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.

Item descriptionTypical 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)

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.

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.

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.

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

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%.

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.

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.

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.

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.