This is general information about US federal tax rules for 2026, not tax advice. Rental taxes are full of exceptions, and states add their own. Use this list to ask better questions, and have a CPA or enrolled agent who sees your numbers check your return.
Here are the ten mistakes that cost small landlords the most, with the fix for each.
First, NOI is not taxable income
Most landlords know their NOI, the rent left after vacancy and operating expenses. Taxable rental income is a different number, because it also subtracts mortgage interest and depreciation:
A triplex rents for $36,000 a year. After a 5% vacancy allowance and $12,636 of operating expenses, NOI is $21,564, as the NOI calculator shows.
Subtract $11,200 of mortgage interest and $10,473 of depreciation, and taxable rental income is −$109: a small tax loss on a property that put cash in your pocket.
Several of the mistakes below come from confusing the two.
1. Not taking depreciation
Residential rental buildings are depreciated over 27.5 years. Skip it and you pay tax on income you did not really have, then pay again when you sell, because the IRS taxes the depreciation you were allowed to take, claimed or not.
Bought for $360,000, with the land valued at $72,000: the building is $288,000. $288,000 ÷ 27.5 = $10,473 a year. Placed in service in October, the first year gets only 2.5 months under the mid-month rule: about $2,182.
Fix: claim it on Form 4562 from the first year. Missed years can usually be caught up with Form 3115, not by amending old returns one by one.
2. Depreciating the land
Land never wears out, so it is never depreciated. Split the purchase price between land and building, using the county assessor’s ratio or an appraisal, and depreciate only the building.
The assessor values the lot at $60,000 and the house at $240,000, so land is 20% of the total. Apply that to the $360,000 you paid: $72,000 of land, never depreciated, and $288,000 of building.
3. Treating an improvement as a repair, or the reverse
Repairs keep the property working and are deducted now. Improvements that better, restore or adapt it are depreciated. Fixing a roof leak for $600 is a repair; a $14,000 new roof is an improvement, recovered over 27.5 years.
Fix: use the safe harbors. The de minimis rule lets you deduct items or invoices up to $2,500 each. The small-taxpayer safe harbor lets owners of buildings with an unadjusted basis of $1 million or less deduct a year’s repairs and improvements up to the lesser of $10,000 or 2% of the building’s basis: for the $288,000 building, $5,760. Both are elections you make on your return each year.
4. Getting deposits and prepaid rent backwards
A refundable security deposit is not income when received. Any part you keep becomes income that year. Last month’s rent collected up front is different: it is rent, and it is income when you receive it.
A lease starts October 1, 2026. The tenant pays $1,600 first month, $1,600 last month and a $1,600 deposit. On the 2026 return, $3,200 of that is income, plus November and December rent. The $1,600 deposit is not, unless you keep some of it.
5. Mixing rental and personal money
When rent lands in a personal account and repairs go on a personal card, proving your Schedule E is slow and sometimes impossible. Fix: a separate account for the rental. Our guide to whether you need a separate bank account explains why.
6. Missing ordinary deductions
Landlords most often forget: mileage for trips to the property, advertising and tenant screening, legal and accounting fees, landlord insurance, HOA dues, utilities they pay, bank fees, and loan points, which are spread over the life of the loan. Mortgage principal is never deductible; only the interest is.
7. Misreading the passive loss rules
Rental losses are passive. If you actively participate, meaning you approve tenants and set rents, you can deduct up to $25,000 of rental losses against other income. That allowance shrinks by 50 cents for every dollar of modified adjusted gross income over $100,000 and is gone at $150,000.
With MAGI of $120,000, the allowance is $25,000 − 50% × $20,000 = $15,000. A $22,000 rental loss deducts $15,000 this year; the other $7,000 carries forward until you have passive income or sell.
8. Ignoring the personal-use rules
Rent a home for fewer than 15 days in a year and the rent is tax-free, but you deduct no rental expenses. Use a property yourself for more than 14 days, or more than 10% of the days it is rented, whichever is greater, and your deductions are limited. Renting to family below market rent counts as personal use.
9. Skipping 1099s
If your rental activity is a business, you may need to send Form 1099-NEC to contractors you pay. The threshold was $600 for payments made in 2025. A 2025 federal law raised it to $2,000 for payments made from 2026. Collect a Form W-9 before you pay anyone.
10. Poor records, and a sale with no plan
Keep the closing statement from your purchase, receipts for every improvement, and a rent roll for each year. Improvement records matter until three years after you file the return for the year you sell, because they set your basis.
Before you sell, ask about depreciation recapture, which can be taxed at up to 25%, and about a 1031 exchange, which has strict deadlines: 45 days to name a replacement property and 180 days to close. For a large purchase, ask whether a cost segregation study makes sense. It moves parts of a building into 5-, 7- and 15-year classes, and with 100% bonus depreciation restored for property acquired after January 19, 2025, it can move years of deductions forward. Recapture still comes due at sale.
Taxes are part of the return you actually earn. Check a deal’s income first with the cap rate calculator, then talk the tax side through with a professional before you buy.
Questions people ask
Is a security deposit taxable income for a landlord?
Not when you receive it, if you plan to return it. It becomes income in the year you keep any part of it, for example for damage or unpaid rent. A deposit that is really prepaid rent, such as last month’s rent, is income when received.
Can I deduct repairs on a rental property in the year I pay for them?
Yes, repairs that keep the property in working order are deducted in the year you pay. Work that betters, restores or adapts the property is an improvement and is depreciated, unless a safe harbor such as the $2,500 per-item rule applies.
What happens if I never claimed depreciation on my rental?
You still owe tax on it when you sell, because the IRS counts depreciation you were allowed to take whether or not you took it. You can usually catch up on the missed amount by changing your accounting method with Form 3115, with a tax professional’s help.
Written by LoomLease editors. Published September 30, 2026. Plain English, not legal, tax or financial advice: your lease, your state’s law and a professional who knows your situation decide what applies.