Are you a landlord or real estate investor in Kentucky? Understanding your tax obligations in 2026 is crucial for maximizing profits and staying compliant. This guide explains Kentucky rental property taxes—covering rental income, deductions, depreciation, state and federal taxes, and advanced strategies to lower your tax bill.
Table of Contents
- Key Takeaways
- What Is Considered Rental Income?
- What Deductions Can Landlords Claim?
- How Does Rental Property Depreciation Work?
- What Are Passive Activity Loss Limitations?
- Do Rental Earnings Trigger Self-Employment Tax?
- Kentucky State Tax Rules for Rental Income
- Case Study: Real Tax Savings Example
- Frequently Asked Questions
Key Takeaways
- Rental income is subject to both federal and Kentucky state income tax; rates range up to 37% (federal) and 5% (state).
- Landlords can deduct mortgage interest, property tax, repairs, insurance, depreciation, and more.
- Depreciate buildings (not land) over 27.5 years, providing a non-cash annual deduction.
- Passive activity loss limits may restrict how much loss you claim against non-rental income—but there are exceptions.
- Short-term and actively managed rentals may create self-employment tax, but regular passive rental income does not.
What Is Considered Rental Income?
For tax purposes, ‘rental income’ includes all compensation received for the use of your Kentucky property: base rent, advanced/late rent, security deposits used as rent, payments for cancelling a lease, or even tenant-paid expenses. Airbnb and short-term rental income also count. All must be reported on IRS Schedule E—and on your 2026 Kentucky return.
- Base rent
- Prepaid rent
- Application/pet/late fees
- Any tenant-paid bills (e.g., utilities or HOA dues you normally pay)
Security deposits are not taxable unless kept for unpaid rent or damages, in which case they are income in that year.
What Deductions Can Landlords Claim?
You’re allowed to deduct ordinary and necessary expenses related to operating your Kentucky rental property in 2026. These deductions lower your taxable rental profit.
| Deductible Expense | What Qualifies in 2026? |
|---|---|
| Mortgage Interest | Interest only, not principal |
| Property Taxes | County/local taxes on property value |
| Insurance | Landlord/rental property insurance premiums |
| Repairs & Maintenance | Fixing appliances, painting, patching roofs |
| Utilities | If paid by landlord (water, electric, gas, trash) |
| Management Fees | Paid to property managers |
| Depreciation | See next section for details |
Remember: improvements (like adding a new roof or major renovation) must be depreciated over time, not fully written off in the year incurred.
How Does Rental Property Depreciation Work?
Depreciation is a key tax benefit for Kentucky landlords. In 2026, you can depreciate the value of your rental building (not land) over 27.5 years using the straight-line method. For example, if your building is assessed at $275,000, you can deduct $10,000 per year. Depreciation reduces your taxable rental income—even if your property increases in market value.
- Determine the cost of the building (excluding land)
- Divide by 27.5 years: That is your annual depreciation deduction
Be aware: When you sell, you must pay ‘depreciation recapture’ tax at 25% on all depreciation claimed.
What Are Passive Activity Loss Limitations?
In many cases, if your rental property produces a tax loss, you can only deduct up to $25,000 of that loss against non-rental income in 2026—if your joint MAGI is under $100,000. If you are above that threshold, or if you are not an ‘active participant,’ losses may be limited, but they carry forward to offset future rental profit or gain on sale.
| Income Bracket | Rental Loss Deduction Limit (2026) |
|---|---|
| MAGI ≤ $100,000 | Up to $25,000 (if actively managing property) |
| MAGI > $100,000 | Limit phases out by $1 for every $2 over $100,000 |
| MAGI ≥ $150,000 | No current deduction, but loss carries forward |
If you qualify as a ‘real estate professional,’ or meet other special criteria, you may deduct unlimited losses in 2026. Consult a professional if you have large rental losses.
Do Rental Earnings Trigger Self-Employment Tax?
Most Kentucky rental income does not trigger the self-employment tax. However, if you provide substantial services (like Airbnb, VRBO, or managing rentals as a business with cleaning, meals, or daily hospitality), you may owe self-employment tax on some or all of your earnings.
Estimate your self-employment tax liability using the Self-Employment Tax Calculator.
Kentucky State Tax Rules for Rental Income
Kentucky taxes net rental income at a top rate of 5% in 2026. You will report rental income and expenses on your Kentucky tax return, using federal figures as the starting point. Property taxes are also paid at the county level, with average effective rates between 0.5% and 0.8%. Homestead exemptions do not apply to rental property (only your primary residence). All county property taxes are deductible as rental expenses.
- Kentucky individual income tax: up to 5%
- No additional local income taxes on rental profits
- Deduct all property-related expenses (see federal rules above)
- Appeal county property assessments if value is overstated
Case Study: Real Tax Savings Example
Meet Sarah: She owns three rental homes in Lexington, KY. In 2026, after using Uncle Kam’s services, she:
- Tracked and deducted every repair, insurance premium, and management fee
- Claimed $24,000 in annual depreciation
- Appealed an unfair county assessment, saving $1,400 in property taxes
- Saved $7,250 in federal+state income tax through proper documentation—see real client results
Frequently Asked Questions
Can I deduct a loss from Kentucky rental property against my W-2 income?
If you actively manage your property and your modified adjusted gross income (MAGI) is under $100,000, you can use up to $25,000 in rental losses to offset W-2 income. Above this threshold, the deduction phases out. Real estate professionals can deduct all losses.
Are utilities paid by landlords deductible in 2026?
Yes—if you, the landlord, pay for utilities, you can deduct the full amount on Schedule E.
Do I have to pay self-employment tax on rental property income?
Usually no, but short-term rentals and properties with hotel-like services may be subject to SE tax. Use the Uncle Kam Self-Employment Tax Calculator to check for your situation.
Should I form an LLC or S Corp for my Kentucky rentals?
LLCs provide legal protection but don’t confer tax benefits for passive rentals. If you run rentals as a business or have substantial profits, S Corps may reduce self-employment taxes—consult an advisor.
What documentation do I need for deductions?
Save all receipts and statements (loan, repairs, tax bills, insurance invoices) for deductions. The IRS can audit returns back 3-6 years, so keep organized records for every property.
What happens to depreciation when I sell?
The IRS imposes a 25% depreciation recapture tax on all depreciation you claimed when the property is sold. Consider a 1031 exchange to defer this tax.
This information is current as of 2/16/2026. Tax laws change frequently. Verify updates with the IRS (IRS.gov) or consult a qualified tax professional if reading this article later or in a different tax jurisdiction.
Last updated: February 2026
