Schedule E Tax Forms: Reporting Your Rental Income

What is the IRS Schedule E: Supplemental Income and Loss tax form - and do you have to fill one out? If you are a real estate investor or receive rental income, the answer is likely yes. In effect, whether you own multiple rental properties or rent out a single Airbnb to visitors, you must report your rental income to the Internal Revenue Service (IRS).

Wondering how to make sense of the 1040 Schedule E and what instructions you need to know in order to fill it out? We'll take a closer look at the Schedule E tax form here and the role it plays in determining your taxable income.

Schedule E is the official IRS tax form that is used to report supplemental income from a wide range of sources, including real estate investments. You will use Schedule E (Form 1040) to report your income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts and residual interests in real estate mortgage investment conduits (REMICs).

A Schedule E tax form must be attached to the IRS Form 1040 by individual taxpayers who earn supplemental income from renting out real estate, no matter the type of property. Full-time real estate investors and house hackers renting spare rooms alike use Schedule E to report their supplemental income from rental property and real estate investments on their tax returns.

However, when learning about Schedule E, it's also important to note that the tax form is used by individual taxpayers in particular. Partnerships and S corporations are required to file Form 8825 instead, but we'll take a closer look at that distinction later on.

Schedule E Vs. Self-Employment Tax

Although you may work hard and put in many nights and weekends to bring it in, rental real estate income is considered passive income by the IRS. Because of this, real estate investors do not pay a self-employment tax.

Business activities that are considered to be passive are those in which owners do not actively participate in the activity on a regular, substantial and continuing basis. Those that require active participation are viewed differently by the IRS in that losses from passive activities are capped at the number of gains. On the other hand, losses from active activities are not limited.

Put simply, for practical purposes, passive activities are taxed differently from those which require active participation. Regardless of whether or not (and to what extent) you actively participate in the operation of rental investments, the IRS categorizes rental real estate activities as passive for tax purposes. What's more, because the income is considered to be passive, passive investors can only claim losses up to their gains, while active participants can claim all losses in full.

Schedule C Vs. Schedule E

Schedule E is used to report the rental income earned over a given tax year. However, if you provide certain services to your tenants, you may need to fill out the Schedule C form to report your business income instead.

For example, if you rent properties or buildings for which you provide basic services (heat, light, water, trash removal, etc.), you will report rental income and expenses on Part I of the Schedule E form.

However, if you instead provide what the IRS categorizes as substantial services (which might include cleaning, food delivery or other services that go above and beyond what a typical landlord provides), the situation is different. In this latter case, you'll report your rental income and total expenses on Schedule C of your Form 1040 tax form (or Form 1065 if your business is classified as a partnership) instead.

Note that in the event that you provide substantial services - like regular maid or meal service - and must submit a Schedule C, you will also be subject to self-employment tax as well.

Those with any sort of real estate holdings will need to file Schedule E. However, as briefly mentioned before, there are some differences in the requirements for individual investors vs. partners and shareholders of S corporations.

Individual Investors

All real estate investors are required to file Schedule E, whether they rent out a room in their home or own an apartment complex. If this situation applies to you, you'll file this as part of your Form 1040, which is the basic form the U.S. taxpayers file to report their annual income tax.

Partners And Shareholders Of S Corporations

Partnerships and S corporations that real estate investors use for rental real estate income-generating purposes are legal entities and must file Form 8825 instead.

Be advised that if you are an owner of such a firm, as an individual taxpayer, you will also be required to file a copy of the business's Schedule K-1  - roughly equivalent to a W-2 form for employment income. For purposes of reference, a Schedule K-1 form is provided by business entities to partners and owners to provide them with the information needed to accurately report their respective share of the business's profits and losses.

Schedule E is a relatively far-reaching tax form that covers a wide variety of supplemental income sources. Taxpayers need only complete the sections which directly apply to them.

If The Property Is Also For Personal Use

Taxpayers who buy a second home for vacation use may also rent the property to others. Income generated through these occasional rentals must be accounted for on Schedule E. To do so, you'll need to determine how much of any given year is devoted to personal use and how much is given over to rental activity - then prorate expenses accordingly.

The Business's Return

In most cases, the business entity will take all applicable business tax deductions, including depreciation expenses, management fees and mortgage interest. However, be advised that rental real estate partnerships and S corporations must complete Form 1065 to show total income, allowable expenses and overall net profits. This form is then attached to Form 8825 for submission.

Of course, Schedule E can also be a complicated form to complete. Below, you'll find answers to several frequently asked questions (FAQs). If you have further questions, or would like more information, don't hesitate to reach out to a qualified tax professional, who can also help you complete any required forms.

What forms do I need to file?

A real estate investor's chosen business entity - legally considered a "person" in its own right - must file its taxes and provide individuals with a Schedule K-1 so that each taxpayer can subsequently file tax forms for themselves. Partnerships and S corporations file Form 8825 and individuals file Form 1040. Schedule E is considered part of Form 1040, and individuals will attach K-1 forms to their personal income tax returns to verify their profits with the federal government.

Is short-term rental income subject to self-employment tax?

Due to the increasing popularity of short-term rental arrangements, the IRS has noted that owners of short-term rentals (who often provide services above and beyond those that landlords normally provide) could potentially trigger self-employment taxes on their supplemental income. Short-term rental owners should also maintain awareness of any state or local taxes that may potentially be levied upon them as well.

Can a closely held C Corporation qualify for passive activity rules?

The same considerations and limitations described above apply to passive real estate investment income that is generated by closely held C corporations. These businesses must file Form 8810 to report rental income, however.

It's critical for real estate investors to understand and fulfill their tax obligations.  Always consult with a CPA or Tax Advisor to be aware of the implications and impact of any taxable activities on their annual tax payments.