Schedule E tax forms: Reporting your rental income

Are you a real estate investor? Do you receive rental income? If you answered “yes” to either question, you likely need to fill out the IRS Schedule E: Supplemental Income and Loss tax form. Whether you own several rental properties or rent a room on Airbnb, you must report your rental income to the IRS.

If you’re wondering how to fill out Schedule E (Form 1040) or where to find instructions, you’ve come to the right place. We’ll take a closer look at the Schedule E tax form and its role in determining your taxable income.

What is Schedule E?

Schedule E is the official IRS tax form to report supplemental income, including real estate investments. You use Schedule E (Form 1040) to report income or losses from:

• Rental real estate
• Royalties
• Partnerships
• S corporations
• Estates
• Trusts
• Residual interests in real estate mortgage investment conduits (REMICs)

Individual taxpayers who generate supplemental income from renting real estate – no matter the property type – must attach a Schedule E tax form to their IRS Form 1040. From full-time real estate investors to house hackers, you must use Schedule E to report supplemental income from rental property and real estate investments on your tax return.

The Schedule E tax form is primarily used by individual taxpayers. Partnerships and S corporations file Form 8825 instead, but we’ll clarify that distinction later.

Schedule E vs. self-employment tax

Despite all the work it takes to be a landlord and manage a property, the IRS classifies rental income as passive income. Because of this tax classification, real estate investors don’t pay self-employment tax.

Passive business activities are activities owners don’t actively engage in on a regular, substantial and continuing basis. The IRS treats business activities that require active participation differently from passive business activities. The IRS limits losses from passive activities to the number of gains, while losses from active business activities aren’t limited.

Regardless of whether or not (and to what extent) you actively participate in the operation of your rental investments, the IRS categorizes rental real estate activities as passive for tax purposes. Because the income is passive, investors can only claim losses up to their gains. Active participants can claim all their losses.

Schedule E vs. Schedule C

Schedule E is used to report rental income earned over a given tax year. However, you may need to report business income with Schedule C if you provide certain services to your tenants.

For example, if you rent properties or buildings and provide basic services (heat, light, water, trash removal, etc.), you’ll report rental income and expenses on Part I and Part II of Schedule E.

If you provide services the IRS designates as “substantial” (house cleaning, food delivery and other services beyond basic ones), you’ll report your rental income and total expenses on Schedule C of Form 1040. If your business is a partnership, you’ll file Form 1065.

You’ll also be subject to self-employment tax if you provide substantial services to your tenants – like regular linen services or entertainment – and must submit a Schedule C tax form.

Who should file a Schedule E tax form?

You’re required to file Schedule E as long as you have real estate holdings. However, there are distinct requirements for individual investors, partners and shareholders of S corporations.

Individual investors

All real estate investors are required to file Schedule E, whether they rent out a room in their home or own an apartment complex. If this situation applies to you, you’ll file Schedule E as part of your Form 1040, the basic form U.S. taxpayers file to report their annual income tax.

Partners and shareholders of S corporations

Partnerships and S corporations that structure rental real estate investments are legal entities and must file Form 8825.

You must file a copy of the business’s Schedule K-1 if you own a partnership or S corporation. Schedule K-1 is similar to a W-2 form for employment income.

The Schedule K-1 form is sent to partners or shareholders to provide the information they need to accurately report their respective shares of the business’s profits and losses on their tax returns.

How do i prepare my Schedule E tax form?

Schedule E is a relatively far-reaching tax form that covers a variety of supplemental income sources. Taxpayers only complete the sections that directly apply to them.

If the property is also for personal use

Taxpayers who buy a second home to use as a vacation home may rent the property to others. You must report the income generated from temporary rentals on Schedule E. To determine your reportable income and expenses, calculate the portions of the year the property is devoted to personal use and rental activity – then prorate expenses accordingly.

If the property is owned by a business

A business entity typically claims all applicable business tax deductions, including depreciation expenses, management fees and mortgage interest. However, partnerships and S corporations must complete Form 1065 and attach it to Form 8825 to report total income, allowable expenses and overall net profits.

Schedule E FAQs

If you have more questions about Schedule E, you’ll find answers to several frequently asked questions below. If you have different questions, don’t hesitate to speak to a qualified tax professional who can answer your questions and help you complete any required forms.

What forms do I need to file?

A real estate investor’s chosen business entity (legally considered a “person” in its own right) must file taxes and provide partners and owners with a Schedule K-1 to file their tax returns. Individual investors attach K-1 forms to their personal income tax returns to verify their profits with the federal government.

Partnerships and S corporations file Form 8825, and individual taxpayers file Form 1040. Schedule E is part of Form 1040.

Is short-term rental income subject to self-employment tax?

Due to the increasing popularity of short-term rental arrangements, the IRS has announced that owners of short-term rentals (who often provide services above and beyond the services routinely provided by landlords) may trigger self-employment taxes on their supplemental income. Short-term rental owners should also be aware of any applicable state or local taxes.

Can a closely held C corporation qualify under passive activity rules?

A closely held C corporation that isn’t a personal service corporation can qualify under passive activity rules. Because the income is passive, investors can only claim losses up to their gains. C corps must file Form 8810 to report rental income.

The bottom line: Understanding rental real estate taxation is crucial for investors

Real estate investors must understand and fulfill their tax obligations. And they must be aware of the implications and impact of any taxable activities on their annual tax payments.

Learn more about the benefits of investing in real estate– including how to maximize profits and minimize losses.