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Each year, the IRS requires individuals to report and pay taxes on income they earned. But the form you use to report that income may differ depending on how and where you earned it. Certain types of income — considered supplemental income by the IRS — are filed on Form 1040 Schedule E. In this article, you’ll learn what the Schedule E form is and when you might need to file it as part of your annual tax return.
The Short Version
- If you invest in rental real estate, it’s likely you’ll need to file Schedule E with your tax return.
- Schedule E is also used to report certain pass-through business activities, like income from partnerships and S corporations.
- If the income reported on Schedule E is determined to be from a trade or business – even if it is derived from real estate activities – it will also be subject to the self-employment tax.
- Real estate losses, as a passive activity, are subject to limits on their tax deductibility.
What is Tax Form 1040 Schedule E and How is It Related to Investing?
Form 1040 Schedule E is a tax form the IRS requires individuals to file with their annual tax return if they received any supplemental income throughout the year. For the purposes of the Schedule E form, supplemental income includes income and losses from rental real estate, royalties, partnerships, S-corporations, estates, trusts and REMICs.
Many investors are required to file a Schedule E form depending on the type of assets they invest in. In cases where you invest in real estate or certain mortgage-backed securities, you may have to file a Schedule E. The same may apply if you’re a passive partner (aka “silent investor”) in a partnership or S-corporation.
To make sure you are filing your taxes correctly, consider using a tax preparer like TurboTax, H&R Block, or TaxAct.
>>Further Reading: How to Minimize Your Tax Bill?
What’s New For 2022 Tax Year?
As is always the case, there are a few changes for your 2022 taxes that apply to the Schedule E:
Increase in the standard mileage rate. The rate for the first half of 2022 was set at 58.5 cents per mile. But due to inflation, it was increased to 62.5 cents per mile for the second half of the year. If you use one or more vehicles in connection with your real estate investment or pass-through business activity, and take the standard mileage rate, the second half increase will give you a larger deduction for auto expense.
100% business meal deduction. This is not a change from 2021, but many taxpayers are familiar with the 50% limitation on meals that has been a mainstay of the tax code for years. The current tax law allows a 100% deduction for food or beverages from restaurants paid or incurred in 2021 or 2022. (Unless extended by Congress, the 100% deduction won’t apply for the 2023 tax year.)
Not only can the 100% business meal deduction be used for pass-through business activities, like partnerships and S corporations, but also in connection with rental real estate activities. For example, if you own an investment property, and purchase a meal from a restaurant while traveling away from home to manage the property, the meal will be 100% deductible.
Schedule E for Rental Income
One of the most common uses of the Schedule E form is to report rental income earned from real estate holdings, which could include single-family residences, multi-family residences, vacation, and short-term rentals, commercial properties, and land.
If you need to file Schedule E for rental income (or loss), you’ll need to complete Page 1, Part 1, Income or Loss From Rental Real Estate and Royalties:
If you own an investment property that you rent out to a tenant, you must report that income on your Schedule E form. The good news is that as long as you didn’t use the property as your home, you can also report and deduct your expenses.
Expenses you can deduct include:
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- Mortgage interest
- Other interest
- Depreciation or depletion
To accurately complete your Schedule E form, you’ll have to keep records of these expenses throughout the year. You must also track the income you earned. Finally, you should also track the number of days throughout the year the property was rented at its fair rental price vs. the days it was used for personal purposes or was rented for less than the fair rental price.
How Many Properties Can Be Listed on Schedule E?
The actual Schedule E Page 1, Part I form can accommodate three properties. If you have more than three, and you prepare your income tax manually, you’ll need to attach a schedule listing the additional properties.
However, the many tax-preparation software packages available can accommodate this overflow automatically. So can paid tax preparers since they also use tax-preparation software. And because of the many nuances and technicalities involved in rental real estate, we strongly suggest use of either tax-preparation software or hiring a professional tax preparer for the job.
Where to Enter Your Schedule E Total on Your 1040 Tax Return
The income you earn from Parts I, II, III, and IV are summarized on Schedule E, Page 2, Part V, was at the bottom of the page. The summary is performed on Line 41, Total income or (loss).
From there, the total is transferred to Schedule 1 of your 1040 individual income tax return. This is the form used to reflect additional income and adjustments to income. There, you will enter the result on Line 5, Rental, real estate, royalties, partnerships, S corporations, trusts, etc.
You will then include that income with all other income items reflected on Lines 1 – 7 of Schedule A, which are summarized on Line 10.
The net total on Schedule 1, Line 10 will be carried forward to your 1040, Line 8, “Other income from Schedule 1, line 10”, and used to calculate your adjusted gross income on Line 11.
Taxpayer Beware: Schedule E and the Self-Employment Tax
The self-employment tax is a tax levied by the IRS on income from self-employment. It’s the tax earmarked for Social Security and Medicare (FICA tax). All earned income is subject to FICA tax, including self-employment income. Wage income is also subject to the tax, but payment is handled by the employer.
The total tax is 15.3% of income earned, with half paid by the employee and the other half by the employer. But if you’re self-employed, you’ll pay both halves of the tax.
First things first, if you are filing Schedule E because you have pass-through income, like partnership income, that income will be subject to the self-employment tax.
But there’s a wrinkle in the real estate universe, that could also mean you’ll owe self-employment tax on certain real estate related activities.
>Renting Out Your Property as a Vacation Rental
The rise of short-term rental services, like VRBO and AirBNB, have given rise to special tax circumstances. Normally, business activity from rental real estate – including your primary residence – is reported on Schedule E. Since it is considered investment income and a passive source, it is not subject to the self-employment tax.
However, the situation gets gray when it comes to renting out your property to vacationers. The IRS considers this type of activity to represent a trade or business, with any profits subject to the self-employment tax. That’s in addition to ordinary income tax on the income generated.
The self-employment tax is calculated on Schedule SE, at a tax rate of 15.3% of your net profit (12.4% for FICA and 2.9% for the Medicare tax).
The rules on this are not entirely clear, which makes it especially important to consult a tax advisor if you engage in short-term vacation rentals, particularly through an online marketplace. Providers like AirBNB and VRBO frequently issue IRS form 1099K to report the income your rental activities generate. If they do, the IRS will be looking for the income on your tax return. If you are in fact required to declare it, it may need to appear either on Schedule E or on Schedule C, Profit or Loss From Business. If it’s the latter, you will also be required to file Schedule SE, and pay the self-employment tax.
A good guide on the subject is the TurboTax article, 10 Tax Tips for Airbnb, HomeAway & VRBO Vacation Rentals.
Other Types of Schedule E Income
Real estate rental income is one of the most common situations where someone might have to file a Schedule E form, but it’s not the only one. Here are a few other situations where a Schedule E might be required.
Royalty income is money someone earns by allowing someone else to use their property. Royalty income can result from intellectual property such as copyrights and patents. Someone could also earn royalty income from oil, gas and minerals extracted from their property. Royalty income is reported in Part I of the Schedule E form. Royalty income or loss is also file on Schedule E, Page 1, Part 1.
If you do need to file Schedule E for other types of income or loss where the form is required, the results will need to be reported on Page 2, Part II, Income or Loss From Partnerships and S Corporations.
>Partnerships and S-Corporations
Partnerships and S-corporations are both pass-through entities, meaning the company itself doesn’t claim any income, losses, or deductions. Instead, they pass through to the partners. Members of partnerships and S-corporations receive a Schedule K-1 for their income, losses, and deductions each year, which they file in Part II of the Schedule E form.
>Estates and Trusts
Beneficiaries of estates and trusts must report their share of the income in Part III of the Schedule E form. This type of income is often interest earned on the assets within the estate or trust. Beneficiaries will receive a Schedule K-1 that includes all income and losses to report.
>Residual Interests in REMICs
A real estate mortgage investment conduit (REMIC) is a type of mortgage-backed security that provides ongoing cash flow to investors. Individuals who hold interest in a REMIC must report their share of the taxable income and losses in Part IV of their Schedule E form.
How to File Schedule E
If you use tax-preparation software, and you have rental property or any of the pass-through business entities listed above, the software will automatically generate a completed Schedule E. The same will be true if you use a paid tax preparer.
But if you do prepare your taxes manually, you’ll need to print, complete and attach the schedule to your completed Form 1040. You can download a copy of Schedule E directly from the IRS website. Be sure to also pull the IRS guide, Schedule E Instructions before preparing the form. Schedule E is not the easiest form in the tax return to complete!
For that reason, we once again strongly suggest using either tax software to prepare your return, or that you turn the job over to a paid preparer.
The Passive Activity Loss Limit
Real estate related income and losses that are reported on the Schedule E form is considered supplemental income from a passive activity. The IRS defines passive activity as a business activity where you didn’t “materially participate.”
Because of the passive nature of real estate income, the IRS limits losses that you can deduct. For most types of Schedule E real estate income, filers are limited to claiming the amount of loss they are at-risk for or could actually lose. For example, if you contributed $10,000 to the business in a given year, your losses for that year can’t be more than $10,000.
The rules work a bit differently for some real estate activities. You’re exempt from the IRS passive activity loss limit if you actively participated in real estate activities, if your net loss was $25,000 ($12,500 if you are married filing separately) or less, and your modified adjusted gross income was $100,000 ($50,000 if you are married filing separately) or less, among a few other rules.
>>Further Reading: How to Amend Your Taxes
If you earn supplemental income in any given year, the IRS requires that you fill out the Form 1040 Schedule E and file it with your annual tax return. Make sure you’re tracking your income and expenses throughout the year so you know your form is accurate. You might also consider hiring a tax professional, who can help you organize your paperwork and fill out the form.
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