Owning rental property can be a lucrative investment, but it comes with responsibilities, including accurate tax reporting. The IRS requires landlords to report rental income and related expenses on Schedule E (Form 1040), which helps calculate net income or loss from rental real estate. Understanding how to properly complete Schedule E is essential for staying compliant and maximizing tax deductions. This blog provides a detailed, step-by-step explanation of how to report rental income and expenses on Schedule E.
What Is Schedule E?
Schedule E, Supplemental Income and Loss, is a tax form used by individuals to report income and expenses from rental real estate, royalties, partnerships, S corporations, estates, and trusts. For landlords, Part I of Schedule E is where rental activity is recorded. The information entered on Schedule E flows directly to the main Form 1040 and impacts your overall tax liability.
Who Needs to File Schedule E?
If you received rental income from residential or commercial real estate, you must use Schedule E to report that income and deduct any eligible expenses. This applies whether you rent a single-family home, duplex, apartment unit, or vacation property, even if it was rented out for part of the year. If you rent the property for fewer than 15 days in a year, however, the income is not reportable, and you cannot deduct expenses.
Part I of Schedule E: Real Estate Rentals
Part I of Schedule E is used to report income and expenses for up to three rental properties. If you own more than three, use additional copies of page 1 of the form and total them at the bottom of the last page submitted. The form is divided into two main sections: Income and Expenses.
Step-by-Step Guide to Reporting Rental Income
1. Property Description
Start by entering the street address of the rental property. This helps identify which income and expenses are associated with which property, especially if you own more than one.
2. Type of Property
Check the appropriate box for the type of property being reported: single-family residence, multi-family residence, vacation/short-term rental, commercial property, land, or royalty property.
3. Rental Income
Report the total amount of rent received or accrued during the tax year. This includes:
- Monthly rental payments
- Advance rent (counted in the year received)
- Nonrefundable deposits
- Payments for lease cancellation
Security deposits that are intended to be returned to the tenant should not be reported as income unless forfeited by the tenant.
Reporting Rental Expenses
The IRS allows landlords to deduct “ordinary and necessary” expenses associated with the rental property. These expenses reduce your taxable rental income. Below are the main categories reported on Schedule E:
- Advertising: Costs to market the rental property (online ads, signage, etc.).
- Auto and Travel: Mileage or travel costs related to managing the property (must be documented).
- Cleaning and Maintenance: Costs to maintain the property, including lawn care, pest control, and repairs.
- Commissions: Payments to agents or property managers for finding tenants.
- Insurance: Premiums paid for property and liability insurance.
- Legal and Professional Fees: Costs of legal advice, lease preparation, or tax preparation specific to the rental.
- Management Fees: Charges paid to third-party property managers.
- Mortgage Interest: Interest paid on loans used to acquire or improve the property (reported on Form 1098).
- Repairs: Expenses to keep the property in good working condition (e.g., plumbing, electrical, painting).
- Supplies: Items used in maintaining the property (e.g., cleaning supplies, light bulbs).
- Taxes: Property taxes and any other local or state taxes.
- Utilities: Water, gas, electricity, trash, and internet if paid by the landlord.
- Depreciation: A deduction that spreads the cost of the building over 27.5 years for residential properties.
Depreciation: A Critical Deduction
Depreciation is a non-cash deduction that lets you recover the cost of the property over time. Only the building and improvements (not the land) are depreciable. Use IRS Form 4562 to calculate depreciation. You must start depreciation when the property is placed in service, even if it isn’t rented out for the full year.
Special Considerations for Vacation Rentals
If you use the property personally and rent it out part of the year, special rules apply. You can only deduct expenses up to the amount of rental income if personal use exceeds certain thresholds. Keep detailed records of the number of rental days vs. personal use days to determine eligibility for full deductions.
Passive Activity Loss Rules
Rental income is typically considered passive income, meaning losses can only offset other passive income. However, there are exceptions. If you “actively participate” and your modified adjusted gross income (MAGI) is below $100,000, you may deduct up to $25,000 in rental losses. This deduction phases out entirely at $150,000 MAGI.
Carrying Over Unused Losses
If your losses are limited due to passive activity rules, you don’t lose them forever. They are carried forward to future tax years until you either have enough passive income to offset them or you dispose of the property in a taxable sale.
Common Errors to Avoid
- Failing to report all rental income, especially from short-term platforms like Airbnb.
- Claiming capital improvements as repairs. Improvements must be depreciated, not deducted in full.
- Incorrectly calculating depreciation or forgetting to claim it.
- Not maintaining documentation of expenses and mileage.
- Mixing personal expenses with business deductions.
Keeping Proper Records
Good recordkeeping is essential to support your entries on Schedule E. Maintain the following documents:
- Rental agreements and lease documents
- Receipts and invoices for all expenses
- Bank statements
- Utility and tax bills
- Mileage logs (if claiming travel expenses)
- Form 1098 for mortgage interest
Helpful Tools and Software
Many landlords use accounting software like QuickBooks, Stessa, or Rentec Direct to organize rental income and expenses. These tools can generate reports that make filing Schedule E easier and help avoid mistakes.
When to Consider a Tax Professional
If you own multiple properties, manage short-term rentals, or have limited knowledge of tax rules, working with a tax professional is highly recommended. A CPA or enrolled agent can help you take full advantage of deductions, navigate depreciation rules, and ensure full compliance with IRS regulations.
Final Thoughts
Reporting rental property income and expenses on Schedule E is a critical task for landlords. With a clear understanding of the form and careful documentation of your income and deductions, you can minimize your tax liability and stay in good standing with the IRS. Schedule E can seem complex at first, but with the right tools and guidance, you can use it to your advantage each tax season.