How Rental Income Tax Works
Rental income is generally taxable as ordinary income in most countries. However, landlords are allowed to deduct a range of expenses incurred in earning that income, which reduces the taxable profit. The expenses you can deduct, and how they are calculated, vary significantly by country. This calculator provides a simplified estimate for the US, UK, Australia, and Canada.
Allowable Rental Expense Deductions
In most jurisdictions, landlords can deduct the following expenses against rental income:
- Mortgage interest: The interest portion of mortgage repayments (not principal). Note: UK rules restrict this to a 20% basic rate credit since 2020.
- Property tax / council rates: Annual property tax charged by local or state government.
- Landlord insurance: Building and contents insurance for the rental property.
- Repairs and maintenance: Costs to fix or maintain the property in its current state. Major improvements are usually capitalised, not expensed.
- Property management fees: Fees paid to a letting or property management agent, typically 8–12% of gross rent.
- Depreciation: A non-cash deduction for the wear and tear on the building and fixtures over time.
Country-Specific Tax Rules
United States
Rental income is taxed as ordinary income at federal marginal rates (10–37%). If the property is held in a pass-through entity (such as an LLC taxed as a sole proprietorship or partnership), a 20% Qualified Business Income (QBI) deduction may apply, reducing the taxable amount. Depreciation is claimed over 27.5 years for residential property. Passive activity loss rules may limit deductions if your income exceeds $150,000.
United Kingdom
UK landlords pay income tax on rental profits at 20% (basic rate) or 40% (higher rate), depending on total income. Since 2020, mortgage interest is no longer deducted in full — instead, landlords receive a tax credit equal to 20% of the mortgage interest paid. A £1,000 property income allowance is available to individuals with small amounts of rental income.
Australia
Rental income is added to your total taxable income and taxed at marginal rates (up to 45%). Negative gearing — where expenses exceed rental income — creates a tax loss that can be offset against other income, such as wages. Landlords also receive a 50% capital gains tax (CGT) discount if the property is held for more than 12 months.
Canada
Rental income is reported as business income or property income on your T1 return and taxed at federal marginal rates (15–33%) plus applicable provincial rates. Rental losses can generally be deducted against other income. The Capital Cost Allowance (CCA) allows depreciation of the building, but claims are restricted if they would create or increase a rental loss.
Frequently Asked Questions
Can I deduct mortgage principal payments?
No. Mortgage principal repayments are not a deductible expense because they represent the repayment of a debt (building equity), not a cost of earning income. Only the interest portion of your mortgage payment is generally deductible, and even this is restricted in the UK.
What is depreciation on rental property?
Depreciation (called Capital Cost Allowance in Canada) allows you to deduct a portion of the property's value each year to account for wear and tear. In the US, residential rental property is depreciated over 27.5 years using the straight-line method, so a building worth $275,000 generates $10,000 in annual depreciation. When you sell, the IRS recaptures depreciation at 25%, so this deduction is effectively deferred, not eliminated.
Is this calculator a substitute for professional tax advice?
No. This calculator provides a simplified estimate for planning purposes. Tax rules are complex and depend on your individual circumstances, total income, legal structure, and recent legislative changes. Always consult a qualified tax professional or accountant before making decisions about your rental property taxes.