Rental Property Calculator 2026
Cash flow, cap rate, Schedule E tax treatment, depreciation recapture
Last updated: June 2026 · IRC §168 (27.5-yr SL), §469 (PAL), §1411 (NIIT), §199A (QBI), §1250 (recapture)
Property
Auto-fills property tax and insurance from state averages.
$100,000
Land (25%) is not depreciable. Check your county assessor for an exact split.
Financing
Investor loans typically run 2 to 5%. Closing costs are added to basis (depreciable portion).
Income
Other income: laundry, parking, pet rent, late fees.
Operating Expenses
All three % values are taken as a share of gross rent.
Owner Tax Profile
Used to compute your marginal federal + state rates. Marginal rate: 22% federal, 0.00% state.
Projection & Sale
Passive Activity Loss status: Active participation $25k allowance
Schedule E shows a $19,350 paper loss. Deductible this year: $0. Suspended & carried forward: $19,350.
Year 1 Schedule E (IRS Form 1040 Schedule E, Part I)
Cumulative Cash Flow & Equity Buildup
10-Year Projection
| Yr | Rent | OpEx | P&I | Deprec. | Taxable | CFBT | CFAT | Mortgage Bal | Equity |
|---|---|---|---|---|---|---|---|---|---|
| 1 | $33,600 | ($17,688) | ($25,172) | ($10,768) | -$19,350 | -$11,348 | -$11,348 | $297,234 | $116,766 |
| 2 | $34,608 | ($18,160) | ($25,172) | ($11,236) | -$19,131 | -$10,875 | -$10,875 | $294,254 | $134,236 |
| 3 | $35,646 | ($18,646) | ($25,172) | ($11,236) | -$18,411 | -$10,386 | -$10,386 | $291,043 | $152,444 |
| 4 | $36,716 | ($19,144) | ($25,172) | ($11,236) | -$17,657 | -$9,882 | -$9,882 | $287,582 | $171,427 |
| 5 | $37,817 | ($19,655) | ($25,172) | ($11,236) | -$16,867 | -$9,360 | -$9,360 | $283,852 | $191,222 |
| 6 | $38,952 | ($20,181) | ($25,172) | ($11,236) | -$16,039 | -$8,822 | -$8,822 | $279,833 | $211,869 |
| 7 | $40,120 | ($20,720) | ($25,172) | ($11,236) | -$15,170 | -$8,265 | -$8,265 | $275,502 | $233,410 |
| 8 | $41,324 | ($21,275) | ($25,172) | ($11,236) | -$14,260 | -$7,691 | -$7,691 | $270,835 | $255,889 |
| 9 | $42,563 | ($21,844) | ($25,172) | ($11,236) | -$13,304 | -$7,097 | -$7,097 | $265,805 | $279,354 |
| 10 | $43,840 | ($22,428) | ($25,172) | ($11,236) | -$12,300 | -$6,484 | -$6,484 | $260,385 | $303,855 |
CFBT excludes tax, CFAT includes federal + state + NIIT impact. Equity = appreciated market value minus mortgage balance.
Sale at Year 10: ROI & Depreciation Recapture
Understanding Rental Property Taxes (Schedule E)
Why Depreciation Is the Headline Tax Advantage
The IRS lets you depreciate the improvements portion of a residential rental over 27.5 years straight-line (IRC §168(c) and Pub 527). On a $400,000 property with a 75% improvements / 25% land split, that is roughly $10,909 per year of non-cash deduction. Depreciation often turns a property with positive cash flow into a Schedule E paper loss, sheltering rental income (and sometimes ordinary income) from federal tax. The catch: at sale the IRS recaptures the depreciation, taxed at a maximum 25% rate under IRC §1250.
The Passive Activity Loss Wall (IRC §469)
Rental real estate is passive activity by default. Passive losses can only offset passive income, the excess is suspended and tracked on Form 8582 until you fully dispose of the property. Two big exceptions soften this rule: (1) Active participation lets you deduct up to $25,000 of loss against ordinary income, but it phases out $1 per $2 of MAGI over $100k and disappears at $150k MAGI. (2) Real Estate Professional Status under §469(c)(7) makes losses non-passive entirely, with no MAGI ceiling, but requires 750+ hours in real estate trades AND more than half of all personal-service hours that year.
Net Investment Income Tax (3.8%, IRC §1411)
If your MAGI exceeds $200,000 single or $250,000 married filing jointly, net positive rental income is subject to the 3.8% Net Investment Income Tax, the lesser of net investment income or MAGI overage. REPS combined with material participation generally takes rental income out of net investment income for NIIT purposes (Reg. §1.1411-4(g)(7)). On the sale year, depreciation recapture and capital gain are both investment income for NIIT, even REPS does not exempt the sale-year gain.
QBI Deduction (§199A) for Landlords
Rental income qualifies for the 20% qualified business income deduction only if it rises to a Section 162 trade or business. Rev. Proc. 2019-38 provides a safe harbor: separate books and records for each rental enterprise, 250+ hours of rental services per year, and contemporaneous records. Triple-net leased property is excluded. Below the 2026 QBI threshold ($201,775 single / $403,500 MFJ), qualifying landlords deduct 20% of net rental income, capped at 20% of taxable income less net capital gains.
Deferring the Tax Bomb: 1031 and Step-Up
Depreciation recapture and long-term capital gains can be deferred indefinitely with a §1031 like-kind exchange: roll proceeds into another investment property within strict timelines (45 days to identify, 180 days to close, qualified intermediary, etc.). Many investors chain exchanges for decades, then hold until death so heirs inherit at stepped-up basis under §1014, permanently wiping out the deferred tax. This sequence (Buy, Borrow, Defer, Step-Up) is why real estate is a cornerstone of generational wealth planning.
Frequently Asked Questions
Why does depreciation matter so much for rental property taxes?
Residential rental property is depreciated straight-line over 27.5 years on the improvements portion of basis. A $400,000 property with 75% improvements generates roughly $10,909 of annual non-cash deduction. That deduction often turns positive cash flow into a paper LOSS on Schedule E, sheltering rental income (and sometimes ordinary income) from federal tax. It is the single biggest reason real estate is more tax-favored than stocks.
What is the Passive Activity Loss (PAL) trap?
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 fully dispose of the property. Active participation unlocks a $25,000 allowance against ordinary income, but it phases out $1 per $2 of MAGI over $100,000 and is fully gone at $150,000. Most W-2 earners over $150k MAGI cannot currently deduct rental losses, they just stack on Form 8582 until sale.
What is Real Estate Professional Status (REPS)?
REPS under IRC §469(c)(7) requires more than 750 hours per year in real-estate trades or businesses AND more than half of all personal-service hours that year in real estate. If you qualify AND materially participate, rental losses become non-passive and fully deductible against ordinary income with no MAGI cap. In a joint return only ONE spouse needs to qualify, this is why many couples plan around the non-W-2 spouse hitting REPS. Material participation usually also takes the rental out of NIIT.
What is depreciation recapture at sale?
At sale the IRS recaptures the depreciation you deducted (or could have deducted). Under IRC §1250 this Unrecaptured Section 1250 Gain is taxed at a maximum 25% federal rate, higher than long-term capital gains rates. Ten years of $10,909 depreciation = $109,090 of recapture at up to 25% = up to $27,273 of federal tax due at sale. This is why investors use 1031 exchanges to defer the gain or hold until death so heirs receive stepped-up basis under §1014.
Cap rate vs cash-on-cash vs IRR, which one matters?
Cap rate (NOI / price) is unlevered, use it to compare properties apples-to-apples regardless of how each is financed. Cash-on-cash (CFBT / cash in) measures levered first-year return on YOUR money. IRR / total ROI captures appreciation, mortgage paydown, AND cash flow over the full hold and is the best metric for comparing real estate to other asset classes. Use cap rate to screen, cash-on-cash for break-even, IRR for the buy/sell decision.
Active vs passive vs material participation?
Three different IRS tests. PASSIVE is the default for rental real estate regardless of involvement. ACTIVE PARTICIPATION is a lower bar (10%+ ownership, make management decisions) and unlocks the $25k allowance below $150k MAGI. MATERIAL PARTICIPATION (typically 500+ hours per activity, one of seven §469(c) tests) is the higher bar required when combined with Real Estate Professional Status to make losses non-passive.
Can landlords take the 20% QBI deduction?
Maybe. Rental qualifies only if it is a Section 162 trade or business. Rev. Proc. 2019-38 safe harbor: separate books per enterprise, 250+ hours of rental services per year, contemporaneous records. Triple-net leases do not qualify. Below the 2026 QBI thresholds ($201,775 single / $403,500 MFJ) qualifying landlords deduct 20% of net rental income on Form 8995, capped at 20% of taxable income less net capital gains.
What is a 1031 exchange?
IRC §1031 defers the gain when investment real estate is sold and rolled into "like-kind" replacement property. Rules: a Qualified Intermediary holds the proceeds, 45 days from sale to identify replacement property in writing, 180 days to close. Done correctly, both depreciation recapture and capital gains tax are deferred into the replacement property's lower basis. Many investors chain exchanges for decades and pass property to heirs who inherit at stepped-up basis, permanently eliminating the deferred tax.