Schedule E is a supplemental part of Form 1040, the US Individual Income Tax Return.Most real estate investors report the net income or loss from their rental properties using this form. Generally speaking, you will use the Schedule E if:
- You own rental property in your own name, with your spouse, or through a single member LLC
- Rental real estate activity owned through partnerships or S corporations use IRS form 8825
- You are not a real estate professional
- Real estate professionals work half their time or more in real property trades and make a specific tax election.
- You do not provide additional, out of the ordinary services to your tenants
- 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.
As always, contact a tax professional for advice about your particular filing requirements and status.
Get the most recent version and learn more here from the IRS.
1099s
The first section of the Schedule E is about 1099s. Generally, businesses must file Form 1099-MISC if they’ve made more than $600 in payments to one or more independent contractors. However, self-managing landlords and passive real estate investors are typically exempt from this requirement for work related to their own rental properties. If you are not exempt and do have to file 1099’s the IRS deadline for these forms is January 31st.
Fair Rental Days
After entering your property’s address and type, you will enter the Fair Rental Days and Personal Use Days. The IRS uses these values to determine whether or not the property was used as a home, and subsequently whether or not your expenses are tax deductible. Generally, the property is considered a home if your personal use is in excess of 14 days, or 10% of the total days rented to others at fair price. Even if the property is not considered a home, note that expenses related to Personal Use Days can not be deducted.
Fair Rental Days refers to the number of days that the unit was actually rented out- rather than the total time it was available to be rented.
Qualified Joint Venture
This box, abbreviated as QJV, is used by spouses who each materially participate in and collectively own a real estate business. Simply owning rental properties together with your spouse does not qualify for this election.
Where to find your Income and Expenses
As an owner, you are responsible for tracking the income and expenses derived from your rental activities. Your CPA or tax preparation software will then use your records to file a Schedule E as part of your return.
Income and expense information to complete the Schedule E will come from several places.
- The statements from your business bank account (read why you need a business bank account) will contain a transaction history of money that you’ve received or expenses that you’ve incurred.
- Property managers or property management software should track monthly operating income and expenses.
- In January, banks will send a 1098-B statement summarizing the deductible interest paid on mortgages during the prior year.
- Your records, which should contain your receipts as well as information on any other deductible business expenses that you’ve paid for out of pocket.
Owners must total up these sources and any other revenues and expenses related to their properties. To stay organized and maximize their tax deductions, investors should use accounting software or a spreadsheet to help them maintain financial records year-round.
Income and Expense Categories
The Schedule E includes income and expenses categories common to owning rental properties. On the income side, all revenues are classified as ‘Rent Received’. This includes all money received as part of your rental business activities including rent payments, application fees, tenant fees, pass through utility payments, and security deposits withheld.
The expense side is broken out into more detail. The expense categories available on the Schedule E are listed below. For a more complete breakdown of what goes in each category, click here.
- Advertising
- Auto and travel
- Cleaning and maintenance
- Commissions
- Insurance
- Legal and other professional fees
- Management fees (rental agencies and property management companies)
- Mortgage interest paid to banks
- Other interest
- Repairs
- Suppliers
- Taxes
- Utilities
- Depreciation expense or depletion
- Other
As these expenses are deductible against your rents received, you want to make sure you have included every applicable item. Otherwise, you will pay taxes on more net income than you actually received.
The rest of the Schedule E form
The Schedule E is used to report other kinds of supplemental income in addition to rental property. Part I of the form deals with rental real estate (which this article focuses on) and royalties, while Parts II-IV report different sources of passive income and loss. Part V summarizes the preceding sections.
