What impact does rental income above the expenses have on the tax liability for a property owner?

When a property owner generates rental income that exceeds their expenses, the result is positive cash flow, which means that the income is subject to taxation. This surplus income increases the owner's overall taxable income for the year. The Internal Revenue Service (IRS) considers rental income as part of an individual's or entity's gross income, and any profits derived from rental properties must be reported on tax returns.

While property owners can deduct operational expenses related to rental properties—such as maintenance, repairs, property taxes, and mortgage interest—any rental income remaining after these deductions contributes to taxable income. Therefore, as the positive cash flow from rental properties adds to an owner’s income, it inevitably increases their tax liability, making the role of rental income in tax calculation critical for property owners to understand.