Whether you’re maintaining a single property or operating a rental agency, your Schedule E is an important part of ensuring that you’re reporting the profits and losses of your business properly. While specifics might vary depending on your situation, these tips apply to most landlords and real estate professionals.
As always, if you have a question about specific rules and requirements based upon your situation, consulting an accountant or real estate attorney is recommended.
What is a Schedule E?
Schedule E is a tax form used to assess any tax liability, income or losses for a year you might incur from rental properties. Similar to a Schedule C for business owners, the form breaks down common expenses—including advertising, Home Owner’s Association (HOA) fees, repairs and depreciation—as well as income received—such as interest on security deposits or rental income.
The standard Schedule E works for up to three properties. If you’re managing multiple properties, attach additional Schedule E forms to your return.
Who needs a Schedule E?
If you own a rental property you maintain as an individual, you will need to submit a Schedule E.
Other common scenarios use different forms as follows:
- Owning rental property as a business entity: Form 8825
- Owning rental property as a not-for-profit: Schedule A
- Owning a hotel or motel: Schedule C
- Owning rental properties as a real estate dealer: Schedule C
How do you complete your Schedule E?
Accurately tracking income and expenses throughout the year will make filling out this form simple. As mentioned above, you will need a separate form for every three items you maintain in a given year.
The Schedule E asks for information on the rental property in eight different sections as follows:
- Property Description (Line 1): A description of each item—including the its type and street address. If you are a partial owner, include the percentage you own.
- Vacation Home Determination (Line 2): Choose yes or no if you used the it for more than the number of days or percentage listed in the description. This number differs from year to year. Be sure to check each year to make sure you are filling out your Schedule E properly.
- Rental Income (Line 3): Include all income from your rental property. This includes additional sources of income such as parking fees, interest on security deposits, late fees and profits from on-site laundry facilities.
- Expenses (Lines 5 through 19): This section is where you’ll itemize any expenses from throughout the year. This section offers the most potential for tax benefits on your return. Common expenses include cleaning and maintenance, advertising, insurance, management fees, repairs and taxes.
- Depreciation (Line 20): Include any depreciation here.
- Total Income or Loss (Lines 21 and 22): Here you’ll subtract the sum of your profits from your total income for each item to determine your profit or loss for the year. Losses are noted in parentheses.
- Deductible Loss (Line 23): In most cases, you can claim up to $25,000. For losses greater than $25,000, consulting Form 8582 will help calculate your exact deduction.
- Total Income or Loss (Lines 24 through 26): This section aggregates all of your properties to provide a final total for the year. The final total from your business is then entered into your Form 1040.
What happens if I incur a loss for the year?
Rental losses are only netted against the losses and profits of other rental properties you maintain due to their passive income designation. Even with an active designation, allowed deductions for rental losses will vary based upon your modified adjusted gross income (MAGI).
Losses on rental property are often limited by passive income rules and carried forward to the next tax year where profits are used to offset earlier losses. For more information on the proper methods for claiming rental losses on your Schedule E, the Internal Revenue Service (IRS) offers Publication 925: Passive Activity and At-Risk Rules and Chapter 3 of Publication 527: Residential Rental Property