Net rental income is taxed as ordinary income at federal rates from 10% to 37%, stacked on top of your wages and other earnings for the year. Most landlords, though, pay an effective rate well below their bracket, because depreciation, operating expense deductions, and a business income deduction of up to 23% reduce the taxable amount before the rate is ever applied. Higher earners can also owe a 3.8% surtax on top. That is the short version of the tax rates on rental income; the pieces below explain how the number actually lands on your return.
Which Federal Bracket Applies to Your Rental Profit
The IRS treats net rental income the same as wages or interest. You report it on Schedule E of Form 1040, and whatever profit remains after deductions gets added to your other income for the year.1Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss Because it stacks on top of what you already earn, rental profit is usually taxed at your highest marginal rate rather than starting from the bottom of the brackets. A teacher earning $65,000 in salary who nets $15,000 from a rental property will see that $15,000 taxed mostly at 22%.
For the 2026 tax year, the seven federal brackets for a single filer are:2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10% on taxable income up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% above $640,600
Married couples filing jointly get wider brackets. The 37% rate applies once taxable income passes $768,700.3Internal Revenue Service. Rev. Proc. 2025-32
Why the Effective Rate Is Lower Than Your Bracket
You don’t pay tax on gross rent. The taxable amount is what’s left after subtracting allowable expenses, and this is where most landlords see their effective rate drop.
Operating Expenses
Property management fees, insurance premiums, advertising, and supplies are all deductible. So are repairs that keep the property in current condition, like fixing a leaky faucet or patching drywall. Improvements that add value or extend the property’s life, such as a new roof or a kitchen remodel, must be depreciated over time instead of deducted at once.4Internal Revenue Service. Publication 527 – Residential Rental Property Property taxes and mortgage interest tied to the rental are deductible against rental income without the caps that limit personal returns. Driving to the property for maintenance is deductible at either actual cost or the 2026 standard mileage rate of 72.5 cents per mile.5Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents
Depreciation
Depreciation is the single most powerful deduction for rental owners. The IRS lets you deduct the cost of the building (not the land) spread over 27.5 years using the straight-line method.6Internal Revenue Service. Depreciation and Recapture 4 On a $300,000 building, that’s roughly $10,909 a year in paper losses. You never actually spend the money, but it reduces the income taxed at your marginal rate. Depreciation frequently creates a tax loss on paper even when the property generates positive cash flow.
The 23% Qualified Business Income Deduction
Section 199A lets eligible landlords deduct up to 23% of net rental income before calculating tax. Congress raised the deduction from 20% through the One Big Beautiful Bill Act.7Congress.gov. Tax Provisions in H.R. 1, the One Big Beautiful Bill Act On $60,000 of qualified rental income, that removes $13,800 from the taxable amount, cutting the effective rate on that income by close to a quarter.
To qualify, your rental activity needs to rise to the level of a trade or business. The IRS provides a safe harbor: log at least 250 hours per year on rental services such as negotiating leases, screening tenants, coordinating repairs, and managing the books. Those hours can come from your own work or from employees and contractors.8Internal Revenue Service. IRS Finalizes Safe Harbor to Allow Rental Real Estate to Qualify as a Business for Qualified Business Income Deduction You need separate books for each rental enterprise and contemporaneous logs. Higher earners face a cap set at the greater of 50% of wages paid or 25% of wages plus 2.5% of the property’s depreciable basis. That second calculation rarely bites landlords who own the property outright.9Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
The 3.8% Surtax for Higher Earners
Once income crosses certain thresholds, the Net Investment Income Tax adds 3.8% to rental profits, which fall squarely within the definition of net investment income.10Internal Revenue Service. Questions and Answers on the Net Investment Income Tax The surtax kicks in when modified adjusted gross income exceeds:
- $200,000 for single filers and heads of household
- $250,000 for married couples filing jointly
- $125,000 for married filing separately
These thresholds are set by statute and don’t adjust for inflation, so more taxpayers cross them each year.11Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax The 3.8% is charged on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. A single filer with $230,000 in MAGI and $50,000 in net rental income pays the surtax on $30,000, not the full $50,000. Landlords who qualify as real estate professionals and materially participate can reclassify the income as non-passive, which takes it outside the NIIT, but that status requires more than 750 hours a year in real property trades or businesses and is difficult to reach with a full-time job elsewhere.12Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules
Self-Employment Tax Usually Doesn’t Apply
Most landlords do not owe the 15.3% self-employment tax that funds Social Security and Medicare. Federal law specifically excludes rents from real estate from the self-employment tax calculation.13Office of the Law Revision Counsel. 26 USC 1402 – Definitions On $50,000 of net rental income, that exclusion saves roughly $7,650 compared with earning the same amount through a business subject to self-employment tax.
The exclusion disappears when you provide substantial services beyond what a typical landlord offers. If the operation resembles a hotel with daily cleaning, linen changes, meals, or concierge-style amenities, the IRS treats the income as business earnings subject to self-employment tax.14Financial Planning Association. Real Estate Rentals and The Self-Employment Tax Short-term hosts on platforms like Airbnb should pay particular attention when the average guest stay runs seven days or fewer and hotel-like services are part of the package.
What You’ll Owe When You Sell
Selling triggers two separate tax events. The first is capital gains tax on any profit over your adjusted basis. Held for more than a year, that gain is taxed at 0%, 15%, or 20%, depending on income.15Internal Revenue Service. Topic No. 409, Capital Gains and Losses High earners may also owe the 3.8% NIIT on top.
The second is depreciation recapture. Every year of depreciation deductions that reduced your taxable rental income comes back at sale. The IRS taxes the portion of the gain attributable to depreciation you claimed, or were allowed to claim even if you didn’t, at a maximum rate of 25%.16Internal Revenue Service. Property (Basis, Sale of Home, Etc.) 5 Ten years of ownership with $100,000 in total depreciation means $100,000 taxed at up to 25% at sale, separate from the capital gains rate on the rest of the profit. A Section 1031 exchange can defer both by rolling the proceeds into a replacement investment property under strict timing and identification rules; the tax is deferred, not eliminated.
State and Local Rates
Federal is only part of the bill. Rental income is generally taxable in the state where the property sits, even if you live somewhere else. Rates vary widely: some states have no income tax, others impose rates above 10% on higher earners, some use flat rates, and the rest use progressive brackets. Certain municipalities add occupancy or rental registration taxes calculated as a percentage of gross rent; these local taxes are typically deductible as operating expenses on your federal return. Owning in a state other than where you live often means filing returns in both, though most states offer credits to prevent the same income from being taxed twice.