Schedule E: How to Report Rental, Royalty, and Trust Income

Schedule E (Form 1040) is the go-to IRS form for reporting supplemental income and losses from a variety of passive income sources. Whether you earn income from renting out property, collecting royalties, or receiving distributions from trusts or estates, Schedule E helps you accurately report that income on your federal tax return. In this guide, we’ll walk through each part of the form and explain how to maximize deductions while remaining compliant with IRS rules.

Understanding Schedule E

Schedule E is titled “Supplemental Income and Loss” and is typically filed alongside Form 1040. It covers income that doesn’t fall under traditional categories like wages or business profits. Unlike Schedule C, which reports self-employment income, Schedule E is primarily for passive income streams.

The most common sources of income reported on Schedule E include:

• Rental real estate
• Royalties
• Partnerships and S Corporations
• Trusts and estates
• Residual interests in Real Estate Mortgage Investment Conduits (REMICs)

Part I – Rental Real Estate and Royalty Income

Part I is the section most taxpayers use when reporting rental income and royalties. Each property or royalty source is listed separately on its own line.

Rental Real Estate

Rental income is the gross amount you receive for the use of your property. Allowable expenses must be deducted to determine your net rental income or loss. Report the following items:

• Rents received: Total income collected from tenants
• Advertising: Costs to market the property
• Auto and travel: Business mileage to manage the property (only if not commuting)
• Cleaning and maintenance: Repair and upkeep expenses
• Insurance: Property coverage premiums
• Mortgage interest: Deductible interest on loans used to acquire or improve the property
• Repairs: Fixes to restore property to normal condition (not improvements)
• Taxes: Property taxes paid during the year
• Utilities: Costs paid by the landlord
• Depreciation: Annual deduction for wear and tear (requires Form 4562)

Royalty Income

Royalties typically come from intellectual property (books, music, patents) or natural resources (oil, gas, minerals). You must report gross royalty income and deduct related expenses to arrive at net profit or loss.

Royalty income is often reported to you on Form 1099-MISC, and the amounts should be entered directly on Schedule E. Note that the tax treatment may differ depending on whether you created the asset or acquired it through investment.

Depreciation: A Major Deduction for Rental Property Owners

Depreciation allows rental property owners to deduct the cost of the building (but not the land) over 27.5 years. This deduction can significantly reduce taxable rental income. To claim it, you must use Form 4562 and attach it to your return. If you sell the property, you may be subject to depreciation recapture at a higher tax rate.

Passive Activity Loss Rules

Rental real estate is usually considered a passive activity under IRS rules. Losses from passive activities can only be used to offset other passive income unless you qualify for special exceptions. One such exception is the $25,000 offset for active participation, available if:

• You own at least 10% of the property
• You make management decisions or arrange for services
• Your modified adjusted gross income is under $100,000 (phased out at $150,000)

Part II – Income or Loss from Partnerships and S Corporations

If you are a partner in a partnership or a shareholder in an S corporation, you will receive a Schedule K-1 reporting your share of the entity’s income, deductions, and credits. This information must be included in Part II of Schedule E.

You’ll need to provide the following:

• Name and EIN of the entity
• Type of entity (partnership or S corp)
• Your share of income, deductions, and credits
• Whether the income is passive or non-passive

Part III – Estates and Trusts

If you are a beneficiary of an estate or trust, you may receive a Schedule K-1 (Form 1041). Use the information on that form to complete Part III of Schedule E. You’ll need to identify:

• The name of the trust or estate
• Income distributions to you
• Deductions or credits allocated to you

Part IV – Real Estate Mortgage Investment Conduits (REMICs)

If you own a residual interest in a REMIC, use Part IV to report that income. This is generally only applicable to institutional or advanced investors. The REMIC will send you a Schedule Q (Form 1066) detailing your share of taxable income or loss.

Part V – Summary and Transfer to Form 1040

Part V totals all supplemental income and losses from Parts I through IV. The net amount is carried over to Schedule 1 (Form 1040), Line 5, which then flows into Form 1040, Line 8.

Key Tips for Filing Schedule E

• Keep thorough records of all income and expenses throughout the year
• Don’t forget depreciation – it’s a major deduction
• Track personal use of vacation rentals carefully to avoid disallowed deductions
• Use separate lines for each property or royalty stream
• Double-check your Schedule K-1 entries for completeness and accuracy
• Consider professional help if you have passive activity loss carryovers or complex K-1s

Conclusion

Schedule E is a powerful tool for accurately reporting and managing your passive income. Whether you’re a landlord, creative artist, or trust beneficiary, this form ensures the IRS has a clear picture of your supplemental income sources. Understanding how each part of Schedule E works—and taking advantage of allowable deductions like depreciation—can help you minimize tax liability and ensure compliance. Properly filing Schedule E not only keeps your finances in order but also lays the groundwork for smarter tax planning in future years.