Long-Term Residential Rentals: Tax Planning for Traditional Landlords

Long-term residential rental properties offer predictable cash flow but trigger passive activity loss limitations unless you qualify as a real estate professional.

Depreciation is 27.5 years. Residential rental property placed in service is depreciated using the straight-line method over 27.5 years. Only the building qualifies -- land is never depreciated. Getting the land-versus-building allocation right at purchase is critical because it determines your annual deduction for the life of the property.

Schedule E is your reporting home. All rental income, expenses, depreciation, and net results flow through Schedule E. Common deductible expenses include mortgage interest, property taxes, insurance, repairs, and property management fees. Capital improvements must be depreciated separately rather than expensed.

Passive activity rules govern your losses. Under IRC 469, rental activity is passive by default. If your rental shows a loss, it can only offset other passive income unless you qualify for the $25,000 active participation allowance (AGI under $150,000) or meet the real estate professional exception.

Section 8 adds compliance but not complexity. Housing Choice Voucher payments are taxable rental income. The reporting is identical to market-rate rent, though inspections and lease requirements add administrative overhead.

The tradeoff: Long-term residential is the most straightforward rental category, but "straightforward" in real estate tax still means depreciation schedules, passive loss tracking, and basis adjustments on every improvement and disposition.