Are you a property owner with rental income or losses? Thinking about buying a multiple unit property, living in one unit, and renting out the others? Do you expect to have any income from royalties or a pass-through entity such as a trust, estate, partnership or S-corp?
If you answered “yes” to any of those questions, you’ll need to become familiar with IRS Form 1040 Schedule E.
Schedule E is used to report income and losses from rental property, and income from trusts, estates, partnerships and S-corporations. This article focuses on income from rental property.
If you’re receiving income from any of the pass-through activities, you should receive a Schedule K-1 from the entity. If that’s the case, and you don’t have income from rental property, filling out your Schedule E is relatively simple: just fill out some basic identifying information, and follow the instructions on the K-1 that explain where to report the information.
Schedule E for Rental Income
Reporting rental income, on the other hand, will require a bit of accounting over the course of the year. Many people find it easiest to use a spreadsheet program or tax accounting software. Use whatever works best for you. Whatever method lets you keep thorough track of income and deductible expenses is the one to stick with!
Here is a quick list of everything you’ll need to keep track of:
- Purchase price of the property you are renting out, be it a house, condo, or apartment building
- Depreciation, both current annual and accumulated
- Rental income
- Security deposits received
You’ll also want to keep close track of deductible expenses, such as:
- Commissions paid to real estate professionals, including listing agencies
- Property management fees
- Advertising costs
- Any costs incurred from cleaning, maintenance, or repair
- Property insurance and any home owner association dues
- Real estate taxes
- Mortgage interest expenses
- Security deposits reimbursed
- Other expenses, such as utilities, landscaping, waste collection fees, etc
All of these expenses have their own place on the Schedule E. Simply record your well-documented totals for each category on your Schedule E.
Remember, every dollar deducted is up to 35 cents off your tax bill! If you fail to deduct an expense you could write off, you’ll pay taxes on income you never really made. So you want to be sure that every deductible expense is included in your calculations.
The Passive Activity Loss Limit
The IRS considers rental income from these sources a “passive” activity. That means that even though you might find yourself devoting a substantial amount of time to managing you property (finding and selecting tenants, managing upkeep and repairs, etc) you are nonetheless limited to a total loss from all your rental properties of $25,000.
If you lose any more than this amount (most likely due to major, one-time repairs or renovations) you’ll have to carry the amount over to the next year. There is at least the small saving grace that it will reduce your tax liability the following year.
To sum up, landlords should keep close track of expenses throughout the year so that come tax time, reporting is a breeze. For others receiving income from an entity that requires the filing of a Schedule E, your income reporting should be straightforward: you’ll receive a K-1 from the entity, complete with information to copy to the Schedule E and a method for how to do so.
As always, if your situation is at all complicated, it is best to consult a professional for help ensuring you comply with the law and minimizing your tax liability. Should you need help filing your taxes this year, you may want to consider both Turbo Tax and H&R Block. Their free online tax software can make your tax nightmares disappear.