How to Fill Out Schedule E: Supplemental Income and Loss

Schedule E, officially known as Supplemental Income and Loss, is an Internal Revenue Service (IRS) form used to report various types of income or loss. Its primary purpose is to capture financial results from rental real estate activities, royalties, and income or loss derived from pass-through entities like partnerships, S corporations, estates, and trusts. This form plays a central role in determining a taxpayer’s overall taxable income or loss.

Understanding Schedule E Requirements

Individuals generally file Schedule E if they receive income or incur losses from specific sources beyond typical wages or business profits. Schedule E categorizes supplemental income and loss into five parts, each addressing distinct financial activities.

Part I of Schedule E is dedicated to reporting income and expenses from rental real estate and royalties. This includes income from residential or commercial properties you own and rent out, as well as royalties from natural resources, copyrights, or patents.

Part II addresses income or loss from partnerships and S corporations. If you are a partner in a partnership or a shareholder in an S corporation, you will receive a Schedule K-1 (Form 1065 or Form 1120-S) detailing your share of the entity’s income, deductions, and credits. This information is then reported on Schedule E. Part III covers income or loss from estates and trusts, which is also reported to beneficiaries on a Schedule K-1 (Form 1041). Parts IV and V cover residual interests in Real Estate Mortgage Investment Conduits (REMICs) and farm rental income or loss based on crops or livestock produced by a tenant.

Gathering Your Information

Before completing Schedule E, collect all necessary financial records and documents. This involves identifying all income streams and corresponding expenses for each activity.

For rental real estate and royalties, gather detailed records of all income received, such as rent payments from tenants or royalty statements. Compile documentation for all deductible expenses, including advertising costs, auto and travel expenses related to the property, cleaning and maintenance fees, commissions paid, insurance premiums, legal and other professional fees, management fees, mortgage interest (reported on Form 1098), repairs, supplies, property taxes, and utilities if paid by you. Maintain accurate records for all transactions.

Depreciation is a deduction for rental properties, requiring a depreciation schedule. For residential rental properties, the IRS allows depreciation over 27.5 years using the straight-line method; land is not depreciable. You need the property’s address, acquisition date, and cost basis to calculate depreciation.

For income or loss from partnerships, S corporations, estates, and trusts, the primary document needed is Schedule K-1 from each entity. It is also important to track your basis in these entities, as losses you can deduct may be limited by your basis. You may also need Social Security Numbers (SSNs) or Employer Identification Numbers (EINs) for any relevant parties, such as tenants or payees. Tax forms and their instructions, including Schedule E, can be downloaded directly from the IRS website.

Completing Schedule E Part by Part

Begin completing Schedule E by entering your name and Social Security number at the top. Transfer gathered figures to the appropriate lines.

Part I of Schedule E is for rental real estate and royalties. For each rental property, provide its address, type, percentage of ownership, and days rented at fair market value and for personal use. Report gross rental income on Line 3. Enter specific expenses on corresponding lines, such as advertising, auto and travel, cleaning and maintenance, insurance, mortgage interest, other interest, taxes, utilities, and depreciation. Sum all expenses and subtract them from gross rental income to arrive at the net income or loss for each property, totaled on Line 26.

Part II is used to report income or loss from partnerships and S corporations. Information from your Schedule K-1 (Form 1065 or Form 1120-S) is entered here, including the entity’s name, EIN, and your share of ordinary business income or loss, net rental real estate income or loss, and other net rental income or loss. Part III is for income or loss from estates and trusts, similarly requiring the transfer of information from a Schedule K-1 (Form 1041) to the appropriate lines, including the entity’s name and EIN. Parts IV and V are completed if you have income or loss from REMIC residual interests or farm rental income, following similar reporting principles as other pass-through entities.

Finalizing Schedule E and Your Return

Once Schedule E is completed, the net income or loss figures are integrated into your overall tax return. The total net income or loss from Schedule E transfers to Line 5 of Schedule 1, “Additional Income and Adjustments to Income,” then flows to your main Form 1040. This ensures your supplemental income and loss are included in your adjusted gross income calculation.

Consider any limitations that apply to losses reported on Schedule E. Losses from rental real estate and other passive activities may be subject to Passive Activity Loss (PAL) limitations. Form 8582, “Passive Activity Loss Limitations,” calculates the amount of passive loss you can deduct in the current tax year. If your modified adjusted gross income is below $150,000, you may deduct up to $25,000 of rental real estate losses, provided you actively participated in the activity.

Losses from partnerships, S corporations, and certain other activities may also be limited by the at-risk rules. Form 6198, “At-Risk Limitations,” determines the maximum loss you can deduct based on your economic investment. You can only deduct losses up to the amount you are at risk for. Losses disallowed due to these limitations may be carried forward to future tax years.

Maintain thorough records for all income and deductions reported on Schedule E. Keep supporting documents, such as receipts, invoices, Schedule K-1s, and depreciation schedules, for at least three years from your original return’s filing date. Longer retention periods may be necessary if you carry forward a loss or if there are substantial errors.