Filing Taxes with Rental Property Income
Rental real estate is one of the most tax-favored investments in the code — depreciation shelters cash flow, and losses can offset other income under the right circumstances.
Reporting rental income
Rental income and expenses report on Schedule E (personal) or Form 8825 (partnership/S-corp).
Report gross rent received (not net of expenses).
Security deposits held for return are NOT income; forfeited security deposits are.
Deductible expenses
Mortgage interest, property tax, insurance, HOA, utilities you pay, repairs (not improvements), management fees, advertising, legal/professional fees, travel to property, depreciation.
Improvements (roof, HVAC replacement, additions) are capitalized and depreciated — not expensed.
Depreciation
Residential rental property: 27.5 years straight-line on the building portion (not land).
Commercial rental: 39 years.
You MUST depreciate — the IRS treats you as having taken depreciation whether you did or not (via depreciation recapture at sale).
Cost segregation studies can accelerate depreciation on larger properties by breaking out shorter-lived components (5-, 7-, 15-year property).
Passive activity loss rules
Rental losses are 'passive' by default and can only offset passive income (other rentals, limited partnership interests).
Exception: taxpayers with AGI under $100,000 (fully) or $150,000 (phased out) can deduct up to $25,000 of rental losses against non-passive income if they 'actively participate.'
Real estate professionals (750+ hours in real estate, more than in any other activity) can deduct rental losses without passive limitations. This is heavily scrutinized.
Selling a rental — depreciation recapture
Section 1250 recapture: prior depreciation is taxed at up to 25% federal rate on sale.
Regular gain above recapture is taxed at long-term capital gain rates.
1031 like-kind exchange can defer the entire gain by rolling into another investment property within strict timing rules.
A quick disclaimer
This article is general information for Montana small business owners, not tax, legal, or accounting advice for your specific situation. Rules change, and how they apply depends on facts we don't know about you. Before acting on anything you read here, talk to a qualified professional. If you're a Montana business owner and want a real conversation about your books, payroll, or tax, that's what Marlow Accounting is here for — call 406-290-1214 or schedule a discovery call.