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You received rental income this year and tax season is approaching. Your CPA mentioned Schedule E, but you're unsure how to fill it out. One mistake could trigger an audit or cost you thousands in missed deductions.
Schedule E (Supplemental Income and Loss) attaches to Form 1040 and reports income from rental properties, royalties, partnerships, S corporations, estates, trusts, and REMICs. Most rental property owners use Part I to report rental income and deductible expenses, calculating net income or loss that flows to your 1040.
This guide explains what Schedule E is, who files it, how to complete it, and common mistakes to avoid.
IRS Schedule E (Form 1040) reports supplemental income and loss from sources other than wages or business operations. The form has five parts: rental real estate (Part I), royalties (Part I), partnerships/S corporations (Part II), estates/trusts (Part III), and REMICs (Part IV).
Part I lets you report up to three rental properties, listing income and deducting expenses like mortgage interest, property taxes, insurance, repairs, and depreciation. Own more than three properties? File additional Schedule E forms.
Rental income is generally passive—losses can only offset other passive income unless you qualify as a real estate professional. Understanding passive activity loss rules helps maximize deductions.
Schedule E differs from Schedule C. Use Schedule C for active businesses with substantial services (property management, vacation rentals with daily cleaning). Use Schedule E for passive rentals where you collect rent. Schedule C income pays 15.3% self-employment tax; Schedule E rental income doesn't.
File Schedule E if you received income from rental properties, royalties, partnerships, S corporations, estates, trusts, or REMICs.
Rental property owners file when renting residential or commercial property. Includes single-family homes, apartments, condos, vacation rentals (if rented 14+ days). File even if your property had a loss.
Partnership/S corporation owners receive Schedule K-1 showing their share of income/loss. Transfer K-1 info to Schedule E Part II.
Royalty recipients report royalties from oil, gas, minerals, patents, copyrights, or intellectual property.
Estate/trust beneficiaries report their share of income from distributions or ownership interests.
Don't file Schedule E if you rented property fewer than 15 days (personal use exception) or provide substantial services making it an active business (use Schedule C). Understanding when to use different tax forms prevents errors.
Schedule E Part I lets you deduct ordinary and necessary rental expenses:
Mortgage interest - Interest on rental property loans (Form 1098 from lender). Often the largest deduction.
Property taxes - Real estate taxes paid during the tax year.
Insurance - Property, liability, landlord, flood, earthquake insurance premiums.
Repairs - Painting, plumbing fixes, appliance replacements, pest control. Deduct fully in year paid.
Utilities - Water, sewer, electricity, gas, trash, internet (if you pay, not tenants).
Management fees - Payments to property managers (typically 8-12% of rent).
Advertising - Listing fees, signs, online ads for finding tenants.
Legal/professional fees - Attorney fees, CPA fees for rental tax prep.
Depreciation - Residential properties over 27.5 years, commercial over 39 years. A $275,000 home generates $10,000 annual depreciation.
Travel - Mileage (67¢/mile for 2024) or actual expenses driving to properties.
Home office - Portion of home expenses if you have dedicated rental management space.
Cannot deduct: capital improvements (new roof, additions), personal expenses, personal use portions. Keep receipts, invoices, statements, mileage logs for all expenses. Our guide to avoiding accounting mistakes covers essential recordkeeping.
Property Info (Lines A-C) - List address, type (single/multi-family, vacation, commercial, land), fair rental and personal use days.
Income (Line 3) - Report total rents: monthly rent, late fees, pet fees, parking. Don't reduce by expenses.
Expenses (Lines 5-19) - Enter totals by category: advertising, auto/travel, insurance, legal/professional, management, mortgage interest, repairs, taxes, utilities, depreciation, other.
Net Income/Loss (Lines 20-22) - Subtract expenses from income. Income exceeds expenses = rental income. Expenses exceed income = rental loss (passive activity rules may limit deduction).
Total Summary (Lines 23-26) - Add all properties' income/losses. Total flows to Form 1040 Schedule 1 Line 5.
Vacation Home Rules - If personal use exceeded 14 days or 10% of rental days, allocate expenses between personal and rental use. Deductions cannot exceed rental income.
Many owners benefit from professional tax preparation because Schedule E interacts with passive activity rules, at-risk limitations, and depreciation recapture.
Confusing repairs with improvements - Repairs (fixing broken items) deduct immediately. Improvements (adding value/extending life) depreciate. Replacing a broken water heater = repair. Installing new HVAC = improvement.
Missing depreciation - Owners often forget depreciation, leaving thousands unclaimed. IRS assumes you claimed it regardless, so always take the deduction.
Improper vacation home allocation - IRS has strict formulas for personal vs. rental expense allocation. Wrong calculations trigger audits.
Not reporting all income - Report all rent: cash, late fees, kept security deposits. IRS receives 1099s from Airbnb/VRBO.
Deducting personal use - Cannot deduct expenses for personal use days. Family staying free = personal use.
Filing Schedule C instead - Rentals are passive, belong on Schedule E. Schedule C subjects you to 15.3% self-employment tax.
If expenses exceed income, you have a net loss. Deduction ability depends on several factors:
$25,000 Special Allowance - Actively participate (make management decisions) + MAGI $100,000 or less = deduct up to $25,000 against other income. Phases out $100,000-$150,000.
Real Estate Professional - Qualify (750+ hours in real estate, more than half working hours) = losses become non-passive, offset any income without limitation.
Suspended Losses - Don't qualify? Losses suspend and carry forward. Use when you generate passive income or sell the property.
Yes. Filing establishes the loss for IRS records, lets you carry forward suspended losses, and might reduce taxes when you sell the property.
If you actively participate and earn under $100,000 MAGI, deduct up to $25,000 against wages. Above $100,000, the allowance phases out. Otherwise, losses suspend until you have passive income or sell.
Schedule E = passive rentals (collect rent, no substantial services). Schedule C = active business (property management, vacation rentals with daily services). Schedule C pays 15.3% self-employment tax; Schedule E doesn't.
Use Schedule E if rented 14+ days and personal use doesn't exceed 14 days or 10% of rental days. Short-term rentals averaging under 7-day stays with substantial services might qualify for Schedule C.
No. Schedule E Part I fits three properties. Use additional forms for more properties. All totals flow to one line on Form 1040.
IRS will notice unreported income from 1099s, property records, or mortgage interest deductions. You'll get a notice proposing tax, penalties, and interest. File an amended return immediately.
Yes, deduct up to $5,000 startup costs (advertising, legal, inspections) in year one. Phases out once costs exceed $50,000. Remaining costs amortize over 180 months.
You pay tax on depreciation at 25% (up to gain amount). IRS assumes you claimed depreciation even if you didn't, so always claim annual depreciation.
Schedule E is essential for reporting rental income and maximizing deductions. Understand what to report, which expenses qualify, and how passive activity rules affect loss deductions. Most owners save $3,000-$10,000 annually through proper Schedule E prep.
Maintain records throughout the year: receipts, mileage logs, repair docs, expense categorization. Madras Accountancy specializes in rental property tax prep and helps investors optimize Schedule E filings. Contact us for maximum tax benefits in 2025.
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