Rental Income and Taxes for San Antonio Landlords: Schedule E, Depreciation, and What to Track from Day One

The day your San Antonio rental produces its first dollar of rent, you have started a small business in the eyes of the IRS. You will file a Schedule E with your 1040, you will depreciate the building over 27.5 years, and you will lose your homestead exemption on that property with BCAD. Almost every landlord mistake in year one traces back to not setting up the books before the tenant moves in.

This is the framework. It is not tax advice — sit down with a Texas CPA who does rental returns before you file, especially if you own the property in an LLC, if your income is above the passive-loss phase-out, or if you did a cost-segregation study. But you need to understand the shape of what you are doing so you can track the right numbers from month one.

What Schedule E actually is

Schedule E (Supplemental Income and Loss) is the IRS form where rental real estate income lands for most individual landlords. One property gets one column. You can list up to three properties per Schedule E; more than that, you attach additional pages.

The top half is income — essentially gross rents received during the calendar year. The bottom half is expenses, broken into named categories:

• Advertising
• Auto and travel
• Cleaning and maintenance
• Commissions
• Insurance
• Legal and professional fees
• Management fees
• Mortgage interest paid to banks
• Other interest
• Repairs
• Supplies
• Taxes
• Utilities
• Depreciation
• Other (itemized)

Gross rents minus these expenses equals your net rental income or loss for that property. That number flows to your 1040. If it is a loss, whether you can deduct it against your W-2 income depends on the passive activity rules — more on that below.

Depreciation is the deduction landlords forget to take

Residential rental buildings depreciate over 27.5 years under the Modified Accelerated Cost Recovery System (MACRS). Land does not depreciate. So the first thing you need is a defensible split between land value and improvement value on your Bexar County property.

The cleanest source is your BCAD notice. Pull the property up on the Bexar Appraisal District's public search and note the appraised value broken into land and improvement. Use that ratio against your actual cost basis (what you paid, plus closing costs that were capitalized, plus capital improvements before placing in service). If BCAD shows land at 20% and improvements at 80%, and you paid $320,000 plus $8,000 in capitalized closing costs, your depreciable basis is roughly $262,400. Divide by 27.5 and your annual depreciation deduction is around $9,540.

A few things trip people up:

• Placed in service date. Depreciation starts when the property is available for rent — listed, keys ready — not when a tenant signs. If you listed October 1, you get roughly three months of depreciation for that year, prorated using the mid-month convention.
• Appliances and carpet depreciate faster. Five-year property (appliances) and five- or seven-year property (carpet, some furnishings) can be broken out separately. A cost segregation study formalizes this and can accelerate deductions meaningfully on a higher-value property.
• You cannot skip depreciation to save it for later. The IRS treats depreciation as "allowed or allowable" — when you eventually sell, you will pay depreciation recapture tax on what you could have deducted, whether you took it or not. Take it every year.

Repairs versus improvements

A repair is deducted this year. An improvement is capitalized and depreciated over years. Getting this line wrong is the most common Schedule E error.

• Repair (current-year deduction): patching drywall after a tenant, replacing a broken window pane, fixing a leaking P-trap, repainting between tenants, servicing the HVAC.
• Improvement (capitalize and depreciate): new roof, HVAC replacement, kitchen remodel, adding a fence, replacing all the windows, foundation work.

The IRS uses the BAR test — Betterment, Adaptation, Restoration. If the work meaningfully improves the property, adapts it to a new use, or restores it to like-new after deterioration, it is capitalized. A $180 plumber call to fix a valve is a repair. A $14,000 tankless water heater plus repiping is an improvement.

There are safe harbors — the de minimis safe harbor lets you expense items under $2,500 per invoice line if you have a written policy in place before the tax year — but assume anything above that threshold on a single system gets capitalized unless your CPA tells you otherwise.

Passive activity loss rules

Rental real estate is passive by default. If your Schedule E shows a loss, you generally cannot use it to offset W-2 wages or business income. Losses are suspended and carry forward until you either produce passive income or sell the property.

There is one important exception for most landlords: the $25,000 active participation allowance. If you actively participate in the rental (make management decisions, approve tenants, set rent — even with a property manager doing the day-to-day), you can deduct up to $25,000 of rental losses against ordinary income. That allowance phases out between $100,000 and $150,000 of modified adjusted gross income, and disappears entirely above $150,000.

Real estate professional status (750+ hours per year, more than half your working time in real estate) removes the passive limit entirely, but the bar is high and audited hard. Do not claim it because you spent a few weekends painting.

Bexar County property taxes and the homestead problem

Property taxes paid to Bexar County, the City of San Antonio, your ISD, and other taxing units are deductible on Schedule E — not on Schedule A — for a rental. That is a plus.

The minus: renting out your former primary residence means you lose the Texas Property Code § 11.13 homestead exemption on that property. You are required to notify BCAD when the property no longer qualifies. Losing homestead means losing the 10% annual appraisal cap on assessed value, which on a San Antonio home that has been held for years can add up fast. Budget for a larger tax bill in the first non-homestead year, and protest the appraisal every spring under § 41.41 if BCAD's number outruns the market.

What most people get wrong

• Commingling funds. Rent goes into your personal checking account, expenses come out of a credit card you also use for groceries. Six months in, you cannot reconstruct what belongs to the rental. Open a dedicated checking account and a dedicated credit card the day you decide to rent the property out.
• No mileage log. Trips to the property, to Home Depot on Bandera Road for a replacement doorknob, to the SAWS office to set up service — all deductible at the standard mileage rate. Without a contemporaneous log (date, purpose, miles), the IRS will disallow it. A phone app that timestamps trips is enough.
• Missing 1099-NEC filings. If you pay an unincorporated contractor — a handyman, a landscaper, a solo plumber — $600 or more in a calendar year, you owe them a 1099-NEC by January 31. Collect a W-9 before you cut the first check. Property managers who handle payments on your behalf usually handle this; self-managing landlords usually forget.
• Treating the security deposit as income. A deposit is not rent. It is not taxable when received. It only becomes income in the year you keep it — either as a legal deduction under Texas Property Code § 92.104 at move-out, or as forfeited when the tenant breaks the lease. Book it as a liability, not revenue.
• Deducting your own labor. You cannot pay yourself and deduct it. Your time is not a Schedule E expense. Materials you buy to do the work yourself are deductible; sweat equity is not.
• Ignoring the QBI deduction. Rental activity that rises to a "trade or business" may qualify for the 20% qualified business income deduction under § 199A. There is a safe harbor for landlords who log 250+ hours of rental services annually and keep separate books. Ask your CPA whether you qualify.

Set up the file before the tenant signs

Before you hand over keys, get these done:

• Dedicated bank account and credit card for the rental
• A folder (physical or cloud) with the closing statement, the deed, the BCAD land/improvement split, and photos of the property condition on the placed-in-service date
• A written de minimis expense policy dated before January 1 of the tax year
• A bookkeeping tool — even a spreadsheet with the Schedule E categories as columns is fine for one property; QuickBooks or Stessa scales better for three or more
• W-9s on file from every contractor you plan to use
• Calendar reminders for January 31 (1099s), April 15 (federal filing), April 30 (BCAD homestead deadlines and protest windows), and your insurance and lease renewal dates

If you are still deciding whether to rent the property yourself or hand it to a manager, browse local landlord resources at /resources, or list your rental free at /list-your-home when you are ready to find a tenant. The tax setup is the same either way — the paperwork just gets easier when you decide early and stay disciplined about it.