Rental Property Taxes in Kentucky (2026 Guide)

1. Property Tax (Low, but Local Rates Add Up)

Kentucky pairs a very low state real-property rate with local rates set by counties, cities, school districts, and special taxing districts (KRS Chapter 132). The state rate is a small fraction of a percent, so almost all of a rental's bill comes from those overlapping local levies. The typical statewide effective rate runs around 0.8% of market value — well below the national average — though the exact figure depends heavily on which county and school district the property sits in.

2. Income Tax (Flat 3.5% for 2026)

Kentucky taxes income at a single flat rate, reduced to 3.50% for 2026 under the KRS 141.020(2)(d) rate-reduction schedule (down from 4.0% in 2025). There are no brackets — every dollar of net rental income flows through your federal return to your KY return and is taxed at 3.5%.

Because the rate is flat, KY income planning is mostly about getting the federal number right first: depreciation, repairs-vs-improvements, and the correct Schedule E classifications all feed directly into the 3.5% calculation.

3. Capital Gains (Taxed as Ordinary Income)

Kentucky has no preferential capital-gains rate. A gain on the sale of a rental — including depreciation recapture and long-term gain — is taxed as ordinary income at the same flat 3.5% for 2026. There is no holding-period discount and no separate capital-gains schedule, so a $100,000 taxable gain adds about $3,500 of Kentucky tax regardless of how long you held the property.

4. Bonus Depreciation Add-Back

Kentucky decouples from federal bonus depreciation (§168(k)). The state fixes its conformity to the Internal Revenue Code's depreciation rules as in effect on December 31, 2001 (KRS 141.010), which is before bonus depreciation existed in its modern form. You claim the federal bonus deduction, then add it back on your Kentucky return and depreciate the asset on the regular MACRS schedule instead.

In practice that means keeping a separate Kentucky depreciation basis. The two schedules diverge in the year of purchase (federal takes more, KY takes less) and reconcile over the life of the asset — KY gives back the deductions in later years that the federal bonus front-loaded.

5. Real Estate Transfer Tax

Kentucky's transfer tax is the real-estate transfer (conveyance) tax: $0.50 per $500 of value (0.10%), collected by the county clerk when the deed is recorded (KRS 142.050). It is imposed on the grantor (seller) and computed on the consideration paid. At 0.10% it is one of the lowest conveyance taxes in the country — roughly $200 on a $200,000 sale.

6. LLC Costs: the LLET Trap

This is the Kentucky fact most landlords miss. Holding rentals in an LLC carries two recurring state costs:

• LLET (Limited Liability Entity Tax) — every LLC computes the tax both ways and pays the lesser of $0.095 per $100 of Kentucky gross receipts or $0.75 per $100 of Kentucky gross profits, but never less than a $175 minimum (KRS 141.0401). For a small rental LLC under the receipts thresholds, that means a flat $175 every year — a real annual cost, not a one-time fee.
• Annual report — $15 filed with the Kentucky Secretary of State each year by June 30. Miss it and the LLC can be administratively dissolved.

7. Rent Control

Kentucky prohibits local rent control statewide (KRS 65.875) — no city or county may enact an ordinance controlling the amount of rent charged for private residential or commercial property. You set rents at market.

8. Security Deposit Rules

Kentucky's deposit rules (KRS 383.580, part of the Uniform Residential Landlord and Tenant Act adopted by some KY jurisdictions) are strict on handling even though there is no dollar cap:

• No statutory cap on the deposit amount.
• Separate account required — you must hold the deposit in an account used only for that purpose, and disclose the bank and account number to the tenant.
• Itemization required — before applying any of the deposit to damages or unpaid rent, you must give the tenant a written, itemized list of the charges.
• Return on demand — if you fail to follow the separate-account and itemization steps, you can lose the right to keep any of the deposit.

9. How SheltrIQ Helps Kentucky Landlords

Kentucky is simple on rates but easy to get wrong on the LLET and depreciation — SheltrIQ keeps both straight:

• Flat-3.5% income modeling — applies the 2026 KRS 141.020 rate to your net rental income and to any disposition gain (which Kentucky taxes as ordinary income).
• LLET awareness — flags the $175 minimum entity tax so a multi-LLC structure's real annual cost is visible before you split properties.
• Bonus-depreciation tracking — flags the Kentucky §168(k) add-back and keeps a separate KY depreciation basis that reconciles against your federal schedule.
• AI Schedule E classification — sorts each expense to the right line so your flat-rate Kentucky tax starts from an accurate federal return.