Form 8825 vs. Schedule E: What’s the Difference?
The correct tax form for your rental income is determined by your business entity. Understand how ownership structure dictates your filing requirements and tax reporting path.
When reporting rental real estate income, property owners use either Schedule E or Form 8825. Both forms are for reporting income and expenses from rental properties, but they apply to different ownership structures. Choosing the correct form is necessary for accurate tax filing. This guide clarifies the purpose of each form, how the financial information flows to a personal tax return, and special rules for properties held in a Limited Liability Company (LLC).
Understanding Schedule E
Schedule E, “Supplemental Income and Loss,” is part of an individual’s personal income tax return, Form 1040. Its most common use is for rental real estate owned directly by individuals. If you own a rental property in your own name, jointly with a spouse, or through a trust or estate, Schedule E is the correct form. This form is for passive income, which does not require active participation and is not subject to self-employment tax.
Part I of Schedule E is where you detail the income and expenses for each rental property. You must list the property’s address, type, the number of days it was rented at fair market value, and the days used for personal purposes. Gross rents are reported, followed by categorized expenses such as advertising, insurance, mortgage interest, property taxes, repairs, and supplies.
A major deduction for rental property is depreciation, the annual deduction allowed to recover the property’s cost over its useful life. This is calculated on Form 4562, “Depreciation and Amortization,” with the total entered on Schedule E. After subtracting all expenses from gross rents, the net income or loss for each property is calculated and combined to find the total rental income or loss for the year.
Understanding Form 8825
Form 8825, “Rental Real Estate Income and Expenses of a Partnership or an S Corporation,” is used at the business entity level. It is not filed with a personal tax return but is a component of the business’s return. Partnerships, including multi-member LLCs taxed as partnerships, file Form 1065, and S corporations file Form 1120-S, attaching Form 8825 to report rental real estate activities.
The information reported on Form 8825 is similar to Schedule E, including gross rents and a breakdown of expenses like insurance, repairs, and taxes. The form calculates the net rental real estate income or loss for the entity. This figure is a component of the business’s overall financial picture for the tax year.
Depreciation for properties owned by the partnership or S corporation is also calculated and deducted on Form 8825. The final net income or loss is used to determine the profit or loss that will be allocated among the owners.
How Rental Income Reaches Your Personal Return
The path rental income takes to an individual’s Form 1040 differs depending on which form is used. For property owned directly by an individual, the net income or loss from Part I of Schedule E flows directly to Schedule 1 of Form 1040. This amount is then combined with other income to determine the individual’s adjusted gross income.
For income reported on Form 8825, the process involves a pass-through from the business entity. After the net rental income or loss is calculated, the total is reported on the entity’s tax return, either Form 1065 or Form 1120-S. The business entity itself does not pay income tax; instead, it passes the profits and losses to its owners.
The entity issues a Schedule K-1 to each partner or shareholder, detailing their share of the business’s income and deductions. The owner’s share of the net rental income or loss from Form 8825 is reported on the Schedule K-1. The owner then uses this information to complete Part II of their own Schedule E, which is designated for income or loss from partnerships and S corporations.
Special Considerations for LLCs
For a Limited Liability Company (LLC), the correct tax form depends on how the IRS classifies it. This classification is determined by the number of members and any tax elections the LLC has made.
By default, a single-member LLC is a “disregarded entity” for tax purposes. The owner reports all rental income and expenses directly on Schedule E of their Form 1040, as if they were a sole proprietor. In this case, the LLC does not have a separate federal filing requirement.
A multi-member LLC is treated as a partnership by default. It must file a partnership tax return, Form 1065, and use Form 8825 for its rental activities. The LLC then issues Schedule K-1s to its members, who report their share on Part II of their personal Schedule E.
An LLC can also elect to be taxed as an S corporation by filing Form 2553. If this election is made, the LLC files Form 1120-S and uses Form 8825 for its rental income, regardless of the number of members.