Rental property with depreciation
A single-family rental: rent, operating expenses, depreciation, and the passive-loss rules, where a paper loss becomes a real deduction.
Taxpayer facts
Who this is and what their year looked like.
Diane is single and works a W-2 job in Fort Worth, Texas. She also owns one single-family rental house that she manages herself, choosing tenants and handling repairs.
She actively participates in the rental and her income is under $100,000.
- NameDiane R. Okonkwo
- Date of birth04/17/1986
- SSN461-70-3352
- Age (as of 12/31/2025)39
- Filing statusSingle
- DependentsNone
- OccupationNurse (W-2) and rental owner
- Address3521 Hulen St, Fort Worth, TX 76107
- ResidencyTexas, full year (no state income tax)
- Rental participationActive participant (chooses tenants, approves repairs; a leasing agent handles showings and rent collection)
- Rental purchaseBought and first rented out 03/01/2021 for $300,000 (land $52,500, building $247,500); $34,123 of depreciation taken 2021 through 2024
Source documents
Work from these the way you would a real client's paperwork. Everything is fictional.
Objectives
What a correct return should capture.
- Report the rental on Schedule E, starting with the rent received.
- Deduct the operating expenses (mortgage interest, property tax, insurance, repairs).
- Compute depreciation: only the building is depreciable, not the land. Use 27.5-year residential straight-line from the IRS MACRS table, based on the month and year it was placed in service. (Form 4562 is required only in the year property is placed in service, so it is not part of this return.)
- Arrive at the rental income or loss on Schedule E.
- If the result is a loss, it is passive. Check her active participation and her MAGI against the $100,000 start of the phase-out to see how much of the special $25,000 allowance she can use against her other income.
- Combine the rental result with her W-2 wages, apply the standard deduction, and compute the tax.
- Reconcile withholding to the refund or balance due.
- Note that Texas has no state income tax.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
Stuck? Work through it with Yehuda
A one-on-one, 30-minute tutoring session on this return with Yehuda Tenenbaum, EA. Bring the spot where you got stuck and we will work through it together: how the forms connect, why a figure lands where it does, and how to check your work. $250. This is education on the practice return, not advice on your own taxes.