Do I Have to report rental income If It doesn’t cover my mortgage payments?

Yes. You must report all rental income you receive, even if it does not cover your mortgage payments or results in an overall loss.

1) Rental income must always be reported

The IRS requires you to report all rental income you receive, regardless of profitability.

Rental income includes:

• Monthly rent payments
• Advance rent
• Tenant-paid expenses (e.g., utilities paid on your behalf)
• Security deposits kept by you

Whether your rent covers your mortgage is irrelevant for reporting purposes.

2) Mortgage payments are not the test (common misconception)

Mortgage payments are not deductible in full, which is why many rentals show a loss.

How mortgage payments are treated:

• Mortgage interest → deductible rental expense
• Principal portion → not deductible
• Principal payments do not reduce taxable rental income directly

3) You may still deduct rental expenses

Even if rent doesn’t cover the mortgage, you can deduct ordinary and necessary rental expenses, including:

• Mortgage interest
• Property taxes
• Insurance
• Repairs and maintenance
• HOA fees
• Utilities (if paid by you)
• Depreciation (often the largest deduction)

These deductions frequently create a tax loss even when cash flow is negative.

4) Where rental income and expenses are reported

Rental activity is reported on:

• Schedule E (Form 1040) – Supplemental Income and Loss

Income and expenses are netted to determine rental profit or loss.

5) What if the rental shows a loss?

A rental loss may or may not be currently deductible.

Passive activity loss (PAL) rules:

• Rental real estate is generally passive
• Losses may be limited or suspended
• Special allowance of up to $25,000 may apply if you:
  
  • Actively participate, and
  • Have modified AGI ≤ $100,000 (phases out up to $150,000)

Disallowed losses carry forward.

6) Special cases to be aware of

A) Partial-year or personal use

If the property is used partly as a residence and partly rented:

• Expenses must be allocated
• Deduction limits may apply

B) Below-market rent (renting to family)

If you rent to a relative at below-market rent:

• You must still report the income received
• Expense deductions may be limited

Summary

• Rental income must be reported, even if it doesn’t cover your mortgage
• Mortgage principal is not deductible
• Mortgage interest and other expenses are deductible
• Report on Schedule E
• Loss deductions may be limited under passive activity rules

Related Questions

• Are mortgage points deducted or amortized?
• 9 Best Tax Software for Rental Property for Smooth Schedule E Filing
• What Is tax Form 540 2EZ?

Sources:

• IRC §61(a) (Gross income includes rents)
• IRS Pub 527 – Residential Rental Property
• IRC §163(h) (Interest rules)
• Schedule E Instructions
• IRC §469 (Passive activity losses)
• IRS Pub 925 – Passive Activity and At-Risk Rules
• IRC §162(a) (Ordinary and necessary expenses)