When you earn rental income on a residence, building, or receive royalties from a partnership or S corporation, you must prepare Schedule E for your tax return. In addition to your personal tax return, you must include all income and losses related to these activities on Schedule E.
What is Schedule E?
A Schedule E is a catch-all form for several types of income. If you receive royalties, rents, or other income from a partnership, LLC, or S corporation, you must attach Schedule E to your Form 1040 (or Form 1040NR).
Although it may seem confusing to report these types of income on your tax return, Schedule E is actually quite straightforward. Simply fill out the sections that apply to you.
What Is Supplemental Income?
The Schedule E lists specific types of income that qualify as supplemental, including income from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits.
Accordingly, this article focuses on Schedule E to report partnership income and loss, S corporation income, and rental real estates businesses, such as home sharing and AirBnB services.
While this discussion does not include real estate professionals, it does include properties owned by individuals, partnerships, or corporations and from which they receive income and incur expenses.
Reporting rental income on Schedule E
The most common reason for you to fill out a Schedule E is if you own real estate that you rent to tenants. Rent from renting out space in the same home you reside in is also included here. It is rare that the IRS considers you self-employed, so no Schedule C is required.
However, if your primary business activity is managing rentals, then your participation in a rental establishment may qualify as self-employment requiring you to file a Schedule C instead of Schedule E.
Helpful Resource: How is rental income taxed?
Home-Sharing Business Considerations
Schedule E is used to report rental income when you run an Airbnb-type home-sharing business without providing any substantial services. If you operate an Airbnb-type business that involves substantial services (e.g., transportation), you will be taxed as a business, using the appropriate form for your business type.
Each individual's tax situation is different, making it difficult to determine where they stand. Get advice from your tax professional about your tax status if you are starting a residential real estate or Airbnb-type business.
Partners and shareholders of S corporations
If you are a partner or a shareholder of an S corporation and earn business income, you will need to prepare Schedule E to report your share of the income. The nature of the business the partnership or S corporation engages in is irrelevant for purposes of the Schedule E.
Your share of income, losses, and deductions is reported on a Schedule K-1 from the partnership or corporation. Schedule E must include the figures from the K-1.
These will "pass through" to your personal income tax return and are taxed with all other income you receive that you don't report on Schedule E.
Limitation on Schedule E losses
Schedule E reports more than income. The form might be used to report a loss from particular business activity. As a general rule, when you engage in a profit-making activity, the IRS limits your loss deduction to the amount you are "at-risk" for.
As an example, if you invest $100,000 in a partnership and your share of losses is $110,000, the IRS allows you to deduct only $100,000 since you are not responsible for reimbursing the partnership for the excess $10,000 in losses.
In addition, you must consider the passive activity rule to determine if there are additional limitations on how much you can deduct. Even though the IRS has some complicated rules and many exceptions, your business activity is considered passive if you are not actively involved.
As a result, you may only deduct passive losses to the extent of your passive income.
Schedule E vs. Schedule C - Substantial Services
Your business activities determine whether you must report your business tax situation using Schedule E or Schedule C (profits or losses from small businesses).
If you are renting a building and providing basic services, such as heat and light, collection of trash, etc., you should report your rental income and expenses on Schedule E (Part 1). According to the IRS, if you provide substantial services mainly for your tenant's convenience, report your rental income and expenses on Schedule C of your Form 1040, or on Form 1065 if you are a partnership.
If you provide services to occupants primarily for their convenience, they are not considered services associated with the rental of rooms for occupancy only. Regular cleaning services, maid services, bed linen changes, but not the provision of heat and light, cleaning of public areas, trash removal, and so on, are considered substantial services.
You must also pay self-employment taxes on this income if you provide substantial services and are considered a business owner.
How to file your Schedule E
You need only complete the parts of the Schedule E that pertain to your income or losses. For example, if you receive income from a partnership, complete only the section that applies to partnerships. The schedule must be attached to your Form 1040 and submitted by the deadline.
A personal tax return includes a number of schedules, including Schedule E. It reports income from a variety of sources. Each part of the form reports a different type of income.
In the event you have income from several businesses or rental properties, list them all on Schedule E. You can list up to 3 rental properties, or up to 4 partnerships or S corporations. A second sheet can be used if there are too many items to list directly on the form.
Part I: Income from Rental Real Estate and Royalties
You will report income or loss from individual properties in this section. It is best to separate fair rental days (the days when the property was rented at a fair market price) from personal use days. For each property, income and expenses must be detailed.
Part II: Partnerships and S corporations
To report your income as a partner or owner of a partnership, a multi-member LLC, or an S corporation, there are three steps.
Step 1: Calculate and report the business net income
Business income and expenses must be reported on Form 1065 by partnerships and multiple-owner LLCs, including total income, expenses, and net income. This includes income from rental real estate, which is reported on Form 8825, Rental Real Estate Income, and Expenses of a Partnership or S Corporation. S corporations calculate their business income and expenses on Form 1120-S.
Step 2: Make determinations for each owner
Separate income, deductions, and credits for each owner based on their written agreement for each business type and whether they received passive or active income.
Step 3: Prepare Schedule K-1
Prepare a Schedule K-1 for an individual owner, including the information on Schedule E.Individual partners' share of ordinary income, rental income, real estate income, interest, dividends, royalties, short-term and long-term capital gains, other income and losses, section 179 deductions, and other deductions are listed on Schedule K-1.
Trustees and estates are required to report income or losses on Schedule E, part III. As with partnerships and S corporations, trusts and estates issue Schedule K-1s to beneficiaries reporting their respective income, losses, and deductions. The K-1 will be used to complete Part III of Schedule E.
Schedule E's Part IV is used to report income or loss from a Real Estate Mortgage Investment Conduit (REMIC). With investor funds, REMICs purchase residential and commercial mortgages and collect mortgage payments.
Investors in REMICs should receive Schedule Q, which tells them how much of the REMIC's profits they need to report on their tax returns.
Getting Help With Schedule E
Schedule E is a complex form. This article is intended to provide a general overview of the topic, and not to offer tax or legal advice. If you are unsure about any action to take, please get in touch with a tax professional.
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