Long-Term Residential Rentals Taxation: What Landlords Need to Know

1. General Tax Treatment

Income from long-term residential rentals (typically leases of more than 30 days) is generally reported on Schedule E (Form 1040). This includes all amounts received as rent, as well as payments for services customarily provided to tenants (such as heat and light), but not for hotel-like services. Owners may deduct ordinary and necessary expenses related to the rental activity, including mortgage interest, property taxes, repairs, maintenance, insurance, and depreciation. Depreciation for residential rental property is calculated using the Modified Accelerated Cost Recovery System (MACRS) over a 27.5-year recovery period. Rental income may also be subject to the 3.8% Net Investment Income Tax (NIIT) if the taxpayer’s income exceeds certain thresholds, unless the rental activity rises to the level of a trade or business and the taxpayer materially participates. Rental activities are generally considered passive, so losses may be limited under the passive activity loss rules.

2. Reporting Requirements: Schedule E

  • Report all rental income received, including non-cash payments, on Schedule E (Form 1040).

  • Use Schedule E if you rent out real property and provide only basic services (e.g., utilities, maintenance, trash collection).

  • List each rental property separately and report total income, expenses, and depreciation for each.

  • Deduct allowable rental expenses, but be aware that losses may be limited by passive activity and at-risk rules, which may require additional forms such as Form 8582 or Form 6198.

  • If you provide substantial services to tenants or the activity is a trade or business, report the income and expenses on Schedule C (Form 1040) instead.

3. Deductible Expenses and Depreciation

Deductible expenses for long-term rentals include mortgage interest, property taxes, depreciation (on the building, over 27.5 years), repairs and maintenance, insurance, utilities, advertising, management fees, legal and professional fees, and other ordinary and necessary expenses. Depreciation is a key non-cash deduction, calculated using MACRS. Only the cost of the building and improvements (not land) is depreciable.

4. Passive Activity Loss (PAL) Rules

Rental real estate activities are generally considered passive, meaning losses can only offset passive income. However, up to $25,000 of rental real estate losses may be deductible against nonpassive income if the taxpayer actively participates in the rental activity and owns at least a 10% interest. This $25,000 allowance is phased out for modified AGI above $100,000 and eliminated at $150,000. Disallowed losses are carried forward to future years and may be deducted when the property is sold in a fully taxable transaction. Taxpayers who qualify as real estate professionals and materially participate are not subject to these passive loss limitations for their rental real estate activities.

5. Self-Employment Tax Considerations

Long-term residential rental hosts are not subject to self-employment tax on their rental income unless they provide substantial services to tenants that are primarily for the tenants’ convenience, such as regular cleaning or maid service. Routine services like providing heat, light, or maintenance do not trigger self-employment tax. Only when the landlord’s activities rise to the level of a trade or business—typically by providing hotel-like services—does the income become subject to self-employment tax and require reporting on Schedule C. Otherwise, long-term rental income is reported on Schedule E and is exempt from self-employment tax.

6. Special Federal Tax Rules and Exceptions

  • $25,000 Active Participation Exception: Allows qualifying taxpayers to deduct up to $25,000 of rental real estate losses against nonpassive income, subject to income phase-outs and active participation requirements.

  • Real Estate Professional Status: Taxpayers who spend more than half their working time and at least 750 hours per year in real property trades or businesses, and materially participate, can treat rental real estate losses as nonpassive, allowing full offset against nonpassive income without the $25,000 cap or phase-out.

This page provides a summary of the key federal tax rules for long-term residential rental hosts. State and local tax rules may also apply.

For more detailed guidance, consult the relevant IRS publications and authoritative tax resources or click Contact to speak with an experience tax advisor.