Rental Property Taxes: A Landlord's Guide for Connecticut and North Carolina

1. Schedule E: where rental income and expenses go

Long-term rentals are reported on Schedule E (Form 1040), Part I, one column per property. Report all rent, advance rent, fees tenants pay you (like late fees) and expenses a tenant pays on your behalf. Security deposits you plan to return aren't income until you keep them.

Common deductions: mortgage interest, property tax, insurance, repairs, cleaning and maintenance, utilities you pay, management fees, advertising, legal and accounting fees, travel to the property, HOA dues, and depreciation. Principal payments aren't deductible.

2. Repairs vs. improvements

A repair keeps the property in its normal working condition and is deducted right away: fixing a leak, patching drywall, replacing a broken window pane. An improvement is depreciated over time. Under the IRS rules, it is an improvement if it is a:

• Betterment: fixes a defect that existed when you bought it, or makes it bigger or better (an addition, an upgraded kitchen).
• Restoration: replaces a major component, like the whole roof or the HVAC system, or rebuilds after a casualty.
• Adaptation: converts it to a new use, such as turning a garage into an apartment.

Three safe harbors help small landlords:

3. Depreciation: 27.5 years for residential rentals

• Residential rental buildings are depreciated straight line over 27.5 years; commercial buildings over 39 years.
• Land is never depreciated. Split the cost between land and building, often using the assessment ratio.
• Depreciation starts when the property is ready and available for rent, using the mid-month convention.
• Appliances, carpet and furniture in a residential rental are 5-year property; fences, driveways and landscaping are 15-year property. These can use 100% bonus depreciation if acquired after January 19, 2025. Section 179 generally isn't available for property used to furnish long-term lodging.

Run your numbers in the rental property depreciation calculator.

4. Passive loss limits and the $25,000 special allowance

Rental activities are generally passive, so a rental loss can usually offset only passive income. The big exception for everyday landlords:

• If you actively participate (you make management decisions such as approving tenants, setting rent and approving repairs, and own at least 10%), you can deduct up to $25,000 of rental loss against wages and other income.
• The allowance shrinks by 50 cents for every dollar of modified AGI over $100,000 and is gone at $150,000. Married filing separately and living apart: up to $12,500, phasing out from $50,000.
• Losses you can't use carry forward and are freed up when you sell the property in a taxable sale.
• Qualifying real estate professionals (more than half their working time and more than 750 hours in real property businesses, and material participation) aren't limited the same way.

Short-term rentals follow different rules. See the Airbnb tax guide.

5. When you sell: depreciation recapture

• Your gain is the sale price minus selling costs minus your adjusted basis (cost plus improvements minus depreciation allowed or allowable, even if you never claimed it).
• The part of the gain from depreciation on the building is unrecaptured Section 1250 gain, taxed at up to 25% federally. The rest is generally long-term capital gain if you held it more than a year.
• Depreciation on 5- and 15-year items (appliances, carpet, land improvements) is generally recaptured as ordinary income.
• Suspended passive losses are generally released in the year of a fully taxable sale.

6. Connecticut notes

• Connecticut income tax starts from your federal adjusted gross income, so Schedule E income or loss flows onto your CT-1040.
• If you take bonus depreciation or Section 179 on rental items, Connecticut adds back 100% of bonus and 80% of Section 179, and gives it back at 25% a year over the next 4 years.
• Rentals of a furnished home for 30 days or less are subject to the 15% room occupancy tax. Leases of 90 days or more aren't.
• Check your town for rental registration, licensing or inspection rules.

7. North Carolina notes

• North Carolina's individual income tax is a flat 3.99% for 2026, starting from federal AGI.
• North Carolina adds back 85% of federal bonus depreciation and deducts 20% a year over the next 5 years. Section 179 is limited to $25,000 ($200,000 investment limit), with the same 85% add-back on the difference.
• Long-term leases (90 days or more) aren't subject to sales or occupancy tax. Shorter stays are; see the Airbnb guide for Wilmington and Leland rates.

Tools: Cash flow and tax calculator · Depreciation calculator · All rental and Airbnb tools