Do I need to pay tax on rental income?

Yes. Rental income is taxable and must be reported on your federal tax return (and often your state return). You can deduct many expenses to reduce taxable income.

What expenses can I deduct as a real estate investor?

Typical deductible expenses include:

• Mortgage interest

• Property taxes

• Repairs and maintenance

• Insurance

• Management fees

• Utilities (if paid by you)

• Depreciation of the property (building, improvements, appliances)

How does depreciation work?

Residential property is depreciated over 27.5 years; commercial property over 39 years. Depreciation can offset rental income but may be “recaptured” at sale. Cost segregation studies can accelerate deductions.

What is the difference between active and passive losses?

Most rental real estate is considered passive. Losses generally can only offset other passive income. However, if you actively participate and your income is below $150,000, you may deduct up to $25,000 of losses against ordinary income.

What is material participation and the 7-day rule?

If you materially participate in short-term rentals averaging 7 days or less per tenant, the IRS may classify the activity as a business rather than passive rental. This can allow you to use losses against other income, but it also may expose you to self-employment tax if you provide significant services.

What records should I keep?

Keep detailed records of income, expenses, leases, and improvements. These are critical for proving deductions, calculating depreciation, and tracking basis.

How are real estate sales taxed?

Profits on sales are subject to capital gains tax. If you held the property for more than a year, you get long-term capital gains rates. Depreciation taken is “recaptured” and taxed at up to 25%.

Can I defer taxes when I sell property?

Yes, with a 1031 exchange, you can defer capital gains and depreciation recapture by reinvesting proceeds into another like-kind property. Strict rules and timelines apply.

How are foreign investors taxed on U.S. real estate?

Foreign investors are subject to U.S. tax on rental income and gains from U.S. real estate. Withholding rules (like FIRPTA on sales) often apply. Treaties may reduce tax rates.

Should I use an LLC for my investment property?

An LLC generally doesn’t change tax treatment but can provide liability protection. Income usually flows through to your personal tax return. Structuring may differ for foreign investors.

Do real estate professionals have special tax benefits?

Yes. If you qualify as a real estate professional (750+ hours per year and more than half your working time in real estate), rental activities may be non-passive, letting you use unlimited losses against other income.