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Rental Property Income Tax Calculator (2026)

Does your rental property reduce your tax bill — or does the IRS suspend those losses until you sell? This calculator runs your Schedule E income and deductions, applies the passive activity loss rules (PAL), and shows the actual federal income tax impact on your return. It also compares passive, active, and REPS scenarios side-by-side so you can see what Real Estate Professional Status would be worth to you.

Your Tax Situation

Annual Rental Income & Expenses

Depreciation

How rental property income tax actually works

Schedule E: the starting point

Every rental property is reported on Schedule E (Supplemental Income and Loss). Your taxable rental income — or deductible rental loss — is gross rents minus ordinary and necessary expenses. The big one most investors undercount: depreciation. A $400,000 residential building (excluding land) generates $14,545/year of depreciation — a deduction you don't write a check for. Many landlords who "break even" on cash flow are actually running a Schedule E loss that could reduce their taxes by $3,000–$8,000 per year, if they can use it.

Passive activity loss rules — who can actually use the loss

Under IRC §469(c)(2), rental activities are passive per se. A passive loss can only offset passive income — it cannot reduce W-2 wages or active business income. The result: most landlords accumulate suspended losses year after year, carrying them forward until they generate passive income or sell the property.

Two exceptions break this rule:

Exception 1 — The $25,000 allowance (IRC §469(i))
If you actively participate in managing your rental — approving tenants, setting rents, authorizing repairs — and you own at least 10% of the activity, you can deduct up to $25,000 of rental losses against ordinary income per year. The catch: this allowance phases out between $100,000 and $150,000 of AGI (by 50 cents for every dollar over $100K), and disappears entirely above $150,000.2 High-income investors with W-2 salaries get zero benefit from this exception.
Exception 2 — Real Estate Professional Status (REPS, IRC §469(c)(7))
If you spend more than 750 hours per year in real estate activities AND more than half of all your working hours are in real estate, rental losses convert to ordinary losses — deductible against all income without limit. The classic move: one spouse qualifies as REPS, the other has a high-income W-2, and the rental losses shelter the household income. The REPS requirement must be met by one person — hours can't be combined across spouses for the test itself.3

Net Investment Income Tax on rental income

When your Schedule E is positive (net rental income), passive rental income is subject to the 3.8% Net Investment Income Tax (NIIT) under IRC §1411 if your MAGI exceeds $200,000 (single) or $250,000 (married filing jointly).1 These thresholds are fixed by statute — they've never been adjusted for inflation since NIIT was enacted in 2013 and apply to 2026 as written.

REPS investors who materially participate in their rental activities can eliminate the NIIT on rental income under Treas. Reg. §1.1411-4(g)(7), which provides a 500-hour safe harbor for "real estate professionals" to treat the rental as non-passive for NIIT purposes. Non-REPS landlords with profitable rentals owe income tax plus 3.8% on top of that net rental income.

Suspended losses: not lost — deferred

Suspended passive losses accumulate and carry forward indefinitely. They get used in two situations: (1) you generate passive income in a future year that they can offset, or (2) you fully dispose of the rental property in a taxable transaction. At disposition, IRC §469(g) releases all suspended losses to offset the gain — including depreciation recapture — which can dramatically reduce the exit tax bill and makes accumulated suspended losses genuinely valuable at sale.

Practical implication: If your AGI is above $150K and you're not REPS, you're running up a tab of suspended losses that gets paid off at sale. A specialist advisor models how many years of suspended losses you'll accumulate and what that means for your net exit yield vs. a 1031 exchange strategy.

Related tools and guides

Sources

  1. IRC §1411 — Net Investment Income Tax, 3.8% rate. Thresholds $200,000 (single) / $250,000 (MFJ), fixed by statute, not adjusted for inflation. IRS.gov — Net Investment Income Tax
  2. IRC §469(i) — $25,000 passive activity loss allowance for active participants; phaseout per §469(i)(3): 50% of AGI excess over $100,000, fully eliminated at $150,000. IRS Publication 527, Residential Rental Property
  3. IRC §469(c)(7) — Real Estate Professional Status. 750-hour test and majority-of-services test. IRS Publication 925, Passive Activity and At-Risk Rules
  4. IRC §168(c), MACRS — 27.5-year recovery period for residential rental property (39-year for nonresidential). Mid-month convention applies. IRS Publication 946, How to Depreciate Property
  5. Treas. Reg. §1.1411-4(g)(7) — 500-hour safe harbor for real estate professionals to treat rental as non-passive for NIIT. T.D. 9644, final NIIT regulations

Tax rules verified as of May 2026. NIIT thresholds and PAL allowances are fixed by statute (not annually adjusted). Depreciation recovery periods are statutory under MACRS.

Get your rental tax situation modeled across your full portfolio

Whether you should pursue REPS, whether your suspended losses are strategically valuable at exit, and how depreciation timing interacts with a future 1031 — these decisions compound across years. A specialist runs the full picture.