Rental Property Calculator 2026

Residential rental property is depreciated straight-line over 27.5 years (IRC §168) on the improvements portion of basis (not land). A $400,000 property with 75% improvements generates roughly $10,909 of annual depreciation. That non-cash deduction often turns a positive cash-flow rental into a paper LOSS on Schedule E, sheltering rental income from federal tax and sometimes other ordinary income too. It is the single largest reason real estate is tax-advantaged versus stocks.

Under IRC §469, rental real estate is passive by default. Passive losses can only offset other passive income, the rest is suspended and carried forward until you dispose of the property. Exception 1: if you actively participate (set rents, approve tenants) AND MAGI is $100k or less, you can deduct up to $25,000 of rental loss against ordinary income each year. The allowance phases out $1 per $2 of MAGI over $100,000 and is fully gone at $150,000 MAGI. Most W-2 earners over $150k MAGI cannot currently deduct rental losses, the losses just stack up on Form 8582 until sale.

REPS under IRC §469(c)(7) requires (1) more than 750 hours per year in real-estate trades or businesses, AND (2) more than half of all personal-service hours that year in real estate. If you qualify AND materially participate in the rental, losses are no longer passive, they fully offset ordinary income with no MAGI cap. In a joint return only ONE spouse needs to qualify, which is why many couples plan around the non-W-2 spouse meeting REPS. REPS material participation usually also exempts the rental income from the 3.8% Net Investment Income Tax.

When you sell a rental, the part of your gain that comes from depreciation you deducted (or could have deducted) is called unrecaptured section 1250 gain. It is taxed at your ordinary income tax rate, but never more than 25%; the rest of the gain gets long-term capital gains rates. Example: 10 years of $10,909 depreciation is $109,090 of such gain, so a 24% bracket owner pays about $26,182 on it and a 32% bracket owner pays the 25% maximum, $27,273. Investors use 1031 exchanges to defer the gain, and heirs get a stepped-up basis under IRC 1014 that wipes it out.

Cap rate (NOI divided by purchase price) measures unlevered property performance and is the standard metric for comparing rental properties apples-to-apples regardless of how they are financed. Cash-on-cash (CFBT divided by cash invested) measures levered first-year return on YOUR money. IRR/total ROI captures appreciation, mortgage paydown, AND cash flow over the full hold period and is the single best metric for comparing real estate to other investments. Use cap rate to screen deals, cash-on-cash to check break-even, IRR to decide between asset classes.

These are three different IRS tests. PASSIVE is the default for rental real estate, regardless of how involved you are (§469(c)(2)). ACTIVE PARTICIPATION is a lower bar (own at least 10% and make management decisions) and unlocks the $25k loss allowance below $150k MAGI. MATERIAL PARTICIPATION (one of seven §469(c) tests, typically 500+ hours per activity) is the higher bar required when combined with Real Estate Professional Status to make rental losses non-passive. The terms are easy to mix up but they trigger very different tax outcomes.

Maybe. Rental income only qualifies if the activity rises to a Section 162 trade or business. IRS Rev. Proc. 2019-38 provides a safe harbor: separate books and records per enterprise, 250+ hours of rental services per year, and contemporaneous records of those services. Triple-net leases generally do NOT qualify. If the safe harbor is met (and you are below the QBI taxable-income thresholds of $201,775 single / $403,550 MFJ for 2026), you can deduct 20% of net rental income on Form 8995, capped at 20% of taxable income less net capital gains. Toggle the QBI election in this calculator to model the impact.

IRC §1031 allows the gain from selling investment real estate to be deferred indefinitely by rolling proceeds into "like-kind" replacement property (any U.S. real estate held for investment qualifies, post-TCJA personal property no longer does). Key rules: a Qualified Intermediary must hold the proceeds (you can never touch them), you have 45 days from sale to identify replacement property in writing, and 180 days to close. Done correctly, depreciation recapture and capital gains tax are both deferred into the replacement property's lower basis. Many investors chain exchanges for decades and ultimately let heirs inherit at stepped-up basis, permanently eliminating the deferred tax.