How This Is Calculated
This calculator applies IRS Publication 527 (Residential Rental Property), Publication 925 (Passive Activity and At-Risk Rules), and IRC §469 for tax year 2026. The calculation runs in seven sequential steps. For the full statutory framework, depreciation deep dive, §280A personal-use rules, repair-vs-improvement distinction, and depreciation recapture at sale, see our Rental Income Tax Guide.
Step 1: §280A Minimal Rental Use Check Confirmed
If you rented the property fewer than 15 days during the year and used it personally for more than 14 days, IRC §280A(g) treats the rental as outside the income tax system entirely. None of the rental income is reported, and no rental expenses are deductible. The calculator returns $0 of taxable rental income in this case and skips the remaining steps.
Step 2: Annual Depreciation Confirmed
Allocate the purchase price between land and building. Only the building is depreciable. Annual depreciation equals the building basis divided by 27.5 years (straight-line MACRS GDS). The mid-month convention applies in the year placed in service and the year disposed; for a full holding year the simple division is correct.
Building basis = Purchase price − Land value
Annual depreciation = Building basis ÷ 27.5
Step 3: Personal-Use Proration Confirmed
If personal use exceeds the greater of 14 days or 10 percent of fair-rental days, the property is treated as a residence. Rental expenses are prorated by the rental ratio (rental days / total use days), and rental loss deductions are limited to gross rental income (no Schedule E loss). The calculator applies this proration when the residence test is triggered.
Rental ratio = Days rented ÷ (Days rented + Days personal use)
Step 4: Schedule E Net Income or Loss Confirmed
Net rental income equals gross rent minus mortgage interest, property tax, operating expenses, and depreciation. When personal-use proration applies, only the rental-allocable portion of each expense reduces gross rent, and the result cannot fall below zero (no excess loss in residence-classified rentals).
Schedule E net = Gross rent − Mortgage interest − Property tax − Operating expenses − Depreciation
Step 5: Passive Loss Allowance under IRC §469(i) Confirmed
If Schedule E shows a loss and you actively participate, the $25,000 special allowance lets you deduct up to $25,000 of rental loss against non-passive income (wages, business, portfolio). The allowance phases out by 50 cents per dollar of modified AGI over $100,000 and is fully eliminated at $150,000 MAGI. MFS-Apart receives a $12,500 allowance with phase-out from $50,000 to $75,000. MFS-Together receives no allowance. Rental losses suspended by the passive activity rules carry forward indefinitely until the property is sold or generates passive income.
Allowance (Single/MFJ/HOH) = MAX(0, $25,000 − (MAGI − $100,000) × 0.5), capped at $25,000
Deductible loss = MIN(Net loss, Allowance)
Step 6: Federal Tax on Net Rental Income Confirmed
Positive Schedule E net income is added to other taxable income and taxed at your marginal federal rate (2026 brackets per Rev. Proc. 2025-32). The calculator uses a single-rate approximation; in reality, rental income may straddle bracket boundaries. For pinpoint accuracy on a high-income return, run the result through a full 1040 calculator or your tax software.
Federal tax on net = Schedule E net income × Marginal rate
Step 7: Net Investment Income Tax Confirmed
Under IRC §1411, a 3.8 percent additional tax applies to net investment income, including most rental income, when MAGI exceeds the threshold ($200K single/HOH, $250K MFJ, $125K MFS). The tax equals 3.8 percent of the lesser of (a) net investment income or (b) MAGI excess over threshold. Rental income that qualifies as a non-passive trade or business in which the taxpayer materially participates is generally NIIT-exempt.
NIIT = 3.8% × MIN(Net investment income, MAX(0, MAGI − Filing threshold))
What this calculator does not model. Real estate professional status under §469(c)(7), short-term rental loophole (avg stay 7 days or less + material participation), substantial services pushing to Schedule C, §199A QBI deduction (rental safe harbor under Rev. Proc. 2019-38 requires 250+ hours and contemporaneous time logs), §1031 like-kind exchange, depreciation recapture at sale (§1250 max 25%), excess business loss limit under §461(l), and state income tax on rental income. Use the calculator for the standard passive case; consult a CPA for any of the above.
Assumptions
- Tax year 2026. Federal only. State income tax not modeled.
- Property is a residential rental reported on Schedule E. Substantial services (Schedule C/SE tax) and dealer activity (ordinary income) are out of scope.
- Depreciation is computed on a full-year basis using 27.5-year straight-line MACRS GDS. Mid-month convention is not adjusted for partial first or last years.
- Active participation is taken at face value. The user determines whether they meet the test (typically: making management decisions, approving tenants, authorizing repairs).
- Real estate professional status is not modeled. If you qualify under §469(c)(7), rental losses are non-passive and the $25,000 cap and MAGI phase-out do not apply.
- Short-term rental loophole (avg stay 7 days or less + material participation) is not modeled. STR landlords with material participation should treat losses as non-passive on a full preparer worksheet.
- NIIT calculation uses the full Schedule E net income as net investment income; in practice net investment income may include adjustments (investment interest, other investment income).
- Marginal-rate tax estimation assumes the user's stated marginal rate applies to all rental income; actual brackets may straddle.
- Depreciation recapture at sale (§1250 maximum 25%) is not modeled. The calculator is a holding-period tool only.