Running a rental business and want to know how to pay no taxes on rental income, legally? Whether you rent out gear, vehicles, tools, bounce houses, or real estate, tax season can be tricky. How much do you owe the IRS, and how much can you keep?
Too often, rental business owners work hard but see taxes eat away at their profits. With average refunds hitting $3,138 in 2024, it’s clear that smarter tax strategies can make a big difference. And yes, they’re out there.
This blog is here to help. We’ll break down what counts as rental income, how to report it, and ways to reduce your taxes with deductions, depreciation, and more. Let’s take control of your rental taxes, step by step.
What Is Rental Income?
According to the IRS, rental income includes any payment you receive for the use or occupation of property you own. This applies not only to real estate like houses or commercial buildings but also to tangible personal property such as equipment, vehicles, machinery, or other rentable items.
Rental income covers more than just regular rent payments. It also includes advance rent, security deposits (if retained for damages or unpaid rent), lease cancellation fees, services provided instead of rent (for example, labor), and payments made by tenants or renters that cover expenses related to the property, such as utilities or repairs.
Is Rental Income Taxable?
Yes, Income from rentals is usually taxable and must be included on your federal income tax filing. This applies whether the income comes from real estate or personal property.
The IRS classifies rental income as any payment or the fair market value of property or services received for the use of your property. This means the following count as taxable rental income:
- Regular rent payments
- Advance rent
- Lease cancellation fees
- Tenant-paid expenses that you normally would pay
- Services provided instead of rent
For most individual taxpayers, rental income is taxed as ordinary income at your personal income tax rates, which range from 10% to 37% for the 2024 tax year, depending on your total income and filing status.
You typically report rental income and expenses related to real estate on Schedule E (Supplemental Income and Loss) of Form 1040. Rental income from personal property may be reported on Schedule C or Schedule 1, depending on whether renting is considered a business activity.
Special exemption: If you rent out your residence for fewer than 15 days in a year, the rental income generally does not need to be reported.
Deductions for landlords: You can deduct rental expenses such as:
- Mortgage interest
- Property taxes
- Repairs
- Maintenance
- Depreciation
These deductions help reduce your taxable rental income.
How Is Rental Income Taxed?
If you’re renting out anything, your apartment, a camera, or a fleet of forklifts, that income is generally taxable. If someone pays you to use your property, real estate or personal, you’ve got to report it.
And yes, no matter how small the payment, the IRS (or your country’s tax authority) wants their share.
Rental revenue is more than just the monthly rent you receive. The IRS counts other things too, like advance rent, lease cancellation fees, utilities paid by the tenant, or even if a tenant repaints your walls instead of paying rent. If it benefits you financially and is related to your rental, it’s usually taxable rental income.
In the U.S, real estate rental income typically goes on Schedule E of your tax return. But if you rent out personal items like tools or party equipment regularly, you may need to use Schedule C, especially if it looks more like a business. The form depends on what you rent and how often you do it.
You’ll also want to understand sales tax requirements for equipment rentals to keep your books clean and IRS-friendly.
The actual tax rate you’ll pay depends on your total taxable income. Rental income gets taxed at your ordinary income tax rate, not a special rental rate. More income generally means a bigger tax bill. But don’t worry; deductions can lower the amount that gets taxed.
You can subtract tons of allowable expenses, from property taxes and mortgage interest to maintenance, repairs, insurance, and depreciation.
These reduce your net rental income, meaning less goes to taxes and more stays in your pocket. The better organized you are, the more deductions you will find. So, keep track of everything!
There are even some notable exceptions. For example, in the U.S., if you rent out your home for fewer than 15 days a year, you don’t have to report that income at all. It’s called the 14-day rule, and it’s legit.
Does Rental Income Count as Earned Income?
No, in most cases, rental income doesn’t qualify as “earned income” under IRS definitions. It’s considered “unearned” because it comes from your investment, not from working a job or business.
Why does this matter? Because you can’t use rental income to contribute to traditional retirement accounts like IRAs or Roth IRAs. These accounts require “earned income.”
However, there’s one major exception: if you qualify as a real estate professional (and log enough active hours), or you operate your rentals like a business, some or all of your income might count as earned.
Does Rental Income Affect Social Security?
Generally, rental income does not affect Social Security benefits.
That’s because the Social Security Administration treats it as passive income, not wages. It doesn’t count toward the earnings limit that reduces your benefits if you work before full retirement age.
If you actively manage rentals and provide services like maintenance, delivery, or customer support, your income might be considered earned income. (Source: Social Security)
In that case, you could face self-employment taxes, and it might impact your Social Security.
Also, rental income adds to your adjusted gross income (AGI). If your AGI is too high, up to 85% of your Social Security benefits could become taxable.
How to Calculate Tax on Rental Income
Paying tax on rental income, whether it’s from vehicles, equipment, or event supplies, is simple. You just need to know how much you earn and how much you spend. Your taxable rental income is what’s left after expenses, and that’s the amount you’ll pay tax on.
Step 1: Add up your income
Start by calculating your gross rental income, which is everything you’ve earned from rentals. This includes:
- All cash payments from customers.
- Non-cash payments, like trade services (e.g., if someone repairs your equipment instead of paying you, the fair market value of that repair counts as income).
Step 2: Subtract your expenses
Next, subtract the costs directly related to your rental activity. These allowable expenses can include:
- Maintenance and repairs.
- Insurance.
- Fuel and storage.
- Advertising.
- Licenses or registration fees for vehicles or equipment.
- Depreciation of your rental assets over time.
The formula
Taxable Rental Income = Gross Rental Income − Allowable Expenses
This gives you the amount you’ll report as income on your tax return. Whether it’s treated as a business or a side hustle will determine how it’s taxed.
Example:
Let’s say you earn $30,000 from renting out lighting and audio equipment over the year. Your allowable expenses, including maintenance, insurance, and depreciation, are a total $12,000.
Taxable Rental Income = $30,000 − $12,000 =$18,000
In this case, $18,000 would be your taxable rental income for the year.
How to Pay No Taxes on Rental Income (Legally)
Running a rental business, whether it’s party supplies, cars, property, or construction equipment rental, can be a great way to make money. But did you know there are legit ways to pay way less in taxes (or even none at all)? Yes, the IRS allows it if you know the right moves. Here’s the deal:
Claim All Deductions
Deduct business expenses like repairs, advertising, insurance, utilities, and management fees. Keep all receipts and invoices. Use digital tools for recordkeeping, and make sure you collect the right sales tax every time to avoid costly errors. Regularly review IRS guidelines to avoid missing deductions.
Use Depreciation
You can claim a tax deduction for the annual depreciation of your rental property or equipment, even if you didn’t spend any cash that year.
The depreciation period for residential real estate is 27.5 years. For equipment or vehicles, the timeline varies. Make sure to keep purchase records and appraisals as proof, and file the correct IRS depreciation forms.
Qualify as a Real Estate Professional (If Applicable)
Though more relevant to property rentals, if you spend over 750 hours per year on rental activities, you may be able to deduct losses without passive activity limits. Be sure to keep detailed records of your hours and work, as you may need them when filing IRS Form 8582.
Try the 14-Day Rental Rule
Also known as the “Augusta Rule,” If you rent out your home or personal property for less than 15 days a year, the income is tax-free, as long as you use the property yourself the rest of the year. This rule can apply to certain types of rentals if properly documented.
Take Advantage of Short-Term Rental Loopholes
Renting equipment or spaces for less than seven days at a time may help avoid some passive activity loss limits and qualify for better tax treatment. Make sure to track rental durations accurately.
Conduct a Cost Segregation Study
For properties or equipment, a cost segregation study can help you accelerate depreciation. By breaking down short-life assets (e.g., appliances, carpets) separately, you can deduct more upfront. Hire a professional for this process.
Use a 1031 Exchange (Real Estate Rentals)
If you own rental properties, a 1031 Exchange lets you defer capital gains taxes by trading one property for another “like-kind” property, as long as you meet specific deadlines (identify within 45 days, close within 180 days). While not directly applicable to non-real estate rentals, it’s valuable for property rental businesses.
Invest in Opportunity Zones
Investing in Opportunity Zones can defer and possibly eliminate capital gains taxes if the property is held for 10 years. This applies mainly to real estate investments.
Offset Income with Passive Losses
Use passive losses from your rental business to offset other passive income streams. Make sure to understand the IRS “at risk” rules and properly document any losses.
Use a Self-Directed IRA
Owning rental properties or assets within a self-directed IRA allows you to defer or avoid taxes on rental income. This requires careful structuring and compliance.
Hire Family Members
Pay family members a fair market wage for work they perform for your rental business. These wages can be deducted as a business expense, but make sure you have proper documentation to meet IRS requirements.
Form an LLC or S-Corp
While forming an LLC or S-Corp won’t eliminate taxes, it offers liability protection, potential pass-through deductions, and administrative flexibility. Consult a CPA or attorney for the best structure and file the necessary IRS forms.
Disclaimer: The information provided is for general educational purposes only and should not be considered legal, tax, or financial advice. Tax laws can be difficult to understand and may change in the future. For guidance specific to your situation, please consult a qualified tax professional, accountant, or attorney before making any decisions related to your rental business or tax planning.
Do I Have to Report Rental Income from a Family Member Who Lives with Me?
Yes, you generally have to report rental income from a family member who lives with you, as the IRS expects all rental income to be declared, regardless of the tenant’s relationship to you. Charging rent to a sibling, child, or parent counts as taxable income.
Here’s what you need to know:
When Rent from a Family Member Isn’t Taxable
Charging rent below market value can have tax implications. The IRS may treat part or all of the payments as gifts instead of rental income, which changes how they’re reported.
If a tenant helps with shared expenses like utilities or groceries instead of paying rent, those payments usually aren’t considered taxable rental income.
For homes that are mainly your residence, small, occasional payments from family members might not count as taxable income.
These rules depend on how the property is used and the type of payments involved. Knowing these details can help you manage rental income properly.
Why It's Important to Report
Not reporting rental income can lead to serious problems like penalties, interest, or even an IRS audit. To avoid financial stress, make sure to keep track of your tax responsibilities.
If you leave out rental income on purpose, it’s even riskier. This can be seen as tax evasion, and it could bring legal trouble and hurt your finances and reputation.
The best way to stay safe is to report all rental income on your tax return. Being transparent keeps you legal and also gives you peace of mind.
Common Tax Mistakes That Can Attract IRS Attention
If you’re renting out property, vehicles, tools, event supplies, or other items, rental income is taxable. And rental activity is something the IRS watches closely. Inaccurate reporting risks delays, inspections, or financial penalties. Here are the big mistakes to avoid:
Not Reporting All Rental Income
All rental income must be reported, including rent payments, refundable deposits that become rent, service charges, and even non-cash payments (like bartered services). The IRS often receives information from third parties, such as payment processors or property management platforms. So, underreporting is one of the fastest ways to raise a red flag.
Inflating or Misreporting Deductions
Only deduct legitimate, business-related expenses. Overstating repairs, writing off personal purchases, or claiming expenses without proper records can all trigger scrutiny. Keep receipts, invoices, and clear notes about what each expense was for.
Depreciation Mistakes
Assets like buildings, vehicles, or equipment used in your rental business must be depreciated correctly. Common issues include using the wrong depreciation method, forgetting to claim depreciation, or failing to recapture it when you sell the asset. Tax planning for the future starts with accurate depreciation.
Mixing Personal and Business Finances
If you pay for business expenses from a personal account or vice versa, it can confuse your records and raise questions during an audit. Use separate bank accounts and credit cards for your rental business, and document every transaction.
Poor Recordkeeping
Missing receipts, vague expense logs, or incomplete income records make it harder to support your tax return if questioned. Keep digital and physical backups of receipts, leases, invoices, and communication with tenants or clients.
Misunderstanding Passive Activity Loss Rules
Most rental income is typically considered “passive,” and losses may be limited unless you meet special IRS criteria (such as being a real estate professional). Misclassifying income or incorrectly deducting losses can delay processing or result in tax notices.
Pro-Tip: Rental management platforms like RentMy can help track income, expenses, and depreciation, which can help you to generate tax reports easily. Using technology keeps your records clean and reduces human error, two things the IRS likes to see.
RentMy tracks your income and expenses accurately, automatically.
- Free trial
- No credit card required
When You Should Talk to a Tax Professional
Starting a rental business is often simple. But as your business grows or gets more complex, there are times when DIY tax prep just isn’t enough. Here are key situations where it’s smart to bring in a tax expert:
Owning Multiple Rental Assets
Keeping track of money, expenses, and depreciation for multiple properties can get complicated. A tax pro can help you stay organized and make sure you’re not missing out on valuable deductions.
Planning a 1031 Exchange
If you’re selling a property and buying a new one, a 1031 exchange can let you defer capital gains taxes. But the rules are strict, so a tax advisor can guide you through the process to make sure everything is done correctly and on time.
Renting to Family Members
The IRS has special rules for renting to relatives. If not handled properly, you could lose deductions or have your rental activity reclassified. A skilled tax advisor can assist you in setting this up properly.
Using Advanced Tax Strategies
Strategies like cost segregation, bonus depreciation, or investing in Opportunity Zones can lower your tax bill, but they require detailed knowledge. A tax expert can help you apply these methods safely and effectively.
Getting an IRS Notice or Audit
If the IRS contacts you, it’s best to respond with the help of someone who knows the system. A tax professional can help you understand what’s being asked, fix any issues, and protect your interests.
Forming a Business Entity
Setting up an LLC, S-Corp, or partnership for your rental activity can offer tax and legal benefits, but it also adds complexity. Professional advice can help you pick the right one and manage it properly.
Conclusion
We’ve gone deep into how to pay no taxes on rental income, the legal, ethical, and realistic way. From real-world examples to IRS-approved strategies, you now have the tools to stop overpaying and take control of your finances.
No matter what you rent, photo booths, property, forklifts or anything in between, you deserve to keep more of your earnings. Start early to get organized and unlock more savings before tax season.
Ready to simplify the process? RentMy’s POS system for the rental business makes it easy to handle rental payments, expenses, and taxes. Because every rental should bring in revenue, not red tape.
eep your rental finances clean, clear, and compliant.
- Free trial
- No credit card required
FAQs
Yes! For real estate, landlords can deduct expenses like mortgage interest and repairs. For personal rentals (tools, cars), you report rental income but can deduct expenses related to the item. Always keep records and check IRS rules for your rental type.
In the US, if you rent your home for less than 15 days per year, rental income is usually tax-free. For other rentals, all income usually must be reported, but expenses tied to rental use can be deducted. Rules vary by rental type, so track your rental days carefully.
