you SHOULD report the rental income and expenses including depreciation and mortgage interest on schedule E. whether you'll have to pay taxes will depend on your taxable income for the year. even if you are not taxed and technically are not required to file if the property is producing a loss you should still file for several reasons. the loss (net operating loss) , if any, may be carried back to the second prior year, then the prior year if any remaining to get back some of the taxes paid those years, if any. you could also elect to carry forward the nol to offset future income. also should you dispose of the property at a gain and you have nol's in prior years, those nol's could be use to reduce or eliminate any taxes you might be owing if sold at a gain . also remember that tax laws frequently change