A Landlord’s Guide To Reporting Rental Income and Expenses on Schedule E

For most landlords, Schedule E is the single most important tax form they’ll file each April.

Schedule E is used to report rental property income and expenses to the IRS (Internal Revenue Service), helping individual landlords and other real estate investors accurately determine their tax liability and claim deductions. Correctly completing and filing Schedule E is essential to not only complying with IRS regulations and avoiding an audit but also for saving the maximum amount possible on your taxes.

In this article, we’ll cover everything you need to know about Schedule E as a landlord.

What is Schedule E?

Schedule E Supplemental Income and Loss reports income and expenses from rental properties. It is a supplemental part of Form 1040 U.S. Individual Income Tax Return, which all taxpayers must file.

To be more specific, the IRS Schedule E tax form is used to report passive income and loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs). Schedule E requires investors to list their income and expenses for each property they own, then total each category for all rental properties. Your taxable rental income is then calculated by subtracting all your deductible expenses listed from your reported income. It’s the taxpayer’s responsibility to ensure the expenses they list are accurate and all rules are followed regarding which expenses are deductible.

IRS Schedule E should be attached to the IRS Form 1040 and filed with your individual federal income tax return. The IRS compares Schedule E with Schedule K-1, which reports this information to partners, to ensure that important line items match.

Note: Schedule E is not for reporting income from leased personal property. Schedule C is used for this purpose.

Who Should File Schedule E?

In short, IRS Schedule E should be filed by anyone who earns income in one of the ways listed above (real estate, royalties, partnerships, S corporations, etc.). You should file Schedule E if you:

• Own a rental property in your own name, with your spouse, or through a single-member LLC (partnerships and S-corps that own rental property use Form 8825 instead). Properties that you own should be shown on the Schedule of Real Estate Owned (SREO) on your loan application (it might look like this), which lists all the properties you have either partial or full ownership of and your debt obligations to each.
• Aren’t a real estate professional. Real estate professionals like agents, brokers, etc. who spend at least half their time in real property trades make a specific tax election.
• Don’t provide substantial services to tenants beyond housing. If you do (e.g., if you provide meals, activities, cleaning, etc. to tenants), you may need to file Schedule C instead, as this would indicate self-employment.

Additionally, if you’re a partner or shareholder of an S-corp and have income reported on Schedule K-1, you must prepare Schedule E as well. Schedule K-1 is used to complete Schedule E.

What Information Do I Need to Complete the Schedule E Tax Form?

Below is a list of information you’ll need on hand for each rental property before you can complete Schedule E:

• Addresses (street, city, state, and ZIP code)
• Type of property (SFH, Multifamily, vacation/STR, Commercial, Land, Royalties, Self-rental, Other)
• The number of days rented at fair rental value
• The number of personal use days
• Rental income (rents and royalties received)
• Rental expenses, categorized as follows:
  • Advertising
  • Auto and travel
  • Cleaning and maintenance
  • Commissions
  • Insurance
  • Legal and other professional fees
  • Interest
  • Repairs
  • Taxes
  • Utilities
  • Wages and salaries
  • Depreciation
  • Other (list)
• 1099 forms for all your contractors (1099-NEC if you paid cash or check, 1099-K if for electronic payments issued by the payment processor)

When you earn rental income and pay expenses, the information can be obtained from your rental business bank account transaction history, exported by your property management software, supplied by a property manager, or via your personal records/receipts.

‘Rents’ include all payments received by tenants for the use and occupation of the property. This includes rent payments, rental application fees, late fees, other tenant fees, utilities you pay for, the fair market value of any property or services tenant provides, and any deposit amounts that you deducted to use for repairs/maintenance or past-due rent – (refunded security deposits do not count as income). For expenses, remember that you can only deduct expenses related to fair rental days, not ones solely related to personal use days.

For income or loss from partnerships/S Corporations, you will need:

• The name of each partnership/S-corp
• Employer identification numbers for each
• Your passive and nonpassive income and loss

For income or loss from estates and trusts, you will need:

• The name of each estate/trust
• Employer identification numbers for each
• Passive and nonpassive income and loss

For income or loss from REMICs, you will need:

• The name of the REMIC
• The employer identification number
• Information from Schedule Q

Components of Schedule E

You can download a copy of Schedule E here from the IRS. There are four main components of the form:

• Part I: Rental real estate and royalties
• Part II: Partnerships and S corporations
• Part III: Estates and trusts
• Part IV: REMICs

You only need to fill out the parts relevant to the type of income/loss you have. So, if you only own rental properties individually, for instance, you would only complete Part I. Since Part I is the most relevant for most landlords, we’ll focus on that part next.

How to Report Rental Income and Expenses with IRS Schedule E

Below is a step-by-step breakdown of how to report your rental business income and expenses on the Schedule E tax form as an independent landlord.

1. Gather records. Retrieve income and expenses from your books, bank statements, or export them from your rental property accounting software.
2. List all your rental property addresses in Boxes 1a, A-C.
3. Indicate the type of each property in Boxes 1b, A-C.
4. Calculate fair rental days and report for each property in Box 2. Fair rental days are days during which the property was rented at a fair rental price with the clear intention of generating income and without any significant personal use during the period.
5. Calculate personal use days and report for each property in Box 2. Personal use days are days during which you (the owner), your family/friends, or anyone else paying a discounted rent price (below fair market rent) use the property for personal use. These are days during which you gain personal benefit from using or renting the property. Note: According to the IRS, a property is considered a personal residence if you use it for personal reasons for more than the greater of either 14 days of the year or 10% of the total days it’s rented to others at fair rental price. If your property is a personal residence, you don’t need to report rental income or deduct expenses.
6. Indicate whether you are making a Qualified Joint Venture (QJV) election in Box 2.
7. Record gross rents and royalties in Boxes 3 and 4, respectively. Annual gross rent is the total amount of rent received from tenants throughout the tax year, sometimes including other payments tenants make regularly, like utilities paid alongside the rent.
8. Record expenses in Boxes 5-19. These should be categorized as indicated, summed up for the tax year, and divided by property.
9. Follow instructions to total your income (loss) and expenses in Boxes 16-18.
10. Sum your expenses in Box 20.
11. Follow instructions to calculate your gross income or loss in Boxes 21-26
12. If the remaining parts of Schedule E don’t apply to you, enter Box 26 amount on Schedule 1 (Form 1040), line 5. Otherwise, the amount should be included in the total on line 41 of Schedule E.
13. Check your work or give the form to a tax professional to review.
14. Attach Schedule E to your personal Form 1040 and submit before the filing deadline.

Important Limitations on Schedule E Losses

If you take a loss on rental property, you may be permitted to claim the rental real estate loss allowance, a federal tax deduction available for certain real estate investors. This allowance allows those who own and rent property to deduct up to $25,000 in real estate losses per year. However, there are a few stipulations.

Firstly, you can only claim this deduction if your adjusted gross income (AGI) is $100,000 or less. For those who earn between $100,000 and $150,000, the deduction is phased out; those with higher AGIs do not qualify for the deduction.

Secondly, the deduction is only available for non-real estate professionals (e.g., you can’t be a real estate agent, broker, etc.) who actively manage a rental property with at least a 10% interest in it.

Additionally, landlords are also responsible for complying with the “At-Risk” and Passive Activity/Loss Rules. The former refers to rules defined under Section 465 of the tax code, which restricts your deductible loss to the amount you are ‘at risk’ for. For instance, if you invest $100,000 and your share of losses totals $120,000 at the end of the year, you can only deduct your ‘at risk’ funds, $100,000. The passive activity/loss rules dictate that if your business activity is classified as passive, you can only deduct losses from your other passive income—not your active income.

For more information about these requirements, see “Publication 925 – Passive Activity and At-Risk Rules.”

Conclusion

Understanding IRS 1040 Schedule E is essential for landlords to accurately report rental income and expenses while maximizing tax benefits. By keeping thorough records and knowing which deductions apply, you can reduce your tax liability and ensure compliance with IRS regulations. With proper preparation, filing Schedule E can be a straightforward part of managing your rental property finances.

 

Disclaimer: Ledgre does not provide tax or legal advice. All information and materials available on this site are for general informational purposes only. Contact a tax professional for advice with respect to a specific tax matter.