Understanding Schedule E Forms For Real Estate Investors
You should get familiar with the Internal Revenue Service (IRS) Schedule E form if you earn supplemental income from real estate investments, such as rental properties. Also known as the Supplemental Income and Loss form, the Schedule E tax form can impact your tax return.
Let’s take a closer look at the Schedule E form, how taxpayers use it to report supplemental passive income and what you need to know about claiming rental income for tax purposes.
What Is A Schedule E Form?
A Schedule E form is filed with a 1040 tax form to report any income or losses from rental real estate, royalties, partnerships and S corporations and estates or trusts. It’s typically used to report rental activities for residential and commercial properties.
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What Rental Income Do I Include On A Schedule E Tax Form?
You must report rental property income to the IRS using a Schedule E tax form if you:
- Rent out a room in your house using online short-term rental services
- Rent out a second home or vacation home for part of the year
- Own one or more rental properties with long-term tenants
Schedule E helps the IRS track how much you’ve earned in rental income from each of your properties – and can help you estimate your potential tax bill based on what you earned.
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What Rental Losses Do I Include On Schedule E?
Your rental income is only part of the investment picture. A Schedule E form also allows you to report certain losses from rental property. You can potentially lower your tax bill by deducting eligible losses and expenses.
When filling out Schedule E, you may be able to include the following deductible expenses:
- Property taxes: You can deduct the amount paid in city, state, county or local property taxes on a Schedule E. The total amount you can deduct may be limited depending on the type of rental property.
- Depreciation: This represents the gradual decrease in a property’s value due to wear and tear over time. You may also need to fill out IRS Form 4562.
- Basic services: If you provide tenants with services defined by IRS guidelines as basic, such as heating, lighting, trash removal or water, you can report your expenses.
- Repair costs: You can deduct the money you spent maintaining your property – but can’t deduct the cost of improvements. For example, you can deduct the cost of replacing a broken washing machine, but you can’t deduct your expenses to add a laundry room.
- Operating expenses: You can deduct expenses related to the operation of a rental property, including property management company fees or fees from independent contractors, such as landscapers, bookkeepers or attorneys.
Limits On Losses With A Schedule E
Because rental income is classified as passive income, you can’t claim all losses, even if they’re higher than your gains. For example, if you earned $20,000 from your investment property and reported a loss of $30,000, you wouldn’t owe anything. But you wouldn’t receive a business loss deduction for the additional $10,000 in losses.
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Is Schedule E Subject To Self-Employment Taxes?
Generally, no, schedule E is not subject to self-employment taxation because the IRS classifies rental real estate income as passive income for tax purposes. While no one doubts that owning a rental can be a lot of work, this can be to your benefit, since you don’t have to worry about paying additional income taxes.
However, a real estate investor may owe self-employment taxes for certain services. In this scenario, you must list those services on a different tax form.
Schedule E Vs. Schedule C
Taxpayers use Schedule E to report supplemental income and losses.
If you provide what the IRS classifies as substantial services – such as cleaning, food delivery or other perks a landlord doesn’t traditionally offer – you must report your rental income and expenses on Schedule C of your 1040 tax form.
Schedule E Vs. Form 1065
If your business is a partnership, you must report losses and expenses on Form 1065 instead. If you provide substantial services for your tenants, like routine meals or cleaning services, you’ll also be subject to self-employment tax and will need to report it on your 1065.
Who Should Use A Schedule E Tax Form?
Schedule E is a commonly used tax form that applies to investors with various types of real estate holdings. Here’s how the different tax forms break down for individual investors versus businesses like an S corporation:
Real Estate Investors
Whether you own an apartment complex or rent a room through Airbnb, professional and armchair real estate investors must file a Schedule E tax form. The Schedule E form gets submitted with your Form 1040 – the standard tax form individual taxpayers use to file their taxes each year.
Individual taxpayers file a Schedule E to report supplemental income from rental real estate, partnerships, S corporations and other activities.
Partners And Shareholders Of S Corporations
Things operate a little differently for S corporation partners and shareholders. These businesses file a Form 8825 instead. If you’re a shareholder or own the business, you must also file a copy of the company’s Schedule K-1 with the IRS.
How Do You File A Schedule E?
You can file online or complete paper forms and mail them to the IRS. Complete only the sections that apply to you and attach your Schedule E to your Form 1040. Be sure to submit your return by the assigned deadline.
FAQ
There are many frequently asked questions about the Schedule E tax form. We take a closer look at several below, but if there are more topics you need clarity on, speak with a qualified tax professional.
You must submit information about the type of real estate you’re renting. This information determines whether the property qualifies for special IRS taxation deductions, such as deductions relating to certain land types or types of self-rental.
Typically, you do need to file a Schedule E form for vacation rentals. However, for select property types, such as second and vacation homes, you may be able to prorate based on how much of the year you use the property versus renting it out.
On the Schedule E form, you’ll find enough room to report income and expenses for up to three rental properties. Attach additional Schedule E forms if you need to report more than three rental properties. You can include as many as four partnerships or S corporations on a Schedule E form.
The Bottom Line
Schedule E is the official tax form the IRS requires taxpayers to use to report supplemental income or losses from a wide range of sources, including real estate investments. If you’re a homeowner and need funds to build your real estate empire, you can consider tapping into your home equity through a cash-out refinance or home equity loan.
