Three ways to measure rental income
Gross rental income is what tenants pay; net cash income is what is left after costs and the mortgage; taxable rental income is what is left after deductible expenses, including depreciation.
| Measure | Amount | Includes |
|---|---|---|
| Rent collected | $47,538 | Rent and other income, less vacancy |
| Net operating income | $30,738 | After operating expenses |
| Cash flow | $5,054 | After $25,684 of mortgage payments |
| Taxable rental income | −$4,230 | After $22,168 interest and $12,800 depreciation |
What counts as rental income
For U.S. tax purposes, rental income includes normal rent and advance rent, which is income in the year you receive it even if it covers a later period. A security deposit is not income when you receive it if you plan to return it; any part you keep is income, and a deposit meant as the final month's rent is advance rent.[1]
Lenders treat rent differently: when rental income is used to qualify for a mortgage on a 1–4 unit property, Fannie Mae multiplies gross monthly rent by 0.75 and subtracts the full payment (PITIA) from the result.[4]
Why taxable income differs from cash
- Mortgage interest is deductible; principal is not, though it is cash out of your pocket.[1]
- Depreciation is deductible but costs no cash. U.S. residential rental buildings are depreciated over 27.5 years using the straight-line method and the mid-month convention, about 3.636% of the building's cost in a full year; land is not depreciated.[1][2]
- Improvements such as a new roof are depreciated over time rather than deducted in the year paid.
In the example, depreciation of $12,800 turns $5,054 of cash into −$4,230 of taxable income. When taxable income is negative, the passive activity rules may limit how much of the loss you can deduct in the year; owners who actively participate can deduct up to $25,000 of rental losses against other income, reduced by half of modified adjusted gross income over $100,000 and gone at $150,000.[3]
Outside the United States
- United Kingdom: rental profits are taxed as property income, and individuals can use a property allowance of up to £1,000 a year instead of deducting actual expenses.[5]
- Australia: when deductible expenses exceed rental income, the property is negatively geared and the loss can be claimed against other income or carried forward.[6]
- Canada: rental income and expenses are reported on Form T776; buildings are depreciated through capital cost allowance, which cannot be used to create or increase a rental loss.[7]
The worksheet uses U.S. depreciation rules for the tax column; the cash column works anywhere.
Not tax adviceThis is a simplified estimate. It does not include your other income, tax bracket, credits or state rules. Use it to understand the moving parts, then check with a tax professional.
Related calculators
Work out the depreciation schedule on the rental property depreciation calculator, and cash flow over several years with the investment property calculator. For monthly cash flow with a stress test, use the rental cash flow calculator; for gross and net yield, the rental yield calculator.
Frequently asked questions
How do I calculate rental income?
Multiply monthly rent by the number of units and by 12, add other income such as parking or laundry, and subtract expected vacancy. Then subtract operating expenses for net operating income and the mortgage for cash flow.
Is rental income taxed as ordinary income?
In the U.S., net rental income is generally taxed at ordinary income rates, after deducting expenses, mortgage interest and depreciation. Gains on selling the property are taxed differently.
Are security deposits rental income?
Not when received, if you intend to return them. If you keep part of a deposit because the tenant did not meet the lease terms, that part becomes income in the year you keep it.
Why is my taxable rental income lower than my cash flow?
Depreciation reduces taxable income without costing cash. Early in a mortgage, interest is also a large share of each payment and is deductible.
Sources
- Publication 527 (2025), Residential Rental Property
- Publication 946 (2025), How To Depreciate Property
- Publication 925 (2025), Passive Activity and At-Risk Rules
- B3-3.8-02, Rental Income from the Subject Property (Selling Guide)
- Tax-free allowances on property and trading income
- How to claim rental expenses
- Guide T4036, Rental Income