Owning a rental property is rarely as simple as collecting rent and keeping the difference. The IRS treats rental income as ordinary business income reported on Schedule E of your Form 1040, and every dollar you collect is offset by a stack of deductions — mortgage interest, property tax, depreciation, repairs, insurance, and management fees. The number that actually hits your tax bill is the net of income minus those deductions, and when you eventually sell, a second tax surfaces that catches many new landlords by surprise: depreciation recapture.
This landlord tax calculator walks the full Schedule E picture. It takes your annual rent and your deductible expenses, returns your net taxable rental income, applies your marginal tax rate to it, and then — using the depreciation you have claimed over the years — estimates the Section 1250 recapture tax you will owe when you sell.
How to Use
- Enter your Annual Rental Income — the gross rents you collected this year before any expenses. This is Schedule E, line 3.
- Add your Mortgage Interest. Only the interest portion of your loan payment is deductible; the principal you pay down is not.
- Enter your Property Tax — the annual real-estate tax bill on the rental building.
- Set your Annual Depreciation. Residential rental buildings are depreciated over 27.5 years using straight line. You depreciate the building value only, not the land.
- Add Repairs & Maintenance — routine fixes like a new water heater or patching a roof. Improvements that add value (a new kitchen) are capitalized and depreciated over years, not expensed in one year.
- Combine Other Expenses — insurance premiums, property management fees, utilities you pay, HOA dues, advertising, and legal or accounting fees.
- Choose your Marginal Tax Rate — your combined federal and state bracket on ordinary income. If you are unsure, 22% federal plus 4–6% state is a common middle estimate.
- Optionally enter your Selling Price and Accumulated Depreciation Taken to model the sale. The recapture rate defaults to 25%, the legal cap on unrecaptured Section 1250 gain.
The result card shows your total Schedule E deductions, your net taxable rental income, the annual income tax on that profit, the depreciation recapture tax, and a combined estimated liability.
The Schedule E Formula
Net taxable rental income is built line by line on Schedule E:
Net Rental Income = Gross Rents − (Mortgage Interest + Property Tax + Depreciation + Repairs + Other Expenses)
Worked example on a property renting for $30,000 a year, with $12,000 of mortgage interest, $4,000 of property tax, $8,000 of annual depreciation, and $2,000 of repairs: total deductions are $26,000, leaving $4,000 of net taxable rental income. At a 22% marginal rate that is only $880 of annual tax — a far cry from the $30,000 of rent you collected. That gap is exactly why depreciation is called the landlord's best friend: it shields most of your cash flow from tax.
The catch is that depreciation does not disappear. Every year you take it, your cost basis in the building falls. When you sell, the IRS taxes back that previously-depreciated amount as unrecaptured Section 1250 gain, capped at 25%. If you have claimed $8,000 of depreciation over the years, that is $2,000 of recapture tax owed at sale — on top of any long-term capital gain on the appreciation.
Passive Losses and the $25,000 Allowance
If your deductions exceed your rent, you run a passive loss. In general, rental real estate is "passive," and those losses can only offset passive income — unless you qualify for the special $25,000 allowance for active landlords. If you actively manage the property and your modified adjusted gross income is under $100,000 (phasing out to zero at $150,000), you can deduct up to $25,000 of rental losses against your other income. Above the phase-out, losses carry forward to future years or until you sell. This calculator assumes profitable rental income; model a negative net figure as a passive loss to carry forward, not an immediate refund.
Examples
Example 1 — The classic $30k landlord. Rents are $30,000; mortgage interest $12,000; property tax $4,000; depreciation $8,000; repairs $2,000. Net taxable income is $4,000, the annual tax at 22% is $880, and with $8,000 of accumulated depreciation the recapture tax at sale is $2,000. Total estimated liability across the year and sale is $2,880.
Example 2 — A high-rent million-dollar property. A condo generates $2,000,000 in annual rent on a large portfolio, against $800,000 interest, $150,000 tax, $200,000 depreciation and $50,000 repairs. Net taxable rental income is $800,000; at a 32% marginal rate the annual tax is $256,000, and $800,000 of accumulated depreciation triggers $200,000 of recapture — a combined $456,000 liability.
Example 3 — A barely-cash-flowing property. If rent is $20,000 and deductions total $26,000, the net is a $6,000 passive loss rather than taxable income. No annual tax is due; the loss carries forward until it is absorbed by future profit or claimed at sale under the passive-loss rules.
FAQ
How is landlord rental income taxed?
Net rental income is reported on Schedule E of Form 1040 and taxed at your ordinary marginal federal and state rate, the same way wages are — but only the net amount (rents minus allowable deductions) is taxable. Depreciation, mortgage interest, property tax, repairs, insurance, and management fees all reduce the figure before tax applies.
What expenses can I deduct on a rental property?
Common Schedule E deductions include mortgage interest, property tax, depreciation of the building, repairs and maintenance, insurance, property management fees, advertising, utilities you pay, HOA dues, travel to inspect the property, and legal or professional fees. You cannot deduct principal loan payments, the cost of major improvements (those are depreciated over years), or your own labor.
What is depreciation recapture and when do I pay it?
When you sell a rental property, the IRS "recaptures" the depreciation you previously claimed. That amount — unrecaptured Section 1250 gain — is taxed back at a maximum rate of 25%, separate from and in addition to the long-term capital gain on any price appreciation. You owe recapture tax in the year of sale, reported on Form 4797 and Schedule D.
Can rental losses offset my regular salary?
Usually rental real estate is passive, so its losses can only offset passive income. However, active landlords under $100,000 of MAGI may deduct up to $25,000 of losses against other income, phasing out between $100,000 and $150,000. Excess losses carry forward indefinitely until they can be used or are released at sale.
Is mortgage interest fully deductible?
The interest portion of your rental mortgage is fully deductible on Schedule E, but the principal repayment is not. For older loans there may also be acquisition-debt limits, but for typical residential rentals the full interest paid on the rental loan is deductible each year.
Should I depreciate land or the building?
Only the building (structure) is depreciated, over 27.5 years for residential rental property. Land never wears out, so its value is excluded from the depreciation calculation. Splitting the purchase price between land and building is an important step that increases your annual deduction.
Disclaimer
This landlord tax calculator is provided for informational purposes only and does not constitute tax, legal, or investment advice. Estimates are simplified from IRS Publication 527 and do not model state-specific rules, the $25,000 active-loss allowance phase-out, at-risk rules, net investment income tax, section 1031 exchanges, or your personal full tax return. Actual liability depends on your filing status, bracket, location, and depreciation schedule. Always confirm your figures with a qualified tax professional before filing or selling.