(f)(1)(ii)(D), reads “The amount paid for the property does not exceed $500 per invoice (or per item as substantiated by the invoice)” for a taxpayer without an applicable financial statement, “or other amount as identified in published guidance.” That guidance is Notice 2015-82, which raised the limit for such taxpayers “from $500 to $2,500” per invoice or item.
• Safe harbor for small taxpayers. Under 26 CFR 1.263(a)-3(h)(1) a qualifying taxpayer may elect to deduct, for each building, total repairs, maintenance and improvements up to the lesser of 2 percent of the building’s unadjusted basis or $10,000. Paragraph (h)(3) requires average annual gross receipts of $10,000,000 or less and (h)(4) a building with an unadjusted basis of $1,000,000 or less. The regulation’s Example 3 applies it to two rental buildings, each tested separately.
• Routine maintenance safe harbor (26 CFR 1.263(a)-3(i)(1)(i)). For a building, the activities are routine only if the taxpayer reasonably expects to perform them “more than once during the 10-year period beginning at the time the building structure or the building system upon which the routine maintenance is performed is placed in service by the taxpayer”; Publication 527 points to this safe harbor for work that might otherwise be an improvement.

These are elections made on the return; the regulation, not this page, controls the conditions.

Personal-use days and the 14-day rule (section 280A)

If the unit is also a home, section 280A(a) disallows deductions “with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence,” and then carves rentals back in. The pieces that people call “the 14-day rule” are two different tests in the statute:

Publication 527 (2025) gives the arithmetic in its examples. A guest bedroom rented for 27 days a year gives a 10% test of 3 days, so the 14-day figure governs; 21 days of rent-free family use makes it a home. A condominium rented for 170 days, minus 10 days the family used it, counts as rented 160 days, so the ceiling is 16 days and 17 days of personal use tips it. At 200 rental days the ceiling is 20 days, and it stays at 14 until 140 rental days (our arithmetic on 280A(d)(1)). A residence-rental that loses money does not produce a passive loss: Publication 527 says the excess expenses are carried forward and treated as expenses of the same property, not as a deduction against other income.

Why almost half of landlords report a loss, and who can use it (section 469)

Depreciation, interest and taxes are the reason the numbers above turn negative on paper. Section 469 then decides whether the loss does anything. Under 469(a)(1) a passive activity loss is not allowed against other income, and 469(c)(2) says: “Except as provided in paragraph (7), the term ‘passive activity’ includes any rental activity.” A disallowed loss “shall be treated as a deduction or credit allocable to such activity in the next taxable year” (469(b)), and it is released as nonpassive when the whole interest is sold to an unrelated party in a fully taxable transaction (469(g)(1)(A)).

Three exits exist, each with its own statutory test:

1. The $25,000 allowance (469(i)). It applies to a natural person who “actively participated”; Publication 527 says that means owning at least 10% and making management decisions in a significant and bona fide sense, such as approving tenants and expenditures. The statute caps it at $25,000, and “shall be reduced (but not below zero) by 50 percent of the amount by which the adjusted gross income of the taxpayer for the taxable year exceeds $100,000” (469(i)(3)(A)). Married filing separately and living with a spouse gets nothing (469(i)(5)(B)). Applying the formula (our arithmetic): $25,000 up to $100,000 of modified AGI, $20,000 at $110,000, $15,000 at $120,000, $12,500 at $125,000, $5,000 at $140,000 and $0 at $150,000. Modified AGI for this purpose is defined in the Form 8582 instructions (it adds back items such as IRA deductions and excludes passive losses). Publication 925’s own 2025 example gives $15,000 allowed and $16,000 carried to 2026 on a $31,000 loss at $120,000.
2. Real estate professional (469(c)(7)). The taxpayer must perform “more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates” and more than half of all personal services in trades or businesses; on a joint return one spouse must meet both tests (469(c)(7)(B)). Then rental real estate is not automatically passive, but each rental is still tested for material participation unless the grouping election is made. Our real estate professional guide covers the tests and the Tax Court record.
3. Not a rental activity at all (26 CFR 1.469-1T(e)(3)(ii)). An activity is not a rental activity if “the average period of customer use for such property is seven days or less,” or 30 days or less with significant personal services. It is then tested like any business under the material participation tests; one of the tests in Publication 925 is participation of more than 500 hours in the year. This is the short-term rental route; our cost segregation guide shows how it interacts with a first-year loss.

The dollar amounts do not move. Section 469(i) states $25,000, $100,000 and $150,000 as fixed numbers. Rev. Proc. 2025-32, the IRS list of inflation-adjusted amounts for 2026, contains no section 469 amount, and Public Law 119-21, the 2025 tax law, does not amend sections 280A, 469(i) or 1411; its only reference to section 469 is a cross-reference to 469(h) in new section 199A(i) (our search of the saved texts). A phase-out fixed in 1986 dollars reaches more landlords each year (our reading).

Two taxes on top: the 20% deduction and the 3.8% tax

Section 199A, the qualified business income deduction. It is a deduction of “20 percent of the excess” of taxable income over net capital gain, as limited, and it applies only to a “qualified trade or business.” A rental that is not a trade or business does not qualify. Rev. Proc. 2019-38 offers a safe harbor under which a rental real estate enterprise is treated as a trade or business for 199A if, among other conditions, separate books are kept and “250 or more hours of rental services are performed” per year (or in any three of five years for enterprises in existence four years), with contemporaneous time records and a statement attached to the return. Failing the safe harbor does not rule it out; the Revenue Procedure says the taxpayer or the IRS can still show that the rental is a trade or business. The 2024 edition of the Code still ends section 199A with “This section shall not apply to taxable years beginning after December 31, 2025”; section 70105 of Public Law 119-21 replaced that subsection with a new one that adds a $400 minimum deduction for taxpayers with active qualified business income of at least $1,000 (Rev. Proc. 2025-32 section 2.12), so the termination clause no longer applies (our reading). Higher earners meet a second test. Above the 2026 taxable income threshold of $201,750 ($403,500 joint; Rev. Proc. 2025-32 section 4.26), the deduction for each business is capped by W-2 wages or by wages plus “2.5 percent of the unadjusted basis immediately after acquisition of all qualified property” (199A(b)(2)(B)(ii)). A landlord with no employees is left with the property leg, measured on the depreciable property defined in 199A(b)(6); section 70105(a) of Public Law 119-21 widened the phase-in range to $75,000 ($150,000 joint) (our reading).

Section 1411, the net investment income tax. The tax is “3.8 percent of the lesser of” net investment income or the excess of modified AGI over the threshold amount, $250,000 for joint returns and $200,000 in other cases (married filing separately: half of the joint amount). Net investment income includes “gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2)”, and paragraph (2) names a trade or business that is “a passive activity (within the meaning of section 469) with respect to the taxpayer.” So rent from a passive rental is generally in the base; rent from a nonpassive rental business (for example by a real estate professional) is generally outside it, and net gain on sale follows the same split (our reading of 1411(c)). The thresholds are stated in the statute and are not indexed. The IRS list for 2026 does not change them (Rev. Proc. 2025-32 contains no section 1411 amount, our search).

The ordinary income tax comes first: net rental income goes on Schedule 1 (Form 1040), line 5 (Schedule E, line 26) and is taxed with other income at the section 1 rates that Rev. Proc. 2025-32 says remain 10%, 12%, 22%, 24%, 32%, 35% and 37% for 2026 (the 37% bracket starts above $640,600 for single filers and $768,700 for joint filers, our reading of its tables).

What changed for 2026

The Schedule E instructions we read are the 2025 edition, for returns filed in 2026. Forms and instructions for tax year 2026 will be published later; the table above is the law, not a form.

State rules vary: three examples read from official sites

Federal rules are the same everywhere; the state layer is not. Three we could read directly from official sources, none a complete guide:

• Florida, income. Article VII, section 5(a) of the Florida Constitution says “No tax upon estates or inheritances or upon the income of natural persons who are residents or citizens of the state shall be levied by the state, or under its authority, in excess of the aggregate of amounts which may be allowed to be credited upon or deducted from any similar tax levied by the United States or any state.” That is a cap tied to a federal credit, which in practice leaves no room for a Florida personal income tax beyond it (our reading).
• Florida, rental tax. Florida Statutes section 212.03(1)(a) taxes the privilege of renting living quarters in an apartment house, condominium and similar properties at “6 percent of and on the total rental charged,” but says a person who “exclusively enters into a bona fide written agreement for continuous residence for longer than 6 months in duration” is not exercising a taxable privilege. A short-term landlord in Florida is in the tax; a 12-month lease is not (our reading).
• Minnesota, nonresident landlords. Minnesota Statutes section 290.17, subdivision 2(b) says “Income or gains from tangible property located in this state that is not employed in the business of the recipient of the income or gains must be assigned to this state.” An owner who lives elsewhere can have a Minnesota filing for rent from a Minnesota property (our reading).

We could not read the California, New York or North Carolina code sites from our systems on October 12, 2026 (access refused), so we do not describe their rules here: not verified. Local taxes, transient occupancy taxes and licensing are separate again.

How people pay less, and where each route ends

Searches for “how to pay no tax on rental income” are really searches for which section does the work. Each route below is in the Code; each has a catch stated in the same source.

None of these makes rental income disappear; each moves it to a different year, form or taxpayer (our reading). The two that move the most money sit outside this page: the 1031 exchange rules for deferral on a sale, and the step-up in basis guide for what an heir inherits.

What a landlord, buyer or heir can do with this

This is a description of what the documents say and where the decisions sit, not a plan for anyone:

• Match your own return to the census. If your Schedule E shows a loss with positive cash flow, the gap is depreciation (line 18). If it shows a loss you cannot use, the Form 8582 instructions and Publication 925 are where the allowance is computed, and the carryover stays with the property.
• Check the days. If any property is also used personally, count rental days, personal days and fair-rental days against 14 and 10% before anything else (section 280A(d)).
• Check the repair line. The $2,500 per invoice limit and the small taxpayer safe harbor are elections; both are in the regulation, and Publication 527 points to them.
• For a rental you inherit or plan to buy, the questions are basis (step-up or carryover), whether the 27.5-year clock restarts, and whether the building is residential rental property under the 80% test.
• Know which professional answers this. Choosing between the allowance, real estate professional status, the 199A safe harbor and a state filing is a CPA or enrolled agent question, because it turns on your return. A financial-adviser match, the product some of our pages offer, is not the right tool, so we do not offer it here.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 12, 2026: IRS Statistics of Income, Individual Complete Report, Table 1.4 for tax years 2023 and 2022 (irs.gov/pub/irs-soi, file 23in14ar.xls, Publication 1304, March 2026) and Publication 4801, 2023 Individual Income Tax Returns Line Item Estimates (Rev. 6-2026), each with the extraction script and its output; 26 U.S.C. 61, 162, 167, 168, 199A, 212, 263, 280A, 469, 1016 and 1411, United States Code 2024 edition, Government Publishing Office (govinfo.gov); 26 CFR 1.263(a)-1, 1.263(a)-3 and 1.469-1T (eCFR, current text); IRS Notice 2015-82, Rev. Proc. 2019-38 and Rev. Proc. 2025-32 (irs.gov); Public Law 119-21 sections 70105, 70301, 70432 and 70433 (govinfo.gov); IRS Publications 527 (2025) and 925 (2025), Instructions for Schedule E (2025), Instructions for Form 8582 (2025) and Instructions for Forms 1099-MISC and 1099-NEC (Rev. December 2026); the Constitution of the State of Florida, Article VII (leg.state.fl.us), Florida Statutes section 212.03 (flsenate.gov) and Minnesota Statutes section 290.17 (revisor.mn.gov). Counts, sums, shares and per-$100 figures are CrowdfundedWealth arithmetic on those sources. This is analysis of public documents, not investment, legal or tax advice.