How to File Schedule E: Supplemental Income and Loss

IRS Form 1040 Schedule E, Supplemental Income and Loss, is used to report income and losses from sources outside of a typical salary. It provides a standardized way to calculate net profit or loss from rental properties, royalties, partnerships, S corporations, estates, and trusts.

The income or loss calculated on Schedule E is transferred to Schedule 1 of Form 1040 and combined with other income to determine your total income. This form attaches to your main Form 1040 individual tax return.

Who Is Required to File Schedule E

Rental Property Owners

Individuals who receive income from renting real estate, such as single-family homes, apartments, or commercial buildings, are required to file Schedule E. The form is used to report gross rental income and deduct related expenses. This is distinct from operating a real estate business that provides significant services to tenants, like a bed and breakfast, which is reported on Schedule C.

Royalty Income Recipients

Taxpayers who receive royalty payments must report this income on Schedule E. Royalties are payments for the right to use property, including intellectual property like copyrights and patents, or for the extraction of natural resources like oil or gas from a property you own.

Investors in Pass-Through Entities

If you are a partner in a partnership, a member of an LLC taxed as a partnership, or a shareholder of an S corporation, you will need to file Schedule E. These are “pass-through” entities, meaning profits and losses are not taxed at the business level. Instead, the financial results are passed through to the individual owners, who report their share on Schedule E.

Beneficiaries of an Estate or Trust

Individuals who are beneficiaries of an estate or a trust and receive income from it will also use Schedule E. The fiduciary of the estate or trust provides each beneficiary with a form that outlines their share of the income or loss to be reported.

Information and Documentation Needed for Filing

For Rental Properties (Part I)

To complete Part I for rental properties, you will need the physical address and property type for each rental unit. You also need a complete record of all income received, including rent, advance rent, and late fees. A detailed list of all categorized expenses is also required.

Common expense categories include:

• Advertising
• Auto and travel
• Insurance
• Legal and professional fees
• Management fees
• Mortgage interest (reported on Form 1098)
• Repairs and supplies
• Taxes and utilities

For depreciation, you will need the property’s cost basis and the date it was placed in service.

For Partnerships, S Corps, Estates, and Trusts (Parts II & III)

For income from partnerships, S corporations, estates, or trusts, the primary document you need is a Schedule K-1. The entity is required to provide this form to each partner, shareholder, or beneficiary. The Schedule K-1 details your specific share of the entity’s income, losses, deductions, and credits for the tax year. You will need the entity’s name and its Employer Identification Number (EIN) from this form.

Completing Part I for Rental Real Estate and Royalties

Part I of Schedule E is for reporting income and expenses from rental real estate and royalties. You must list the physical address and type for each of your rental properties. If you have more than three properties, you will need to attach additional Schedule E forms.

Gross rental income is reported on line 3, which includes all rents received and any services or property received as rent at their fair market value. Royalty income is reported on line 4. The expense section, on lines 5 through 17, allows you to deduct the costs associated with your rental activity. For travel expenses, you can deduct the actual costs or use the standard mileage rate.

Depreciation, reported on line 18, is a deduction that allows you to recover the cost of your rental property over its useful life. Residential rental property is depreciated over 27.5 years. To calculate this deduction, you will need to complete and attach Form 4562, Depreciation and Amortization.

After listing all expenses, you total them on line 19 and subtract this amount from your income to determine your net income or loss, which is entered on line 21. The total income or loss from all your rental properties is then calculated and entered on line 26.

Reporting Income from Partnerships, S Corporations, Estates, and Trusts

Reporting income from partnerships, S corporations, estates, and trusts involves transferring information from the Schedule K-1 you received. Part II of the form is for income from partnerships and S corporations, while Part III is for estates and trusts. For each entity, you will enter its name and Employer Identification Number (EIN).

The Schedule K-1 breaks down your share of the entity’s financial activity into passive and nonpassive categories, which must be reported in the corresponding columns on Schedule E. Passive income comes from activities in which you do not materially participate. Nonpassive income comes from activities where you do materially participate.

The Schedule K-1 instructions guide you in placing the correct figures in the correct columns. You will transcribe the numbers for ordinary business income, net rental real estate income, and other items directly onto the appropriate lines in Part II or Part III of Schedule E.

Key Tax Concepts for Schedule E Filers

Passive Activity Loss (PAL) Rules

The Passive Activity Loss (PAL) rules may limit your ability to deduct losses from passive activities. A passive activity is any rental activity or any business in which you do not materially participate. If your total losses from passive activities exceed your total income from them, the excess loss is disallowed for the current tax year.

To determine your allowable passive loss, you must file Form 8582, Passive Activity Loss Limitations. Any disallowed losses are not permanently lost. They are carried forward to future tax years to offset passive income or can be deducted in full when you sell your entire interest in the activity.

At-Risk Limitations

The at-risk rules, detailed on Form 6198, At-Risk Limitations, can also limit the amount of loss you can deduct. These rules state that you can only deduct losses up to the amount you have personally at risk in the activity. The amount at risk includes money you contributed, the adjusted basis of property you contributed, and amounts you borrowed for which you are personally liable.

You are not considered at risk for amounts protected against loss through nonrecourse financing or similar arrangements. The at-risk limitations are applied before the passive activity loss rules. You must first determine your deductible loss under the at-risk rules before applying the PAL rules.