How much of your rental income will actually make it into your pocket in 2025? That’s the big question for property owners who want to stay ahead of the game.
The tax rules around rental income are complex, and many landlords pay more than they should because they don’t understand how their rental income is taxed—or worse, miss out on valuable deductions. While owning rental properties is one of the most effective ways to build wealth, the IRS can take a substantial portion of your profits if you’re not strategic with tax planning.
Keep reading to learn exactly how much you could owe in taxes on your rental income in 2025—and how to reduce that liability with strategic tax planning.
How Rental Income is Taxed
The IRS generally treats rental income as ordinary income, just like wages or business profits. This means rental income is subject to the same federal tax rates that apply to other sources of income.
Rental income includes money received from renting out property, whether it’s from long-term tenants, short-term rentals like Airbnb, or renting out a parking space or storage unit. It’s important to note that gross rental income is taxable, but owners can reduce it by deducting eligible expenses related to their rental properties.
Federal Income Tax Rates for 2025
In 2025, the IRS continues to apply a progressive tax system, meaning the more money you make, the higher percentage you will pay in taxes. Here’s a breakdown of the tax brackets for 2025:
- 10%: Up to $11,925 (single), $23,850 (married filing jointly)
- 12%: $11,926 to $48,475 (single), $23,851 to $96,950 (married)
- 22%: $48,476 to $103,350 (single), $96,951 to $206,700 (married)
- 24%: $103,351 to $197,300 (single), $206,701 to $394,600 (married)
- 32%: $197,301 to $250,525 (single), $394,601 to $501,050 (married)
- 35%: $250,526 to $626,350 (single), $501,051 to $751,600 (married)
- 37%: Over $626,350 (single), over $751,600 (married)
Rental income is combined with other income, such as wages or business profits, and taxed according to the applicable federal tax bracket. For example, if rental income is $50,000 and total income is $100,000, that rental income will be taxed based on the federal brackets for that income level.
State and Local Taxes: How They Affect Rental Income
Apart from federal taxes, state and local taxes can also impact rental income. Depending on the property location, rental income may be taxed at the state level. Some states, like California and New York, have high state income taxes, which will increase the amount of tax owed on rental income. Other states, such as Florida and Texas, do not have a state income tax, so there will be no state-level taxes on the rental income.
Local taxes may also apply, especially in cities or counties that impose additional taxes on rental properties. Rental property owners must familiarize themselves with the tax codes in their state and local jurisdiction to ensure they’re properly accounting for these taxes.
Deductions and Strategies to Minimize Rental Income Taxes
Rental property owners have several opportunities to reduce their taxable rental income through deductions. Here are some common deductions available:
- Operating Expenses: Deduct costs associated with managing and maintaining the rental property, such as repairs, property management fees, utilities, and insurance premiums.
- Depreciation: Property owners can deduct a portion of the property’s value over time through depreciation. This deduction comes from the wear and tear on the property.
- Mortgage Interest: Owners can deduct the interest paid on any mortgage used to finance the property.
- Professional Services: Fees for services like accounting, legal advice, or property management, are deductible.
In addition, property owners who buy new property or make improvements to an existing property may be eligible for bonus depreciation in 2025, which allows for a larger initial depreciation deduction.
Special Tax Considerations for Rental Property Owners
There are also special tax considerations for those who are more deeply involved in the rental business:
- Real Estate Professionals: If real estate is a primary business and the owner spends more than 750 hours a year on rental activities, they may qualify as a real estate professional. This allows for greater flexibility in deducting rental losses.
- Passive Income: Most rental property income is considered passive, meaning losses from rental properties may be limited in how they offset other income. However, owners with income under a certain threshold may deduct up to $25,000 in rental losses.
Additionally, if a property owner decides to sell a rental property, they may be subject to capital gains taxes on the profit. If the landlord holds the property for more than a year, the profit is generally taxed at lower long-term capital gains rates. Property owners may also defer these taxes through a 1031 Exchange, which allows for reinvestment in other property without paying capital gains taxes.
Plan for Rental Income Taxes in 2025
With the tax landscape in 2025, rental property owners have both opportunities and challenges. By understanding how rental income is taxed, utilizing available deductions, and planning ahead, owners can keep more of their rental income and put it back into their properties or businesses.
If you’re unsure how your rental income will be taxed or need guidance on tax strategies, consulting a tax professional is best. Proper planning and expert advice can help property owners reduce their tax burden and ensure compliance with tax laws.
FAQs
What if my rental property is a loss in 2025?
If your rental property operates at a loss, you may be able to deduct the losses, but there are limitations if the rental activity is considered “passive.” However, if you qualify as a real estate professional, you may be able to offset these losses against other income.
Can I deduct expenses for repairs and improvements?
Repairs are deductible in the year they are made, while improvements (such as new construction or upgrades) must be depreciated over time. Make sure to differentiate between repairs and capital improvements when preparing your taxes.
Claim Maximum Tax Benefits With Your Rental Properties
Tax Goddess specializes in helping real estate business owners lower their tax rates and claim maximum tax benefits through Strategic Tax Coaching (STC). Our STC clients pay an average tax rate of 6.92% annually. If you are serious about claiming every tax benefit available as a real estate business owner, you cannot go wrong with STC. Book a FREE Consultation with the Tax Goddess team today if you are curious about how much you can save with STC.
