There are two different ways to report rental income on your federal tax return. Each has a different impact on your taxable income and taxes owed, so it’s important to have a basic understanding of the two options. Below is a brief overview of Schedule C versus Schedule E rental income reporting for multi-family investment properties in Massachusetts.
Schedule C Rental Income
Schedule C is used for reporting business income. If your rental properties are owned under an LLC (for which you are the sole owner), you must use this form. You would also use this form if you operate rental properties as an active trade or business. For example, if you own several properties and have employees to help manage them, then you are clearly operating a business. You would use this form. Since it’s business income, self employment tax applies to amounts listed on Schedule C.
Schedule E Rental Income
Schedule E is designed for passive rental income. This form is most appropriate when your rental properties provide supplemental income. For instance, if you own a multi-family property where you live in one unit and rent out the other, you would use Schedule E. If you own multiple properties as passive income sources, you might also use this form. Earnings on this form still contribute to your taxable income, but no additional self-employment tax applies.
Other Important Differences Between Schedule C versus Schedule E Rental Income
In addition to tax liabilities, you should also consider limitations on losses reported on each schedule. The amount of passive losses allowed on Schedule E depend on your adjusted gross income (AGI). For the 2020 tax year, passive losses were limited to $25,000 if AGI below $100k. It then phases out for AGI’s up to $150,000. This can be important, especially if you have potentially high losses.
Before deciding on Schedule C versus Schedule E rental income reporting, consult with an accountant and/or tax professional. Assess the short-term versus long-term impact of each. Also take into account your future investment plans. Do you intend to purchase multiple properties? How might your deductions and tax scenarios vary as a result. Understanding the advantages and disadvantages will help you make better financial decisions.
FAQs
Key Differences Between Schedule C and Schedule E:
Should I report my rental on schedule E or schedule C? ›
Generally, your rental income is passive and should be reported onto a Schedule E (even as a real estate professional). However, if you provide substantial services in conjunction with the property or the rental, you can use Schedule C to report the income.
Is it better to file schedule C or E? ›
If you engage in vacation or short-term rentals, your classification depends on the level of service provided. Offering substantial services categorizes it as a business, reportable on Schedule C. Conversely, minimal participation with no substantial services means reporting on Schedule E.
Do you report Airbnb income on Schedule C or E? ›
Generally if you rent out your entire home on a short-term basis, you will file under Schedule C; while those who rent out just a part of their home or who also have long-term tenants will file under Schedule E.
What is the difference between Schedule C and Schedule E for short-term rentals? ›
So only put it on Schedule C if you are really providing substantial services during guests' stays. If the rental has a taxable profit, reporting the income on Schedule E is more advantageous, as it exempts you from self-employment taxes that you would have to pay if its income reported on a Schedule C.
Does Schedule E show rental income? ›
Key Takeaways. Schedule E is used to report rental income and losses, as well as income and losses from partnerships and S corporations.
How does the IRS know if I have rental income? ›
The Internal Revenue Service (IRS) employs a multifaceted approach to identify rental income, like utilizing audits, data matching, access to public and governmental records, advanced technology for pattern recognition, and information from property management companies.
Are Schedule C more likely to be audited? ›
Schedule C audits are common since this type of reporting is more likely to see mistakes. Compare W-2 income, which is reported by the employer and is consistent, versus self-employment income, which can be reduced by deductions that are harder to track and verify.
Who should not file a Schedule C? ›
Who files a Schedule C form? Schedule C is for two types of businesses: sole proprietors or single-member limited liability corporations (LLCs). Schedule C is not for C corporations or S corporations.
Can you deduct rent on Schedule C? ›
Rent expenses are deducted as business expenses on Schedule C, used to report a sole proprietorship's income or loss. The rent is deducted in its entirety as a business expense.
If you provide substantial services to tenants, such as operating a bed and breakfast, you likely need to file on Schedule C for Small Businesses.
Will IRS know about Airbnb income? ›
Form 1099-K reports gross payment transactions processed on your behalf by Airbnb. As a Third Party Settlement Organization (TPSO), Airbnb is required by the Internal Revenue Service (IRS) and state tax authorities to issue Form 1099-K to US citizen or US tax resident Hosts who meet 1099-K reporting thresholds.
Is Airbnb rental considered active or passive income? ›
Whether you are just starting your hosting journey or own several vacation rental properties, a common phrase you'll hear is passive income. Airbnb income becomes passive when the rental agreement is short-term. Passive income is where the money being earned isn't achieved through active participation.
When should I use Schedule C for rental property? ›
When Is Schedule C a Good Choice? If you show a tax loss on your rental property, Schedule C is a great choice because it allows you to deduct your rental losses against all other income (assuming you materially participate in the rental property, as discussed later).
Can schedule C income be passive? ›
Also, note that your interest in a business can be passive, but income reported on Schedule C is generally considered to be nonpassive by default (and subject to SE tax).
What qualifies as self rental on Schedule E? ›
If Self-Rental is the type of property selected, this indicates the property is rented to a trade or business in which you, the taxpayer, materially participated.
Can I deduct rent on my Schedule C? ›
Rent expenses are deducted as business expenses on Schedule C, used to report a sole proprietorship's income or loss. The rent is deducted in its entirety as a business expense.
Is Schedule E rental property qualified business income? ›
Rental income will be considered to be qualified business income if it meets the following criteria under the safe harbor rules contained in Revenue Procedure 2019-38. Under the safe harbor rule, a rental real estate activity falls under the definition of a rental real estate enterprise.
Can a schedule C be passive activity? ›
Also, note that your interest in a business can be passive, but income reported on Schedule C is generally considered to be nonpassive by default (and subject to SE tax).
