Schedule E tax forms: Reporting your rental income

By some counts, there are more than 800 IRS forms. And at tax time it can feel like you need to fill out every last one of them. Fortunately, that’s not true. But if you’re a real estate investor or you receive rental income, one form is likely necessary: Schedule E (Form 1040): Supplemental Income and Loss.

Because virtually all rental income is taxed, you’ll need to fill out this form whether you own a small fiefdom of rental properties or rent out a room in your home. So let’s take a look at what Schedule E is, how it differs from other forms like it, and how to fill it out.

What is Schedule E?

First, it’s important to understand what a schedule is when it comes to the IRS. If your taxes are very simple, you might only need to fill out Form 1040. But if you have other streams of income or deductions, you might need to fill out a schedule to list it, and include it with your Form 1040.

Schedule E is used for rental income, as well as some other forms of income, such as income from:

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

If you’re an individual with any of the above streams of income, you’ll use Schedule E. As far as real estate rental income, this includes any real estate investment property type. It’s also important to note that partnerships and S corporations file Form 8825 rather than Schedule E. And so the list above is clear, when it lists partnerships and S corps, it means that you receive income from them.

Schedule E is not only about reporting income either. Property taxes and other ordinary and necessary expenses related to your rental property are also reported here, lowering your tax burden.

Schedule E vs. Schedule C (and self-employment tax)

There is one important distinction the IRS attaches to different types of rental income and it’s especially pertinent in our current world of short-term vacation renting.

Most rental income and expenses will be reported on Schedule E since the IRS labels it as passive income, for example, passive real estate investing. Passive income is not subject to self-employment tax, and losses are limited.

However, if your rental activity looks more like a business, such as when you run an Airbnb and provide more than basic services, you may need to fill out Schedule C instead of Schedule E. According to the IRS, an activity qualifies as a business and you must use Schedule C if:

• Your primary purpose for engaging in the activity is for income or profit.
• You are involved in the activity with continuity and regularity.

Under Schedule C, your rental income is subject to ordinary income tax and self-employment tax. Essentially, you’re running a business in the eyes of the IRS, not passively investing. Here’s when you likely need to fill out a Schedule C:

• You provide substantial services to tenants beyond basic services (e.g., daily cleaning, meals, concierge-type services, linen changes, entertainment).
• You’re a real-estate dealer who buys and sells properties as a trade or business.
• You operate short-term rentals (Airbnb, VRBO, bed and breakfast) and offer hotel-like amenities.

Here are some common examples of when each would apply:

• Schedule E: You run a long-term rental, as you would when leasing out a second home, with basic services like heat, water and trash removal.
• Schedule C: You run a vacation rental with regular cleaning and food service.

While all this might seem very straightforward, you should always consult a tax professional, or use reputable tax software, to ensure you’re filling out the correct form correctly. Taxes have a way of getting complicated fast.

How do Schedule E taxes work?

When you own a rental property or get royalties or other income reported on Schedule E, you include it, along with any applicable expenses related to the entity. These are subtracted from your income. The final tally, whether a profit or loss, is reported on your 1040 and factored into your year’s income and tax burden.

What you can deduct:

• Mortgage interest paid on the rental property (reported on Form 1098)
• Property taxes for the rental property
• Insurance costs
• Maintenance and repairs (ordinary and necessary ones)
• Utilities (if paid by you)
• Depreciation on the rental property (land excluded)
• Management fees, legal/professional fees
• Advertising, travel related to the rental activity
• For real estate partnerships/trusts etc.: your pro-rata share of income/loss from the pass-through entity

What you can’t deduct (or limitations):

• Personal use portion of the property.
• Losses may be limited under the passive-activity rules.
• If you provide hotel-like services and it becomes business income, Schedule E may no longer apply and you’ll need to use Schedule C.
• Repairs must be “ordinary and necessary.” Major improvements may need to be amortized and deducted over years.

You may be wondering what tax rate this income is subject to. Basically, because it’s passive income that is then reported on your 1040, it is taxed at whatever personal income tax bracket you fall into.

Who should file a Schedule E tax form?

Schedule E applies to a variety of income types. If you’re a rental property owner who gets passive income from your rentals, you’ll file Schedule E. This applies whether it’s from a rental property or renting out part of your home.

But remember, if your rental takes on more of a business flavor – you do more than provide basic services – you may need to use Schedule C instead. And real estate partnerships and S corporations use Form 8825 rather than Schedule E for passive income.

Here are other examples of those who need to file Schedule E:

• Royalty earners: If you get royalties from books, music, oil, gas or mineral leases, and they’re passive in nature, you’ll need Schedule E. Use Schedule C if the royalties are part of your business as a self-employed individual.
• Schedule K-1 recipients: If you’re a partner in a partnership or an S corporation shareholder, your share of earnings and losses from it will be reported on a K-1, which will then be listed on Schedule E.
• Certain beneficiaries and investors: If you inherit income from an estate/ or trust, or earn residual income from REMICs, you’ll typically use Schedule E. A Schedule K-1 will show your share of earnings and losses.
• Partnerships and S corporations: While these typically use Form 8825 rather than Schedule E, if you receive income from them, the income, or loss, may be reported on your Schedule E.

How do I prepare my Schedule E tax form?

As we’ve seen, Schedule E covers a wide variety of income. But don’t feel pressured to fill in every box. You only fill out what is applicable to your situation. When complete, you’ll include it with your 1040 and other forms you send to the IRS as part of your tax return.

To prepare your Schedule E, you’ll need certain information and documents. Here’s a list of common things needed:

• Form 1098: Mortgage Interest Statement
• Form 1099-MISC: Royalty income
• Lease agreements: Rental terms and income details
• Utility bills: Expenses for the property
• Property tax statements: Taxes paid on the property

If the property is also for personal use

If you buy a second home and use it as a vacation home, but also rent it out occasionally or for part of the year and the income is passive, you’ll use Schedule E.

However, you must report the amount of time the home is used by you, or a friend or member of your family, for personal use. You’ll need to use this to prorate any expenses you claim on the schedule.

If a business owns the property

The business would claim all applicable business tax deductions including depreciation, management fees, mortgage interest associated with the property. If the business is a partnership, it would file Form 1065, if it’s an S corporation, it would file Form 1120-S. And if either has rental real estate, they would file Form 8825 instead of Schedule E to file passive income and expenses.

Schedule E FAQ

When should I file Schedule E?

Schedule E is filed with your federal tax return, due in mid-April or, if you file an extension, in mid-October. But remember, if you file an extension, it only pertains to filing, not payment. If you owe money, you’ll need to pay by the April deadline or potentially face interest and penalties. Also, for partnerships and S corporations, the K-1s you receive (which feed into Schedule E) typically arrive around mid-March, so plan accordingly.

How do I file Schedule E?

Most online tax return software can handle Schedule E, however if your return is complex, you might need a higher-tier version. If you have a tax professional, you’ll need to provide them with all the information and documentation to fill out the schedule. Schedule E is also available as a downloadable, fillable PDF at the IRS website.

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

Possibly. The increasing popularity of short-term rentals in recent years is no secret. In fact, the IRS has taken notice and so they announced that owners of short-term rentals will be more closely monitored and their income may trigger self-employment tax. This is only if they provide services beyond basic landlord services. Regardless, if you run a short-term rental, you should be aware of all applicable local, state, and federal laws.

The bottom line: Use Schedule E to report your supplemental income

Understanding when and how to use Schedule E is vital for anyone who receives income from a rental property. It not only keeps you compliant with tax law, it might save you money on your taxes since the schedule is also used to report expenses and losses.

But it’s vital to know when your rental income is passive – and appropriate for Schedule E – and when it’s not, and triggers the use of Schedule E, with its own rules.

When you’re ready to buy a vacation or rental property, Rocket Mortgage® can help you explore all your mortgage options.

This article is for informational purposes only, and is not a substitute for professional advice from a medical provider, licensed attorney, financial advisor, or tax professional. Consumers should independently verify any service mentioned will meet their needs.