Rental Property Taxes in Virginia: A Landlord's Guide for 2026

Owning a rental house or townhouse is one of the most common ways Fredericksburg-area families build wealth, whether it's a home kept after a PCS move or a property bought as an investment. It also brings some of the trickiest rules in the tax code. This guide to rental property taxes in Virginia covers what you report on Schedule E, how depreciation works, when a repair has to be capitalized, how much of a loss you can actually deduct, the special rules for Airbnb-style short-term rentals, and what happens when you sell.

What counts as rental income

Most landlords report rentals on Schedule E (Form 1040), Part I, one column per property. Rental income includes more than the monthly rent:

• Advance rent is taxable in the year you receive it, even if it covers next year.
• Security deposits aren't income while you expect to return them. Any part you keep for damage or unpaid rent becomes income in the year you keep it. A "deposit" that's really the last month's rent is advance rent.
• Expenses the tenant pays for you (for example, the tenant pays a repair bill and deducts it from rent) are income, and you can deduct the expense if it's deductible.
• Lease cancellation fees and property or services you receive instead of rent count at fair market value.

If you provide substantial services mainly for your tenants' convenience, such as regular cleaning, changing linens or maid service, the activity is reported on Schedule C instead and may owe self-employment tax. That's most common with short-term rentals (covered below).

Deductible expenses and depreciation

Ordinary and necessary costs of managing and maintaining the property are deductible in the year paid: mortgage interest, real estate taxes, insurance, HOA dues, property management fees, advertising, utilities you pay, repairs, legal and tax preparation fees for the rental, and local travel to the property.

How depreciation works

1. Find your basis. Purchase price plus most settlement costs (title fees, recording fees, transfer taxes). Loan costs are amortized separately.
2. Split land from building. Land never depreciates. Many landlords use the land-to-building ratio from the county or city real estate assessment.
3. Depreciate the building over 27.5 years (straight line, mid-month convention). A $240,000 building gives about $8,727 a year after the first partial year.
4. Depreciate other items on their own schedules: appliances, carpet and furniture over 5 years; fences and shrubbery over 15 years; improvements to the building over 27.5 years from when they're placed in service.

Repairs vs. improvements

This is the most common source of mistakes on landlord returns. Under the IRS "tangible property" regulations, a cost is an improvement, which you depreciate, if it's a betterment (fixes a defect that existed when you bought the property, enlarges it, or materially increases its capacity or quality), a restoration (replaces a major component or substantial structural part, or rebuilds after a casualty), or an adaptation to a new or different use. Anything else that keeps the property in ordinary operating condition is a repair, deducted now.

Three safe harbors help small landlords:

• De minimis: elect each year to deduct items costing $2,500 or less per invoice or item.
• Routine maintenance: recurring work you expect to do more than once during the building's 10-year period (such as servicing systems) can be deducted.
• Small taxpayer safe harbor: if your average gross receipts are $10 million or less and the building's unadjusted basis is $1 million or less, you can deduct all repairs, maintenance and improvements on that building for the year as long as the total doesn't exceed the lesser of $10,000 or 2% of the building's unadjusted basis. You elect it each year with a statement attached to your return.

Rental losses: the passive activity rules

Depreciation often turns a cash-positive rental into a tax loss. Rental activities are generally passive, and passive losses can normally offset only passive income. The big exception is the $25,000 special allowance: if you (and your spouse) own at least 10% and actively participate (approve tenants, set rent, approve repairs, even if you use a property manager), you can deduct up to $25,000 of rental losses against wages and other income.

The allowance drops 50 cents for every dollar of modified AGI over $100,000. Married people filing separately who lived together during the year get no allowance. Disallowed losses aren't lost: they carry forward to offset future rental income and are released in full when you sell the property in a taxable sale. Real estate professionals who meet strict hours tests (more than 750 hours a year, and more than half of their working time in real property businesses) can escape the passive rules entirely.

Worked example: a Spotsylvania townhouse

The Garcias bought a townhouse in Spotsylvania County for $320,000. Using the county assessment, $80,000 is land and $240,000 is building. In 2026 they collect $2,200 a month, use a property manager and earn $120,000 of wages.

At a 22% federal rate plus Virginia's 5.75%, the $1,939 loss saves the Garcias roughly $540. More importantly, the $6,788 left after expenses (before principal payments) is sheltered from tax this year. The catch comes at sale: every dollar of depreciation lowers their basis.

Short-term rentals and Airbnb in Virginia

Federal rules

• Rented fewer than 15 days in the year, while you also use it as a home: the rent is tax-free and you deduct no rental expenses. That's handy for renting your house during a big local event.
• Personal use of more than the greater of 14 days or 10% of rented days makes it a residence. Expenses are split by days, and losses aren't allowed.
• Average stay of 7 days or less: the property isn't a "rental activity" under the passive rules. The $25,000 allowance doesn't apply. Instead, losses are nonpassive only if you materially participate, for example more than 500 hours in the year, or more than 100 hours and not less than anyone else, including cleaners and managers. Otherwise they're passive and suspended.
• Hotel-like services (cleaning during stays, meals, concierge) can move the activity to Schedule C with self-employment tax.

Virginia sales and lodging taxes

Selling a rental: recapture and 1031 exchanges

When you sell, your gain is the sale price (less selling costs) minus your adjusted basis: original basis plus improvements, minus depreciation allowed. On the federal return:

• Unrecaptured Section 1250 gain (the part of the gain equal to straight-line depreciation on the building) is taxed at a maximum of 25%.
• The rest of a long-term gain gets 0%, 15% or 20% capital gains rates. Higher earners may also owe the 3.8% net investment income tax.
• Suspended passive losses are released in a fully taxable sale.

Virginia has no special capital gains rate, so the whole gain is taxed at up to 5.75%.

1031 like-kind exchanges let you defer the gain by exchanging into other business or investment real estate. Since 2018 only real property qualifies. The basics:

1. Use a qualified intermediary before closing. Touching the sale proceeds yourself can kill the exchange.
2. Identify replacement property in writing within 45 days of transferring the old property.
3. Receive the replacement within 180 days, or by your tax return due date with extensions if that's earlier.
4. Report it on Form 8824. Cash or debt relief you don't reinvest ("boot") is taxable.

The deferred gain and depreciation carry into the new property's basis. They're postponed, not forgiven.

Virginia notes and record keeping

• Same income, same building schedule. Virginia starts from federal AGI, so your Schedule E result flows through, and the 27.5-year building schedule is the same.
• No bonus depreciation. Virginia doesn't allow federal bonus depreciation or the higher Section 179 limits, and it uses a fixed IRS conformity date of December 31, 2025. If you expense new appliances or furniture immediately on the federal return, you'll have a Virginia addition now and smaller Virginia subtractions later. Keep a separate Virginia depreciation schedule.
• Nonresident owners of Virginia rentals generally file Form 763. Virginia residents with rentals in other states usually file there and claim a Virginia credit for tax paid to the other state.
• Local taxes: real estate tax is deductible on Schedule E for the rental (it's not subject to the SALT cap there).

• Closing statement from purchase, and the assessment showing the land and building split
• Leases, rent ledger, and security deposit records
• Receipts and invoices for every repair and improvement, with dates and descriptions
• Depreciation schedule (federal and Virginia), kept until you sell plus at least three years
• Mileage log for trips to the property, and a log of hours if you're relying on material participation
• Platform statements and 1099-Ks for short-term rentals

A separate bank account and simple bookkeeping make tax time far easier. See our bookkeeping guide or let our bookkeeping service handle it. Our tax preparation team prepares Schedule E, depreciation and Virginia adjustments every season, and tax planning before a sale or 1031 exchange can save far more than fixing things afterward. Our office is in Fredericksburg, and we work with landlords throughout Virginia and out of state remotely. Nagham Alobaidi and our team can also walk you through it in Arabic.

Written by the Timeless Tax & Accounting teamTimeless Tax & Accounting was founded in 2020 by Nagham Alobaidi and serves clients across Virginia and in other states, in English and Arabic. Reviewed for accuracy against IRS and Virginia Tax guidance as of October 2, 2026.

This page is general information, not tax, legal or financial advice for your specific situation. Tax rules change often — talk with a professional before acting.