IRS Schedule E, Supplemental Income and Loss, is for reporting income or losses from real estate rentals, royalties, partnerships, S corporations, estates, trusts and interests in real estate mortgage investment conduits. A real estate mortgage investment conduit is a security made up of mortgage loans that issue mortgage-backed securities. Real estate mortgage investment conduits are exempt from federal taxes but investors are not. The IRS will accept your own schedule in lieu of a Schedule E form as long as it follows tax Schedule E’s format.
Schedule E is used to report passive income to the IRS.
Probably the most common reason for including a Schedule E with your tax return is that you own property that you rent out. You might also use a Schedule E to report income from renting a room in your house. This money is income and is therefore taxable. You only have to fill out the sections on the form that pertain to the type of income you earned or the type of loss you incurred. Whether you use the IRS’s Schedule E form or your own, be sure to enclose loss figures in parentheses. Then attach tax Schedule E or your schedule to Form 1040 and send them in. Complete Schedule E instructions can be found on the IRS’s website.
IRS Schedule E Filing Exceptions
Owning rental property on the side and renting it out is not usually considered self-employment by the IRS. But if you provide services to your tenants or manage several rental properties as your main business, the IRS might consider it self-employment. In this case, you would need to file a Schedule C instead of Schedule E.
There are limits to the amount of losses you can report on tax Schedule E. Deductible losses are limited to the amount of money you are at risk for. For example, if you invested $60,000 in an S corporation or a partnership and it lost $75,000 during the tax year, you cannot take a $75,000 deduction. The maximum you could deduct is the $60,000 you invested and lost.
Deductible losses may be further limited by the IRS’s Passive Activity and At-Risk Rules. These rules are meant to keep investors from deducting losses from business pursuits that they didn’t actively participate in. If you’re unsure about whether you should use tax Schedule E or C, or whether passive activity rules apply to you, check with a licensed tax professional.
Rental Property Deductions for 2018
The Tax Cuts and Jobs Act, which goes into effect for the 2018 tax year, has some great news for landlords who own and rent residential property. It’s a new and substantial tax deduction. If your rental activity qualifies as a business – and most do – you may be able to deduct an amount equal to 20 percent of the income you get from your rental. This is in addition to all of the usual rental property deductions you might be able to take for upkeep of your rental property. If you’re entitled to the new deduction, you can take it whether or not you itemize.
The new Form 1040 is still in draft phase but it looks like you’ll be entering the new deduction on line nine. It’s a complicated deduction but worth bringing up to your professional tax preparer. If you qualify for it, you might just be taxed on 80 percent of your rental property income.
Rental Property Deductions for 2017
The new 20-percent deduction for landlords only applies to tax years 2018 to 2025. For tax years 2017 and earlier, you can deduct expenses for property maintenance and management. For example, the cost of materials and services provided by plumbers, gardeners, painters, carpenters and electricians.
Landlords can also deduct the cost of travel that’s necessary to the business of renting their properties. Half of meal expenses that you incur while doing business with potential clients and business associates are also deductible. All of this is entered on 2017’s tax Schedule E and the final figure is entered on line 17 of 2017’s Form 1040.
- Intuit Turbo Tax: Schedule E vs. C
- Intuit TurboTax: Rental Property Deductions You Can Take at Tax Time
- Investopedia: Passive Activity Loss Rules
- IRS.gov: (2017) SCHEDULE E (Form 1040)
- IRS.gov: Publication 925; Passive Activity and At-Risk Rules
- IRS.gov: Schedule E Instructions
- IRS.gov: Topic Number 414 - Rental Income and Expenses
- NOLO: How the Tax Cuts and Jobs Act Affects Landlords
- NOLO: The 20% Pass-Through Tax Deduction for Business Owners
- What Is a Schedule E IRS Form?
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