Written for landlords, property managers and short-term rental hosts across the US, with state detail for California, Texas, New York and Florida.
The short version
- Split the price into building and land.Use the assessor's ratio. Only the building depreciates, straight-line over 27.5 years from the month placed in service (As of Oct 2026).
- Know your passive loss allowance first.Rental losses are passive. Above a certain income the allowance shrinks, and what you cannot use carries forward to later years.
- Keep time logs if hours matter.Real estate professional status and some deductions turn on hours worked. Log them as you go and take them to your CPA.
Rentals owned by individuals and by disregarded LLCs are reported on Schedule E. Three things do most of the damage: depreciation done wrong, losses you assumed you could use, and deadlines missed on 1099s and exchanges.
Depreciation
Residential rental buildings depreciate straight-line over 27.5 years from the month placed in service, using the mid-month convention. Land never depreciates. As of Oct 2026.
IRS Publication 527 and Publication 946
| Building, 80% of the price per the assessor's ratio | $640,000 |
| Land, never depreciated | $160,000 |
| Purchase price | $800,000 |
| Depreciation for a full year | $23,272.73 |
$640,000 / 27.5Placed in service in March, the first year takes 9.5 months: $18,424.24.
Bonus depreciation is generally 100% for qualified property acquired and placed in service after January 19, 2025. It covers eligible items with a recovery period of 20 years or less, not land or the rental building itself. A cost segregation study may identify qualifying 5, 7 and 15-year items. California does not follow federal bonus. As of Oct 2026.
To treat work as a repair rather than an improvement, your CPA can use the safe harbor for small items ($2,500 per invoice or item without an applicable financial statement), the small taxpayer safe harbor for buildings with an unadjusted basis of $1 million or less, or the routine maintenance rules. Each is an election or method the CPA makes. As of Oct 2026.
Passive losses
Rental losses are passive. An active participant can deduct up to $25,000 against other income, reduced by 50% of modified AGI over $100,000 and gone at $150,000. A real estate professional (more than 750 hours, and more than half of personal services, in real property trades) who materially participates escapes the limit. Rentals with an average stay of 7 days or less are not a rental activity under these rules. As of Oct 2026.
IRC 469(i) and 469(c)(7); Treas. Reg. 1.469-1T(e)(3)(ii)(A)
| Passive loss allowance | $25,000 |
| Less 50% of modified AGI over $100,000 ($120,000 - $100,000) | -$10,000 |
| Allowance left | $15,000 |
| Loss carried forward as a suspended passive loss | $7,000 |
$22,000 loss - $15,000 deductible
Deadlines and records
- 1099-NEC to contractors and 1099-MISC for rent paid at $2,000 or more, for payments from January 1, 2026. Get a W-9 first, or backup withhold 24%. As of Oct 2026.
- Recipient copies are due January 31; January 31, 2027 is a Sunday, so the date is February 1, 2027.
- Estimated tax is due April 15, June 15, September 15 and January 15.
- If you collect rent for owners, you also report the rents collected to each owner. If an owner lives abroad, withhold 30% of the rent unless they give you Form W-8ECI after electing to be taxed on net income: for example, $900 a month on a $3,000 a month condo. As of Oct 2026.
- 1031 exchange: identify replacement property within 45 days, and receive it by the earlier of 180 days after the transfer or your return due date including extensions, through a qualified intermediary.
- The 20% QBI deduction can apply if your rentals rise to a trade or business. The safe harbor needs 250 hours of rental services a year (in 3 of the last 5 years once the enterprise is 4 years old), separate books and records, and contemporaneous time logs, and it excludes triple net leases and homes you use yourself. As of Oct 2026.
Land never depreciates, so in that example $160,000 of the price can never be deducted as depreciation.
Model the sale, not just this year's deduction. Unrecaptured section 1250 gain has a maximum 25% rate, section 1245 recapture on cost-segregated items is generally ordinary income, and the 3.8% net investment income tax can apply above $200,000 single or $250,000 joint. As of Oct 2026.
Asked in Greymill
Building: 80% of $800,000 = $640,000
Land: $160,000, never depreciated
Full year: $640,000 / 27.5 years = $23,272.73 (As of Oct 2026)
This year: March counts as half a month, so 9.5 months = $18,424.24
Second catch: the loss may not reach your salary. Rental losses are passive. If you actively participate, up to $25,000 can offset other income, cut by 50% of modified AGI over $100,000 (As of Oct 2026).
Your allowance: $25,000 less half of $20,000 = about $15,000
Any loss above that carries forward to later years.
The way out: a real estate professional who materially participates escapes the limit. That takes more than 750 hours, and more than half your working time, in real property trades (As of Oct 2026). Log hours now if you might claim it.
Take this to your CPA. I can list the questions to ask.
Ask it about your own business
Paste this into Greymill with your own figures, and Tax & Bookkeeping works it through for your business.
I run a property management business in [state], in the US. I own [number] rentals: for each, [purchase price, land value from the assessor, month placed in service]. My modified AGI is about [$], I spend about [hours] a year on real estate, and last year's rental result was [$ profit or loss]. Work out depreciation for each property, whether I can use the loss this year, and the 1099s I owe by [date], with a list of questions for my CPA.
More for property management and rentals in the US
- Raising rent to market without breaking a rent capIn capped states and cities the legal maximum, not the market, sets this year's increase, so check the cap and the notice period before you price.Read the lesson
- Will this building still cash flow after the loan, taxes and reserves?Lenders and buyers judge a rental on NOI and DSCR, so work them out the way they do and run a 13-week cash view alongside.Read the lesson
- Do I need a broker license to manage rentals for other owners?Managing rentals for others for a fee is brokerage in most states, and a trust account and safety duties come with it.Read the lesson
- Lease clauses and deposit mistakes that cost owners doubleSome common lease clauses are void, and getting a security deposit wrong at move-out can cost two or three times the amount.Read the lesson
- Paying a maintenance tech, a leasing agent and an on-site manager the right wayProperty management roles carry their own traps: the full-time 1099 handyman, the unlicensed leasing agent and the free apartment counted as pay.Read the lesson
- Winning owners and filling units without a fair housing problemOwners buy lawful screening, deposit compliance and clean trust accounting, and every listing and screening step has to follow fair housing law.Read the lesson
- A tenant has stopped paying: the notice, the count and the court in your stateNonpayment cases fail on the notice: the wrong number of days, the wrong delivery method, or a federal notice you did not know applied.Read the lesson
Open the interactive lesson · Every property management and rentals lesson · What Greymill knows about the trade
Sources
The primary sources behind this lesson, checked Oct 2026.
- 168(c), (d)(2); Pub. 527 (Tax)
- IRS Notice 2026-11 sections 2.02, 3.02, 3.03 and 3.07; IRC section 168(k) (Tax)
- Form 3885 instructions (Tax)
- 1.263(a)-1(f); 1.263(a)-3(h) (Tax)
- 469(c)(7), (i) (Tax)
- 1.469-1T(e)(3)(ii)(A) (Tax)
- thresholds; IRC 6050W(e) as amended (Pitfalls that embarrass the product)
- www.fincen.gov (Pitfalls that embarrass the product)
- FHEO memo (summaries: NAA, NLIHC) (Pitfalls that embarrass the product)
- 1950.5(c) (Pitfalls that embarrass the product)
- 9058(c) (Pitfalls that embarrass the product)
- Rule 61J2-14 (Hard cases: rent increases, deposits, late fees and screening)
- 15 U.S.C. 9058(c)(1); Property Code 24.005(c-1) (SB 38 s4) (Hard cases: rent increases, deposits, late fees and screening)
- due dates (The us calendar: 1099-NEC, property tax, deposit and deal clocks)
- Tax Code 31.02 (The us calendar: 1099-NEC, property tax, deposit and deal clocks)
- payment dates (Rev. and Tax. Code 2617, 2618) (The us calendar: 1099-NEC, property tax, deposit and deal clocks)
- 197.162; 197.333 (The us calendar: 1099-NEC, property tax, deposit and deal clocks)
- reporting (The us calendar: 1099-NEC, property tax, deposit and deal clocks)
- CCP 1161(2) (Federal, state or local, and who signs off)
- 83.56(3) (Federal, state or local, and who signs off)
- GOL 7-108(1-a)(e); Fla. Stat. 83.49(3); Civ. Code 1950.5(g); Prop. Code 92.103 (Federal, state or local, and who signs off)
- 42 USC 4852d; 24 CFR 35.88 (Federal, state or local, and who signs off)
- 42 USC 4013(c) (Federal, state or local, and who signs off)