What Is Schedule E? Your 1040 Schedule E Complete GuidePersonal Taxes
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- Rental Income If you have a rental property, you will need to file Schedule E to reports its income and expenses.
- Royalty Income If you collect royalties, perhaps from a song you or someone else wrote, you will have to file Schedule E.
- Pass-Through Income If you received pass-through income, typically reported on a Schedule K-1, from a partnership, S corporation, estate, or trust, you will need to file Schedule E.
- Attached To
- Related Forms
Form 8582, Form 4562
- Related Deductions
If during the tax year you collected rental income, earned one-off royalties, or received a Schedule K-1, congratulations! You officially have “supplemental” streams of income and must now file Schedule E.
In this article, I will define what Schedule E is and who should file it. Then I will tell you exactly how to complete Schedule E for each one of these income types by giving you line-by-line tips on how to accurately complete this important tax form.
What Is Schedule E?
Schedule E is a tax form that you will complete and attach to Form 1040. You will use Part I of Schedule E to report rental and royalty income and Part II of Schedule E to report income or loss from Schedule K-1 forms as well as REMIC income.
The net amount you calculate after you have completed Schedule E is reported on 2019 Form 1040, Schedule 1, Line 5. This amount is then transferred to page one of the 2019 Form 1040 on line 7a, which is summed with your other income sources to arrive at your adjusted gross income for the year.
Who Should File Schedule E?
Those who have rental or royalty income, Schedule K-1 income, or income from REMICs should file Schedule E.
That said, there are some exceptions to the general statements above.
For example, if you rent out a property at below-market rates, you should not report this property on Schedule E. Also, if you are an independent musician who collects royalties in the normal course of your business, you should report royalty income on Schedule C rather than Schedule E.
I have described these exceptions and more in the relevant sections in the article below, so be sure to read carefully!
Schedule E for Rental Income
Schedule E, Page 1, is where taxpayers report rental income.
Rental income is the fair market value (FMV) of the consideration that you receive in exchange for renting out real estate to tenants. While the most common form of rental income is cash, rental income can also be received in the form of property or services.
Now, there are some instances in which amounts that you think might constitute rental income would not be reported on Schedule E. Before reporting a particular rental activity on Schedule E, consult the table below to determine where you should report it.
|Type of Income||Where to Report|
|Cash Received Equal to Fair Market Rent||Schedule E|
|Services Received Equal to Fair Market Rent||Schedule E|
|Property Received Equal to Fair Market Rent||Schedule E|
|Income Received for Renting Out Personal Property Along with Real Estate||Schedule E|
|Below-Market Rent||Schedule A. Learn more here.|
|Income Received for Renting Out Personal Property (e.g. Vehicles) Not with Real Estate||Schedule C|
|Income Received for Other Services Such as Laundry, Parking, Etc.||It depends.|
|Vacation Home||It depends. Learn more here.|
|Farm Rental Income||Form 4835|
Line 1: Rental Information
Schedule E, Line 1 asks you for the physical address of each one of your rental properties. You will put one address in each row of Line 1a, lettered A through C.
In Line 1b, you need to indicate a particular number corresponding to the type of property each property is. See the table below for the numbers corresponding to each property type.
|Line 1b||Property Type|
|1||Single Family Residence|
|6||Royalties (more on this later)|
Line 2: Rental and Personal Use
Schedule E, Line 2 asks you to indicate how many days you rented out each property at a fair rental rate and how many days you used each property for personal use.
The number of fair rental days for each unit should be easy to determine: this is the number of days a tenant paying market rent occupied your property.
Personal use days are any days or part of a day that your unit was used by:
- you or another owner of the unit for personal purposes,
- anyone in your family or the family of another owner of the unit, unless the unit is rented out at a fair rental price to them as their primary residence, or
- anyone who pays less than fair market rent for the unit.
Line 2: QJV Status
If you owned a property as a qualified joint venture, check the “QJV” box in the row corresponding to that property on Line 2.
Qualified Joint Venture
It is extremely common for rental property owners to hold their property in one or multiple limited liability companies, or LLCs. An LLC that has two owners is be default treated as a partnership for federal income tax purposes and must file Form 1065, U.S. Return of Partnership Income. However, if an LLC or other entity taxed as a partnership is owned jointly by a jointly-filing married couple, and each spouse materially participates in the business, this couple can elect to be treated as a qualified joint venture instead of a partnership. This sounds fancy, but all this means that you don’t have to file a partnership tax return and can report your income on Schedule E. However, each spouse’s share of the property must be reported as a separate line on Schedule E. You make the election simply by checking the “QJV” box on Schedule E.
Line 3: Rents Received
Schedule E, Line 3 asks you to indicate how much rental income you earned for each property.
Assuming you’re a cash basis taxpayer, this amount would include rental income you actually received during the year, not necessarily the rental income merely earned. So if a tenant is late with his December rent and doesn’t give it to you until January of the following year, you would report this income on the following year’s Schedule E.
Late fees, nonrefundable deposits, and pet fees are all treated the same as “standard” rental income. Security deposits, however, are not rental income to the extent that they are required to be returned to the tenant at the end of the lease. However, if you retain any amount of a security deposit, you will include that amount as rental income in the year of retention.
One last tip: be sure to check your personal rent records against those reported on statements issued to you on Form 1099-MISC, Miscellaneous Income, Box 1. Obviously, residential tenants will not issue you a 1099, but if you own commercial property or if you collect rent on a residential property through a governrenment entity, you may receive a 1099.
Under the doctrine known as “constructive receipt,” you can’t defer income into a future year merely by delaying the cashing of a check. So if a tenant gives you his or her December rent check in December of this year, you can’t defer income to next year simply by waiting to deposit or cash the check until January. Once funds are in your control, you are considered to have “constructively” (if not actually) received them, and this is considered income for a cash basis taxpayer.
Lines 5 – 21: Expenses
In order to accurately complete this section of Schedule E, you’ll need an accurate record of your expenses incurred on each rental property and any tax forms such as Form 1098 that you received for your rental properties.
In the table below I’ve provided examples of rental property deductions for each expense line item. This list is not meant to be exhaustive but rather to give you an idea of the kinds of things to be included on each line item. Once you have completed lines 5 – 20, you will sum up all the expenses on line 21.
|Schedule E Line||Example Deductions|
|Line 5: Advertising||Lawn signs, business cards, website placement fees, direct mail|
|Line 6: Auto and Travel||Any auto and travel expenses you incurred to maintain your properties|
|Line 7: Cleaning and Maintenance||Yardwork, housecleaning, routine maintenance|
|Line 8: Commissions||Payments to real estate agent for filling your property|
|Line 9: Insurance||Hazard, fire, flood, landlord, homeowners insurance|
|Line 10: Legal and Other Professional Fees||Attorney fees, eviction fees, accounting fees, tax preparation fees|
|Line 11: Management Fees||Payments to property manager for managing your property|
|Line 12: Mortgage Interest Paid to Banks||Mortgage interested reported on Form 1098|
|Line 13: Other Interest||Interest paid to individuals or non-banks|
|Line 14: Repairs||Minor repairs up to $2,500 if you have made the annual de minimis safe harbor election|
|Line 15: Supplies||Tools, nails, spackle, cleaning solution, locks and keys|
|Line 16: Taxes||Property taxes|
|Line 17: Utilities||Water, gas, electricity, garbage, cable/internet|
|Line 18: Depreciation Expense or Depletion||Depreciation expense as calculated by your tax software|
|Line 19: Other||Amortization, education (books, conferences), HOA dues, bank fees, tenant gifts|
Line 22: Passive Activity Loss
Although it may not feel like it to weekend warrior landlords across the country, rental real estate income is “passive” income in the eyes of the IRS, unlike ordinary income such as W-2 wages or investment income such as interest and dividends.
The significance of this is that losses from passive activities such as rental real estate cannot be used to offset ordinary income and investment income. Passive losses can only be used against passive income.
Passive Loss Example
Let’s say you have W-2 wages of $200,000, and you have a tax loss (after depreciation) of $10,000 on your rental property. In this case, your adjusted gross income is simply $200,000. You can’t net the passive loss of $10,000 against your ordinary income of $200,000.
What happens to this $10,000 passive activity loss? It becomes “suspended,” meaning that it is carried forward to future tax years. So if next year your rental property has $15,000 of tax profit, you can apply the $10,000 suspended loss against it, meaning that your net rental income for the year is only $5,000. Assuming your wages are the same as the previous year, your adjusted gross income would be $205,000.
Thankfully, your tax software should make these calculations for you on Form 8582. That said, if you change tax software from year to year, be sure you know what your suspended passive activity loss is from your old tax software so you can input it in your new tax software.
If you change your tax software, make sure you input your suspended passive activity losses from your old tax software!
Now, there are two exceptions to the passive loss rules, so be sure to keep these in mind when preparing your tax return.
Exception 1: You Make Less Than $150,000.
If you actively participate in your rental real estate activity, and you make less than $150,000, you may be able to net some of your real estate losses against your ordinary income.
The maximum amount you may deduct is $25,000, and this amount is reduced by $0.50 for every dollar you make over $100,000.
Use our passive activity loss calculator below to help you run the numbers.
Exception 2: You Are a Real Estate Professional.
If you qualify as a real estate professional, you may potentially deduct all your passive real estate losses against your ordinary income.
In order to qualify, you must meet the following two qualifications:
- you must work at least 750 hours during the year in a real estate trade or business, and
- more than 50% of the services you perform in all businesses (including your W-2 job) must be performed in a real estate trade or business in which you materially participate.
So if you have a full-time job not related to real estate, it’s going to be very difficult if not impossible for you to qualify as a real estate professional. In this case, assuming that you work 2,080 hours at your full-time job every year, you would have to work more than 2,080 hours (i.e. more than forty hours per week) on your rental properties during the year.
Lines 23 – 26: Math
Schedule E, lines 23 – 26 are mere arithmetic calculations that your tax software should calculate for you.
Schedule E for Royalty Income
Schedule E, Page 1, is also where taxpayers report royalty income.
Royalty income is reported on Schedule E very similarly to rental income, but there is one thing you should know: Schedule E is only for reporting royalty income that’s from an activity that you don’t normally participate in. An example of this is if you are a chef, and you write one cookbook. Your main business is not publishing cookbooks; it’s cooking. Royalties from that cookbook, then, would be reported on Schedule E.
If you are a full-time cookbook author, however, you would report your cookbook royalties as gross receipts on Schedule C. Writing cookbooks is your main income, not “supplemental income” of the type that should be reported on Schedule E.
|Source of Royalty||Where to Report|
|Copyright on literary, musical, or artistic work not as a self-employed writer, inventor, artist, etc.||Schedule E|
|Copyright on literary, musical, or artistic work as a self-employed writer, inventor, artist, etc.||Schedule C|
|Oil, gas, or mineral interest||Schedule C|
Line 4: Royalties Received
Schedule E, Line 4 asks you to indicate how much royalty income you earned.
Similar to rents received, you would include royalty income you actually received during the year, and you should double check your own records of how much royalty income you received against Box 2 of any Forms 1099-MISC that you received.
Lines 5 – 21: Expenses
As you may have determined by now, most of these line items will not apply to royalty income. That said, the table below lists some sample expenses you may have related to your royalty income.
|Schedule E Line||Example Deductions|
|Line 5: Advertising||Out-of-pocket advertising costs to promote your artistic work|
|Line 6: Auto and travel||Auto and travel expenses to attend book signings or other events to promote your work|
|Line 8: Commissions||Amounts paid to agents to promote your work|
|Line 10: Legal and Other Professional Fees||Amounts paid to attorneys to copyright your work|
Schedule E for K-1 Income
Schedule E, Page 2, is where taxpayers report Schedule K-1 income from partnerships, S corporations, estates, and trusts.
A partnership is the tax entity created when two or more people join together to carry on a trade or business, regardless of whether or not they formed a separate legal entity. It is also the default tax classification for non-corporate entities with two or more owners. A partnership files Form 1065, U.S. Return of Partnership Income, and issues Schedule K-1s to its partners.
- S Corporation
An S corporation is a corporation that elects to pass through its taxable income or loss (as well as other tax attributes such as tax credits) to its shareholders for federal income tax purposes. Both an LLC and a corporation may file Form 2553 to elect to be taxed as an S corporation. An S corporation files Form 1120S, U.S. Income Tax Return for an S Corporation, and issues Schedule K-1s to its shareholders.
When someone passes away, a separate tax entity immediately exists on the date of their death. This entity is known as the decedent's estate. If an estate has gross income for a tax year of $600 or more, it must file Form 1041, U.S. Income Tax Return for Estates and Trusts and issue Schedule K-1s to its beneficiaries.
A trust is a creation of state law. Some trusts, such as grantor trusts (also known as revocable trusts), do not need to file a separate tax return. Other trusts must file Form 1041, U.S. Income Tax Return for Estates and Trusts, and issue Schedule K-1s to its beneficiaries.
Line 27: Prior Year Losses
If you are reporting a loss this year that was unallowed in a previous year due to limitations, you will check the “Yes” box on this line. If not, you will check the “No” box on this line.
Line 28: Reporting Income or Loss from Partnerships and S Corporations
On the first half of Schedule E, Line 28 you input the identifying information for each partnership or S corporation you received a Schedule K-1 from. This information can be obtained directly from the Schedule K-1 itself.
On the second half of Schedule E, Line 28 you input the income or loss amounts reported if you add up the non-investment income line items on Schedule K-1.
You also must break down your K-1 income or loss sources into passive and non-passive and complete the relevant sections for each. Generally speaking, K-1s from real estate or other investment funds are considered passive income, while K-1s from businesses in which you are actively involved in will be considered nonpassive.
On Schedule E, only report K-1s issued to you or your single-member LLC. Don't report K-1s issued to your self-directed IRA or 401(k).
Lines 29 – 32: Math
Schedule E, lines 29 – 32 are mere arithmetic calculations that your tax software should calculate for you.
Line 33: Reporting Income or Loss from Estates and Trusts
Similar to reporting income or loss from partnerships and S corporations, you must report your K-1 amounts from estates and trusts and categorize these amounts as passive or nonpassive.
Lines 34 – 37: Math
Schedule E, lines 34 – 37 are mere arithmetic calculations that your tax software should calculate for you.
Schedule E for REMIC Income
Near the bottom of Schedule E, Page 2, is where taxpayers report REMIC income.
Not as popular as they used to be thanks to the financial crisis of 2007 – 2008, REMICs (real estate mortgage investment conduits) are investment vehicles through which investors can invest in a pool of mortgages.
Line 38: REMIC Income
On Line 38 you will input the REMIC income that was reported to you every quarter on Schedule Q (Form 1066).
Line 39: Math
Schedule E, line 39 is a mere arithmetic calculation that your tax software should calculate for you.
Schedule E Summary
Schedule E, Lines 40 – 43 summarizes your supplemental income.
Line 40: Net Farm Rental Income
If you have farm rental income, you should complete Form 4835 and report your net income or loss on this line.
Line 41: Total Schedule E Income
On this line you add up all of your rental, K-1, REMIC, and farm rental income. Your tax software should do this for you.
Line 42: Farming and Fishing Income
This line does not affect your tax return. It is only a “check” figure if you have farming and fishing income reported to you on various tax forms.
Line 43: Real Estate Professionals
If you qualify as a real estate professional, you should input your total net real estate income or loss here. See the discussion above pertaining to passive activity losses for more discussion on real estate professional status.
Filing Schedule E
As long as you make your inputs correctly in your tax software program, your Schedule E should be calculated correctly.
However, even with a quality tax software program, making the inputs correctly can still be confusing.
If you are a landlord, partner in a partnership, or shareholder in an S corporation, and you feel confused about your tax situation, feel free to ask me any questions in the comments below!
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.