Chapter 16 · Taxes, briefly

Rental income taxes, briefly

Keep good records and ask the right questions before counting a benefit.

By Dan D’Ambrosio, Founder, Plenteous; Broker-in-Charge, Plenteous Management. Fourth quarter 2026 edition · Updated November 5, 2026 · Sources reviewed November 4, 2026

The short answer

A rental's cash flow and taxable income are different calculations. Repairs and improvements can be treated differently, residential rental buildings are generally depreciated over 27.5 years, losses may be deferred, and on sale the gain from depreciation generally cannot use the home-sale exclusion.

A rental's cash flow and taxable income are different calculations. Give your tax adviser the lease, income records, loan interest, operating expenses and major-work invoices, along with the property's purchase and conversion records.

01
Repairs and improvements can receive different tax treatment.
Some spending is currently deductible; other spending is recovered over time. Exceptions and elections can matter. Describe the work accurately rather than putting every invoice in one repairs category.
02
Residential rental buildings are generally depreciated over 27.5 years under the standard federal system; land is not depreciable.
When a residence becomes a rental, the depreciation basis (the value used to calculate the deduction) generally starts with the lower of adjusted basis or fair market value at conversion, with land excluded.
03
A tax loss is not always deductible immediately.
Passive-activity and other limits may defer it. Setting cash aside for a replacement is not itself a deduction, and principal payments are not mortgage interest.
04
On sale, gain attributable to building depreciation you claimed (or were entitled to claim) generally cannot use the home-sale exclusion and may face a federal rate of up to 25 percent, with other taxes possible.
Model the actual sale with your adviser, including any South Carolina obligations.

Sources

Federal rental taxation, depreciation and sale treatment.

04Sale of a former home · irs.gov / Publication 523
05Rental depreciation and basis · irs.gov / Publication 527
06Rental income and expenses · irs.gov / Topic 414
07Depreciation when a home is sold · irs.gov / Property and sale-of-home questions

How long is residential rental property depreciated?

Residential rental buildings are generally depreciated over 27.5 years under the standard federal system; land is not depreciable.

Is depreciation taxed when I sell a rental?

Gain attributable to building depreciation you claimed, or were entitled to claim, generally cannot use the home-sale exclusion and may face a federal rate of up to 25 percent, with other taxes possible.

All chapters

Part one / The foundations

What you are really getting into

The opportunities, the responsibilities, and the preparation that gives you choices.

Part two / The numbers

Make the numbers yours

A worked budget, three financing scenarios, a difficult year, and two worksheets for the decision in front of you.

Part three / Running it well

Running it well

The life of a tenancy in the order it happens, the owner’s calendar, and the page to open when something breaks.