The Schedule E IRS Form is often used to report supplemental income or losses from royalties, rental real estate, S corporations, estates, trusts, partnerships, and residual interests in real estate mortgage investment conduits. Everyone loves this type of passive income, but trying to figure out how to fill out the necessary tax forms to document this income can be a real headache.
Passive income is money you generate in addition to your earned income, which is associated with your business activities. This guide will walk you through everything you need to know about Schedule E, the information it contains, and how to ensure that you prepare it correctly — plus where to look for help should you run into any problems.
What is the Schedule E Form?
Schedule E is a tax form issued by the Internal Revenue Service (IRS), and you’ll complete it as part of your personal tax return. This is where you’ll report all of the income or losses you experienced as a result of the following:
These elements are exciting additions to a portfolio when they produce good results, but can be detrimental if they take a hit — or if you’re unsure how to claim your profits and setbacks when tax season comes around. Let’s take a look at each in greater detail.
Are you a landlord? Do you rent your home out through an online marketplace like Airbnb?
If you have any kind of rental income at all, you must fill out Schedule E. Under Schedule E, Part I, you’ll designate the type of property you own and rent. Your choices include:
The form allows you to detail up to three rental properties. You’ll need additional Schedule Es if you have more than three, but you’ll only need to complete lines 23a through 26 (totals) once.
Once you select the appropriate type, you’ll indicate how many days you rented the property for that year (“fair rental days”). You’ll also note how many days the property was reserved for your own personal use (“personal use days”).
Under the “Income” section, you’ll enter the income that your rental property generated that year across from “Rents Received”. If you own a multi-family property, you’ll add together all the rental income you made from the building as a whole.
Calculating Rental Expenses on the Schedule E IRS Form
While the IRS might consider rental income to be passive, landlords know that it’s anything but. There are myriad activities and costs that go into maintaining and managing a rental property.
Thankfully, the IRS gives you the chance to list those out on Schedule E. These range from advertising to utilities, and also include the following expenses, among others:
This is why it’s so important to keep up with every dollar you spend on your rental. You can track these expenses in a simple spreadsheet, or you might find that specialized accounting software is more organized and feature-rich.
The bottom line is you don’t want to be sorting through mountains of receipts if the IRS decides to investigate your form. Presenting incomplete information could result in penalties and fees, so be as thorough as possible.
Royalties represent the payments you receive when another individual uses your property. These royalties can include income from:
You will need to report any received royalties on your tax return, but where they are reported will depend on the underlying nature of the taxpayer’s relationship with the activity and of the royalty itself. For instance, if the royalty is an investment, it will only be reported on Schedule E.
S Corporations and Partnerships
When you earn any income as a shareholder of an S corporation or as a partner, you need to report your share of the business income on Schedule E. You will typically receive a Schedule K-1 from the corporation or the partnerships, which will report your share of losses, deductions, and income.
You will then use these figures to prepare Schedule E, and these items will “flow through” to your personal income tax return. They will be taxed with all the other received income that you did not report on Schedule E.
Trusts and Estates
If you are the beneficiary of a trust or an estate, you will need to fill out Schedule E, Part III, with your supplemental income and losses from that estate. You will need your Schedule K-1 from the fiduciary before you can fill out this form.
Once you receive Schedule K-1, you will transfer the information from it to Schedule E. The IRS says this information only needs to be transferred when passive and nonpassive amounts need to be reported on Schedule E, however.
Real estate mortgage investment conduits is a fixed pool of mortgages with various classes of interests that are held by investors who either hold a residual interest or a regular interest. Because a REMIC is not a taxable entity for federal income tax purposes, it is usually treated as a partnership with the residual interest holders acting as partners. When you fill out Schedule E, you will include your overall share of the REMIC’s taxable income or losses for that year.
Passive Loss Limits and What They Mean for You
Schedule E is designed to capture your passive income or losses that are not generated from any business operations, but many investors worry about whether they will be able to deduct all their passive losses. Passive loss limitations stem from your adjusted gross income (AGI).
If your AGI is below $100,000, you can claim up to $25,000 of losses. If you make more than $150,000, you cannot claim the loss. This does not mean that you “lose” these losses, though. Rather, you will report them on Form 8582 and carry them forward.
Property Basis and Loan Cost Basis
When preparing an IRS Schedule E, it is vital to understand the term “basis.” The basis is the amount your property is worth for tax purposes. This is important because the more extensive the basis is, the smaller your profit will be and your tax liability. The basis can be broken up into the following categories:
The Property Basis
This basis is made up of the agreed-upon purchase price plus the closing costs, inspections, transfer taxes, travel costs, appraisals, bank fees, and attorney fees.
The Loan Costs Basis
This basis is the sum of all the costs associated with the loan, including the origination fee, bank fees, credit report, and appraisal fees.
Use a tool, calculator, or an expert when making such calculations to ensure you are using the correct figures and that your results are accurate.
Special Schedule K-1 Considerations
It is important to note that not all Schedule K-1s are the same. You can receive a K-1 if you are a partner in a business or a beneficiary of a trust or estate that has passed some tax liability for its earnings on to you. Each may thus be slightly different, even though your schedules may report similar information.
For these reasons, it may be in your best interest to speak with a tax expert who can ensure you report the information from them correctly — especially if you receive numerous Schedule K-1s.
How to Report Schedule E
If you find yourself needing to fill out Schedule E, remember it is not as challenging as it may seem. In truth, Schedule E is relatively straightforward.
Finalize your Schedule E either on your own or with the help of a qualified tax professional, then transfer the information over to Form 1040.
Let Us Help with Your Schedule E Issues and Questions
Schedule E is used by taxpayers to report their non-employment income from various sources. The actual form is just two pages long, but the process of filling it out can be somewhat overwhelming, stressful, or tedious. If you have any questions about what you need to do with Schedule E, contact Silver Tax Group to speak with an expert today.