How to File Schedule E (Form 1040) for Rental and Other Income

Reporting rental income, royalties, and earnings from partnerships or S corporations requires filing Schedule E (Form 1040). This form helps taxpayers detail supplemental income and associated expenses, ensuring accurate tax reporting. Properly completing it can maximize deductions while keeping taxpayers compliant with IRS regulations.

Understanding how to file Schedule E correctly is essential for avoiding errors that could trigger audits or penalties.

Obtaining the Correct Form

Schedule E (Form 1040) is available on the IRS website as a fillable PDF. Taxpayers using tax preparation software will typically have it included automatically if required. Those filing by mail can request a physical copy from the IRS or obtain one from a local tax office.

The form accommodates multiple types of supplemental income, so selecting the correct sections based on income sources is important. Since tax laws change annually, taxpayers should use the most recent version to prevent processing delays or errors. The IRS updates forms regularly to reflect new regulations.

If additional space is needed, multiple copies of Schedule E can be attached to a single return. Each property or income source must be reported separately, with totals consolidated on the first page before transferring the final amounts to Form 1040.

Types of Income Included

Schedule E reports supplemental income that does not fall under wages or self-employment earnings. The form is divided into sections for rental real estate, royalties, and earnings from partnerships or S corporations, each with specific reporting requirements.

Rental Real Estate

All rental income must be reported, whether from a single-family home, multi-unit building, vacation rental, or commercial space. Payments received in cash or through third-party services like Airbnb or Vrbo must be included. Security deposits retained as income, such as when a tenant breaks a lease, are also taxable.

Depreciation is a key deduction. The IRS allows property owners to depreciate the building (but not the land) over 27.5 years for residential properties and 39 years for commercial properties. For example, if a residential rental property (excluding land) is valued at $275,000, the annual depreciation deduction would be $10,000 ($275,000 ÷ 27.5).

Rental losses are subject to passive activity loss rules. Taxpayers who actively manage their properties may deduct up to $25,000 in rental losses if their adjusted gross income (AGI) is below $100,000. This deduction phases out between $100,000 and $150,000 of AGI. Higher-income taxpayers may not be able to claim rental losses unless they qualify as real estate professionals.

Royalties

Royalties are payments for the use of intellectual property, natural resources, or other assets. Common sources include book publishing, music licensing, patents, trademarks, and oil or gas leases. These payments are typically based on a percentage of revenue generated from the asset’s use.

Royalty income is reported in Part I of Schedule E unless derived from self-employment. If a taxpayer actively creates and markets intellectual property, the income may be considered self-employment earnings and reported on Schedule C. For example, an author receiving a one-time payment for selling book rights reports it on Schedule E, while an author who continuously markets and sells books may need to use Schedule C.

Royalty income is subject to ordinary income tax rates, which range from 10% to 37% depending on total taxable income. If royalties are received from foreign sources, taxpayers may need to file Form 1116 to claim a foreign tax credit. Depletion deductions may apply to royalties from natural resources, allowing taxpayers to reduce taxable income based on resource extraction.

Partnerships or S Corporations

Income from partnerships and S corporations is reported using Schedule K-1, which details each taxpayer’s share of the entity’s income, deductions, and credits. Unlike wages, this income is not subject to self-employment tax, but it may be subject to the Net Investment Income Tax (NIIT) of 3.8% if total income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.

If the partnership or S corporation operates at a loss, the taxpayer may deduct their share, but only up to their basis in the entity. Basis is determined by initial investment, additional contributions, and allocated income or losses. Losses exceeding basis are suspended and carried forward until basis is restored.

Passive activity rules also apply. If the taxpayer does not materially participate in the business, losses may be limited. Material participation is determined by meeting one of several IRS tests, such as working at least 500 hours in the business during the year.

Expense Reporting

Deducting expenses accurately on Schedule E helps reduce taxable income. Only costs considered “ordinary and necessary” qualify, meaning they must be common in the industry and essential for maintaining the income-producing activity.

Operating expenses, such as property management fees, advertising, and insurance premiums, are fully deductible in the year they are incurred. Mortgage interest is another significant deduction, but only the interest portion of the payment qualifies, not the principal. Taxpayers must use Form 1098, issued by the lender, to determine the deductible amount. Points paid at closing may be deductible over the life of the loan rather than in a single year.

Repairs and maintenance must be distinguished from capital improvements. Routine expenses like fixing a leaky faucet or repainting walls are deductible in the year paid. Major upgrades that increase a property’s value or extend its useful life, such as installing a new roof or upgrading HVAC systems, must be capitalized and depreciated over time.

Legal and professional fees qualify as deductible expenses if directly related to managing income-generating activities. This includes attorney fees for lease agreements, accounting services for tax preparation, and costs associated with defending property disputes. Legal expenses tied to acquiring a property must be added to its basis rather than deducted immediately.

Travel expenses related to managing rental properties or meeting with business partners may be deducted, but strict documentation is required. The IRS mandates that mileage for trips to rental properties be tracked using a log, with the standard mileage rate for 2024 set at 67 cents per mile. Alternatively, actual vehicle expenses such as gas, insurance, and maintenance can be deducted if the vehicle is used exclusively for rental activities.

Completing Each Part

Accurately filling out Schedule E requires careful attention to detail. The form captures income and deductions across multiple properties or income sources, requiring taxpayers to maintain clear records. Each property or entity is treated separately, making an organized ledger of rental agreements, royalty contracts, and partnership distributions essential.

For rental properties used for both personal and business purposes, expenses must be allocated accordingly. If rented for fewer than 15 days in a year, rental income is excluded from taxation, but expenses cannot be deducted. If rented for more than 14 days, all rental income must be reported, and a proportional share of expenses can be deducted.

Depreciation schedules must align with IRS guidelines. Residential rental properties generally follow a straight-line depreciation method over 27.5 years, whereas nonresidential properties are depreciated over 39 years. Furniture, appliances, and other personal property used in rental activities may qualify for accelerated depreciation under Section 179 or bonus depreciation provisions.

Filing with Form 1040

Once Schedule E is completed, the final figures must be transferred to Form 1040. The total net income or loss from all reported properties, royalties, and pass-through entities is entered on Schedule 1 before carrying the final amount to line 8 of Form 1040. Since Schedule E income is not subject to self-employment tax, it does not impact Schedule SE calculations, but it can influence overall tax liability, including the applicability of the Net Investment Income Tax (NIIT).

Taxpayers reporting losses must comply with at-risk and passive activity loss limitations. If losses are disallowed due to insufficient basis or passive activity restrictions, they must be carried forward. The IRS may scrutinize excessive losses, making thorough documentation important. If foreign rental income or royalties are reported, taxpayers may need to file Form 1116 to claim a foreign tax credit.

Document Retention

The IRS generally requires taxpayers to keep records for at least three years from the date the return was filed, but longer retention periods apply in certain cases. If a taxpayer reports a loss that is carried forward, records must be kept until the loss is fully utilized. For depreciation, documentation should be retained for the entire recovery period plus three years after the asset is fully depreciated or disposed of.

Supporting documents should include lease agreements, royalty contracts, partnership agreements, mortgage statements, and receipts for deductible expenses. Digital recordkeeping is acceptable, but records must be clear and easily retrievable.