Schedule E Tax Deductions for Rental Property: Depreciation and QBI

Rental property owners claim their deductions on Schedule E (Form 1040), which reports supplemental income and loss from rental real estate, royalties, partnerships, S corporations, estates, and trusts.¹ The Schedule E tax deductions available for rental property fall into a handful of buckets: routine operating costs, mortgage interest, property taxes, repairs, depreciation, and travel. Each has its own line in Part I, and your net income or loss on line 21 is simply gross rents minus the total of those expenses.² Every expense must be ordinary and necessary for the rental activity, and every dollar you claim needs documentation to back it up.

Operating Expenses by Schedule E Line

Part I of Schedule E lists specific expense categories on lines 5 through 19.² The common ones:

Advertising (line 5): listing a vacant unit, running ads, printing flyers.
Cleaning and maintenance (line 7): turnover cleaning, lawn care, snow removal, HVAC filter changes.
Insurance (line 9): fire, flood, liability, and landlord-specific policies.
Legal and professional fees (line 10): attorneys for lease drafting or evictions, accountants for rental tax work.
Management fees (line 11): typically 8% to 12% of collected rent when a property manager handles the unit.
Supplies (line 15): cleaning products, light bulbs, small tools.
Utilities (line 17): water, gas, electric, trash, or internet that you pay rather than the tenant.

Anything that doesn’t fit those lines goes on line 19 as “Other,” with a brief written description. To qualify, an expense has to be common in property management and directly tied to producing rental income.

Mortgage Interest and Property Taxes

For most landlords, mortgage interest is the single largest deduction. Federal law allows a deduction for interest paid on debt during the tax year.³ If your lender is a bank or mortgage company, they send you Form 1098 showing the year’s interest, and that number goes on line 12.⁴ Payments to a private lender through seller financing go on line 13, and you have to report that person’s name and taxpayer identification number.²

Only the interest portion is deductible. Principal is repayment of the loan itself, not an expense, even though it comes out of the same monthly check.

Property taxes assessed by state or local government go on line 16, and the taxes must actually be paid during the tax year to count. Taxes on your personal residence belong on Schedule A if you itemize, not here.

Repairs Versus Capital Improvements

Getting this line right matters more than almost any other call on the return. A repair keeps the property in its current working condition and is fully deductible in the year paid, on line 14. A capital improvement adds value, extends the property’s life, or adapts it to a new use, and has to be depreciated over time.

Repairs include patching a leaky pipe, repainting a bedroom, replacing a broken window pane, or swapping a faulty outlet. The test is whether the work restores something broken or worn rather than making the property fundamentally better. Replacing a few damaged shingles is a repair. Replacing the entire roof is an improvement. A new furnace, a new deck, or a kitchen remodel all get added to your depreciable basis instead of deducted at once.

The De Minimis Safe Harbor

When you buy a tangible item and aren’t sure whether it’s a repair-type expense or a capital asset, the de minimis safe harbor helps. Without audited financial statements, you can deduct items costing $2,500 or less per invoice rather than capitalizing them. Taxpayers with applicable financial statements use a $5,000 threshold. You need a written accounting policy in place at the start of the year and must attach an election statement to your return. That covers purchases like a modest dishwasher or window air conditioner without pushing them into depreciation.

Depreciation

Depreciation is the deduction that confuses people most and pays the best. It recovers the cost of the building over time even though you aren’t spending fresh cash. Under the general depreciation system, residential rental property is depreciated over 27.5 years using the straight-line method.⁵

Only the building depreciates. Land doesn’t wear out, so you separate land value from the purchase price. On a $300,000 property where land is worth $50,000, your depreciable basis is $250,000. Dividing by 27.5 gives roughly $9,091 a year in depreciation, which flows from Form 4562 to line 18 of Schedule E and reduces taxable rental income without any current cash outlay.⁶

Bonus Depreciation on Personal Property

The 27.5-year schedule applies to the structure. Personal property inside the rental, such as appliances, carpeting, and furniture, has a shorter recovery period, typically five or seven years. For property placed in service in 2026, 100% bonus depreciation is available for those shorter-lived assets, so the full cost can be deducted in the first year. Some owners commission a cost segregation study on a newly purchased building to identify components like landscaping, paving, and certain fixtures that qualify for shorter recovery periods and bonus treatment. The study’s fee often pays for itself many times over.

Travel and Vehicle Expenses

Driving to your rental to collect rent, handle repairs, or show the unit is deductible on line 6. For 2026, the IRS standard mileage rate is 72.5 cents per mile.⁷ You can use either that rate or actual vehicle expenses (gas, insurance, maintenance, depreciation), but not both. If you pick the standard rate for a vehicle you own, you have to elect it in the first year the vehicle is available for business use.

When the property is far enough away that you stay overnight, airfare, lodging, and 50% of business meals become deductible, provided the primary purpose of the trip is managing or maintaining the rental. Tacking personal vacation days onto a legitimate business trip is allowed, but lodging and meals on those personal days don’t qualify. Keep a log of date, destination, business purpose, and miles for every trip. Without it, the deduction disappears under audit.

Passive Activity Loss Limits

Rental real estate is a passive activity by default, which means rental losses can only offset other passive income, not wages or investment earnings. If expenses exceed rental income, the excess loss is suspended and carried forward until you have passive income to absorb it or you sell the property.⁸

The $25,000 Special Allowance

A significant exception applies to landlords who actively participate. If you own at least 10% of the property and make management decisions such as approving tenants, setting rent, or authorizing repairs, up to $25,000 of rental losses can offset non-passive income each year.⁸ Limited partners don’t qualify.

The allowance is income-tested. It shrinks by 50 cents for every dollar of modified adjusted gross income over $100,000 and disappears entirely at $150,000.⁸ At $120,000 MAGI, the allowance is $15,000. Above $150,000, rental losses are fully suspended unless you qualify as a real estate professional.

Real Estate Professional Status

Taxpayers who spend more than 750 hours a year in real property businesses, and more than half of their total working time on those activities, can qualify as real estate professionals. That status removes the passive limitation entirely, letting rental losses offset any type of income with no dollar cap. The hourly requirements are steep and the IRS scrutinizes these claims closely, so detailed time logs are essential.

Personal Use and Vacation Homes

If you use the rental personally, the rules change. The property counts as a personal residence when personal use exceeds the greater of 14 days or 10% of the days it’s rented at a fair price.⁹ Cross that line and rental deductions are capped at rental income. You can’t generate a loss from a property that doubles as your vacation home.

At the other extreme, if you rent the property for fewer than 15 days in the year, you don’t report the income and you don’t deduct expenses. That’s a clean break: short-term rental income under the threshold is simply tax-free.⁹

Personal use days include your own stays, days a family member uses the property, days a co-owner stays, and days anyone stays at below-market rent. If the property is purely a rental with no personal use, these limits don’t apply.

The 20% Qualified Business Income Deduction

Rental income may qualify for the Section 199A qualified business income deduction, which lets eligible taxpayers deduct up to 20% of net rental income. This deduction is separate from Schedule E expenses and is claimed on Form 8995 or 8995-A.

To qualify, the rental has to rise to the level of a trade or business. The IRS provides a safe harbor: perform at least 250 hours of rental services a year and keep contemporaneous records of the hours, dates, service descriptions, and who performed the work.¹⁰ For enterprises that have existed four years or more, the 250-hour threshold has to be met in at least three of the past five years.

The full 20% deduction is available to single filers with taxable income below roughly $201,750 and joint filers below roughly $403,500 for 2026. Above those thresholds, the deduction phases down and W-2 wage and property basis limitations kick in. Triple-net lease properties, where the tenant handles nearly all expenses, are excluded from the safe harbor.

Records and Documentation

Every deduction on Schedule E needs backup that would survive an audit. A working documentation set includes:

Receipts and invoices for every expense, paper or digital.
Bank and credit card statements as a secondary layer confirming amounts and dates.
Form 1098 from your lender showing mortgage interest paid.⁴
A mileage log with date, destination, purpose, and miles for every trip.
Leases and tenant records showing rental terms, deposits, and payment history.

The IRS generally requires you to keep these records for at least three years from the date you filed.¹¹ Longer periods apply in some situations, including six years if you underreported income by more than 25%, or indefinitely if you never filed.¹² Holding records for at least seven years is a safe habit.

1099-NEC for Contractors

If you pay an unincorporated independent contractor $2,000 or more during 2026 for rental-related work such as a handyman, property manager, or landscaper, you have to file Form 1099-NEC reporting the payments. The threshold rose from $600 to $2,000 starting in 2026 and will adjust for inflation. The requirement is based on the total paid to that person during the year, including both labor and materials. Payments to corporations are generally exempt. Missing the filing carries penalties separate from anything on Schedule E.

What Happens Without Documentation

If the IRS audits and you can’t substantiate a deduction, it gets disallowed. You owe the extra tax plus a potential accuracy-related penalty equal to 20% of the underpayment.¹³ On a disallowed $10,000 deduction in the 22% bracket, that’s $2,200 in additional tax plus $440 in penalty. Records are the cheapest insurance you’ll buy.

How the Deductions Flow to Your 1040

Each expense goes into its matching line on Part I of Schedule E, lines 5 through 19. Line 20 totals all expenses, and that total is subtracted from gross rents on line 3 (or royalties on line 4) to produce net rental income or loss on line 21.² Multiple properties each get their own column, up to three per Schedule E, with additional copies attached for more.

The net from Schedule E flows to line 5 of Schedule 1 (Form 1040) and into your total income on the 1040 itself. If the passive activity loss rules limit how much of a rental loss you can use, the suspended portion carries forward and is reconciled on Form 8582. The completed Schedule E is filed as an attachment to your Form 1040.¹

1
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
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Internal Revenue Service. Schedule E (Form 1040) 2025 – Supplemental Income and Loss
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Office of the Law Revision Counsel. 26 USC 163 – Interest
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Internal Revenue Service. About Form 1098, Mortgage Interest Statement
5
Internal Revenue Service. Form 4562 – Depreciation and Amortization
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Internal Revenue Service. About Form 4562, Depreciation and Amortization
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Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
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Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
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Internal Revenue Service. Renting Residential and Vacation Property
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Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction
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Internal Revenue Service. Topic No. 305, Recordkeeping
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Internal Revenue Service. How Long Should I Keep Records
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Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments