A rental’s tax bill is not built on the money you put in your pocket. It is built on the rent you collected minus a list of costs, and two of the biggest items on that list behave in ways that surprise people: part of your mortgage payment is not deductible at all, and one of the biggest deductions on the house below never costs you a dollar.
Which rental expenses can you deduct?
The IRS says you “can deduct expenses of renting property from your rental income” (Topic 414). Publication 527, the one written for residential landlords, lists the common ones: advertising, auto and travel, cleaning and maintenance, commissions, depreciation, insurance, other interest, legal and professional fees, local transportation, management fees, mortgage interest, points, rental payments, repairs, taxes, and utilities.
Two of those carry conditions worth knowing before you count on them.
- Mortgage interest. Pub 527 is direct: “You can deduct mortgage interest you pay on your rental property.” If you refinance for more than you owed, interest on the extra money that is not used for the rental generally cannot be deducted as a rental expense.
- Property tax. Taxes are deductible, but Pub 527 carves out local benefit charges that raise the property’s value, such as new streets or sewers. Those get added to your basis instead. Charges for maintaining or repairing the same things stay deductible.
Insurance has a timing rule rather than a limit. Pay a premium covering more than one year and you deduct only the part that belongs to each year, not the whole check in the year you wrote it.
What can’t you deduct?
Three things that cost you money, or look like they should count, and together they are why the tax number and the cash number pull apart.
Principal. Your mortgage payment is interest plus principal. Only the interest side is an expense. The principal is you buying more of the house, so it shows up in your equity rather than on the return.
Money set aside for big repairs. Setting cash aside is not spending it, so there is nothing to deduct until it is spent. What happens then depends on what you buy. Pub 527 says a cost is for an improvement if it “results in a betterment to your property,” restores it, or adapts it to a new use, and improvements have to be capitalized and depreciated rather than deducted the year you pay. A new roof is an improvement. Fixing the one that leaks is a repair.
Rent you never collected. The months a unit sits empty are not a deduction. You simply never had the income, so there is nothing to subtract.
A $250,000 rental’s first year, line by line
Take the house the rental calculator opens with: $250,000 at 20% down, a $200,000 loan on 30 years at 7%, rent of $2,750 a month, $3,000 of property tax and $1,400 of insurance a year. The example sets vacancy at 5%, so $31,350 of the $33,000 scheduled rent actually arrives, and maintenance, a repair reserve and management at 5%, 5% and 8% of rent. Depreciation assumes 80% of the price is the building, since land cannot be depreciated.
| Year one | |
|---|---|
| Mortgage interest | $13,936 |
| Property tax | $3,000 |
| Insurance | $1,400 |
| Repairs and maintenance | $1,650 |
| Management | $2,639 |
| Depreciation, a full 12 months | $7,273 |
| Deductions | $29,898 |
These are example figures, not a forecast for any market.
Against $31,350 of rent collected, that leaves $1,452 of taxable rental income. The same house hands you $5,043 of cash over the year, which the calculator shows as $420 a month under Monthly cash flow.
Depreciation is the one line here that moves no money. Pub 527 sets residential rental property at 27.5 years and says “you must use the straight line method and a mid-month convention,” so a full year on an assumed $200,000 building is $7,273, and the first year is less than that depending on the month you put the house in service. The depreciation post works that one through properly.
Why is the taxable number so much smaller than the cash?
Because the two lists are not the same list. Start from the cash the house produced and swap in the tax treatment of the three items that differ.
| Year one | |
|---|---|
| Cash flow for the year | $5,043 |
| Principal in the payments, not a deduction | +$2,032 |
| Set aside for big repairs, not yet spent | +$1,650 |
| Depreciation, a deduction with no money moving | −$7,273 |
| Taxable rental income | $1,452 |
In year one this house pays its lender $13,936 of interest and $2,032 of principal. You deduct the first and not the second. That split shifts every year: the interest share falls as the balance drops, so a rental’s taxable income tends to climb even when the rent holds still.
The arithmetic also runs the other way. Push depreciation and interest high enough and the return shows a loss while the bank account grows. Whether you can use that loss this year is a separate set of rules, covered in the passive loss post.
Where do these go on the return?
Rental real estate goes on Schedule E, “Supplemental Income and Loss” (Topic 414). The Schedule E instructions give each cost its own line: mortgage interest paid to a bank on line 12, interest paid to anyone else on line 13, repairs on line 14, depreciation on line 18. The general test is “all ordinary and necessary expenses,” and the instructions are explicit that the value of your own labor is not one of them.
There is no line for association dues. Line 19 takes “ordinary and necessary expenses not listed on lines 5 through 18.”
Two conditions change the picture entirely. If you provide substantial services to tenants, the instructions send you to Schedule C instead. And if you used the place yourself, personal-use days “do not qualify as rental expenses,” so costs get split by days of use. A unit counts as a home once personal use passes the greater of 14 days or 10% of the days rented at a fair price, and if it was your home and you rented it under 15 days, you “do not report the rental income and do not deduct any rental expenses.”
What should you do with this before April?
Keep the records that feed each line, because every figure in that first table has to come from somewhere: the Form 1098 for interest, the tax bill, the insurance statement, invoices for every repair, and the closing statement that sets your basis and the land split. The rental expenses post covers the running costs themselves, several of which calculators start at zero.
State rules are their own layer and none of the above touches them. Rules also change, and the figures here are from the IRS pages as of October 2026, so take the arithmetic to a tax professional before it goes on a return.