What North Shore Landlords Need to Know About Rental Income, Deductions, and Recordkeeping

I hear some version of the same question a few times a year, usually from the same two kinds of people: someone who just inherited a house and doesn't want to sell it right away, or someone who moved out of a home rather than sell it and now has a tenant paying the mortgage. Either way, the question is the same — "Now that I'm a landlord, what do I actually need to track for taxes?"

I'm not a CPA, and nothing here should be treated as tax advice for your specific return. But after 25+ years helping buyers and sellers across Essex County and the North Shore, I've sat across the table from enough landlords — new and experienced — to know where the confusion usually starts. So I pulled together the basics straight from the IRS's own guidance, in plain language, along with the questions worth bringing to your tax professional before you file.

What the IRS Actually Counts as Rental Income

Rental income is broader than just the check that shows up on the first of the month. According to the IRS, you generally have to report all amounts you receive as rent, which includes a few categories people don't expect:

Advance rent is taxable in the year you receive it, not the year it covers. If a tenant pays you first and last month's rent up front, and that last payment happens to cover a period ten years from now, you still report it this year.

Security deposits are the exception most landlords get wrong in the other direction — a deposit you plan to return isn't income at all. It only becomes taxable if you keep some or all of it, whether because the tenant broke the lease or because you're applying it as their final rent payment.

A few other categories worth knowing: payments a tenant makes to cancel a lease early, expenses a tenant pays on your behalf (say, they cover a repair directly instead of paying you rent — you report that as income, and separately deduct it if it qualifies), the fair market value of property or services you accept instead of cash, and payments under a lease-option-to-purchase arrangement. And if you own a property with someone else, you only report your proportionate share.

What You Can — and Can't — Deduct

The general rule is that you can deduct ordinary and necessary expenses for managing, conserving, and maintaining your rental property. In practice, that usually covers mortgage interest, property taxes, insurance, utilities you pay on the tenant's behalf, advertising, property management fees, and everyday repairs and maintenance.

Here's where it gets specific: you cannot deduct the cost of an improvement the same way you deduct a repair. A repair keeps the property in normal working condition — patching a leak, repainting a room, fixing a broken step. An improvement makes the property better than it was, restores it, or adapts it to a new use — a full roof replacement, a kitchen remodel, finishing a basement. Improvements get recovered gradually, through depreciation, rather than deducted all at once.

Depreciation, in Plain English

Depreciation lets you recover the cost of the property itself — and any improvements or furnishings you add — a little at a time, rather than all in the year you paid for it. You start depreciating in the year the property is first placed in service, and again in any year you make a qualifying improvement or add furnishings. Only a portion of that cost is deductible each year, and it's calculated on Form 4562 before it flows into your Schedule E.

Where It All Gets Reported

Rental income and expenses are reported on Schedule E of Form 1040 or 1040-SR — one column per property, listing income, expenses, and depreciation for each. If you own more than three rental properties, you'll attach additional Schedule E forms, with the combined totals landing on a single summary form. And if your expenses and depreciation add up to more than your rental income, the loss you can claim may be limited by the passive activity loss rules (Form 8582) and the at-risk rules (Form 6198) — another spot where it pays to have a tax professional double-check the math.

If You Also Use the Property Yourself

Renting out a room in your own home, or renting a vacation property you also stay in some of the year, changes the calculation. Any personal use of a dwelling unit you rent can limit how much of your rental expenses and losses you're allowed to deduct. The IRS lays out the specifics in Publication 527, and this is genuinely one of the areas where the rules depend on your exact situation — worth a real conversation with your accountant rather than a general rule of thumb.

Recordkeeping That Actually Holds Up

Good recordkeeping isn't just about staying organized — it's what stands between you and a much worse conversation if your return is ever selected for audit. You'll want receipts, canceled checks, or bills to support every expense you claim, plus travel records if you're deducting mileage or trips related to the property, following the guidelines in Publication 463. Inadequate records can mean losing deductions you actually earned, along with additional taxes and penalties.

One category worth flagging specifically: records related to your property's basis — what you originally paid, your closing costs, and any capital improvements along the way — are worth holding onto for as long as you own the property. Those numbers feed your depreciation calculations every year, and they determine your gain or loss whenever you eventually sell.

Most individual landlords use the cash method of accounting, which simply means you report income when you receive it and deduct expenses when you pay them, rather than when they're technically earned or incurred.

Whether a rental property makes sense in the first place is a different question than how to report it — and that one, I can actually help with. If you're weighing whether to hold onto a property as a rental, considering a first investment purchase, or wondering what a former primary residence could rent for on the North Shore, I'm happy to walk through the numbers. You can browse what's currently available through our North Shore listings, or read more buyer-focused guidance in our buyer guides library.