Schedule E Worksheet: How to Report Rental Income

IRS Form 1040, Schedule E, is the document for reporting income or loss from sources like rental real estate, royalties, partnerships, S corporations, estates, and trusts. For rental property owners, this form is the tool for communicating yearly financial activities to the IRS. Worksheets, included in the IRS instructions for the form, help organize and calculate the necessary figures before they are entered onto the tax form, ensuring accuracy and compliance.

Information Required for Schedule E

Before beginning, a thorough collection of documents is necessary to accurately complete a Schedule E worksheet. You must gather all records related to the rental property’s income and expenses for the tax year.

For income verification, you will need signed rental agreements, bank statements showing deposited rent payments, and records of payments for lease cancellations. You should also record the fair market value of any services or property received from a tenant in lieu of cash rent. While returnable security deposits are not counted as income, any portion retained to cover damages or unpaid rent must be reported.

On the expense side, a comprehensive set of documents is required. This includes Form 1098, Mortgage Interest Statement, from your lender, as well as records of property tax payments from your local government. You will also need insurance policies detailing the premiums paid, along with receipts and invoices for all repairs, maintenance, and cleaning. Utility bills, advertising costs, property management fees, and professional fees are also necessary.

To account for depreciation, you will need the property’s closing statements, such as the HUD-1 or Closing Disclosure, which establish the original cost basis. Records of any subsequent capital improvements, including invoices and proof of payment, are also needed to adjust this basis. The Schedule E form and its instructions can be downloaded from the IRS website.

Calculating Rental Income and Expenses

The process of calculating the figures for Schedule E begins with determining the total gross rental income. This includes all rent payments received throughout the year, any advance rent payments, and any portion of a security deposit that was not returned to the tenant. If you received property or services as rent, you must include their fair market value in your income calculation.

After establishing gross income, categorize and total all deductible expenses. The Schedule E worksheet provides categories for this, including:

• Advertising
• Auto and travel
• Cleaning and maintenance
• Commissions
• Insurance
• Legal or other professional fees
• Mortgage interest
• Repairs
• Supplies
• Taxes
• Utilities

A distinction must be made between current expenses and capital improvements. Current expenses, such as repairs, are costs that keep the property in good operating condition and are fully deductible in the year they are paid. Examples include fixing a leak, repainting a room, or replacing a broken window.

Capital improvements add value to the property, prolong its life, or adapt it to new uses. These costs are not immediately deductible but must be capitalized and depreciated over time. Examples include a new roof, a room addition, or a complete renovation. The cost of these improvements is added to the property’s basis.

If you use your vehicle for rental activities, such as traveling to the property, you can deduct the associated costs. You have the option to deduct your actual expenses or use the standard mileage rate. For 2025, the standard mileage rate is 70 cents per mile.

If you rent out only a portion of your property, you must allocate expenses and deduct only the portion that applies to the rented space. This allocation is based on the square footage of the rented area compared to the property’s total square footage.

Understanding Depreciation

Depreciation is a tax deduction that allows you to recover the cost of your rental property and its improvements over time. It accounts for the wear and tear, deterioration, or obsolescence of the asset. You can begin to depreciate a rental property when it is “placed in service,” which means it is ready and available for rent.

The building and any improvements can be depreciated, but the land cannot. You must separate the cost of the property between the land and the building to calculate depreciation accurately. This includes appliances, carpeting, and other equipment used in the rental.

The primary method used to depreciate residential rental property is the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, residential rental properties are depreciated over a recovery period of 27.5 years, meaning you deduct a portion of the property’s cost basis each year.

Depreciation is calculated on Form 4562, Depreciation and Amortization, and the result is then reported on Schedule E. You should claim the correct amount of depreciation each year, as you may be required to pay taxes on any unclaimed depreciation when you sell the property.

Transferring Worksheet Data to Form Schedule E

After completing your worksheets, transfer the totals to Schedule E. Each property is reported in a separate column on Part I of the form.

Your total gross rental income is entered on Line 3 of Schedule E. The various expense categories you have totaled will be entered on Lines 5 through 19. For example, mortgage interest is reported on Line 12, and property taxes are reported on Line 16.

The depreciation amount is entered on Line 18. After listing all individual expenses, you will total them and enter the result on Line 20, “Total expenses.”

Finally, subtract your total expenses on Line 20 from your gross income on Line 3 to determine your net rental income or loss, and enter this figure on Line 21. If you have more than three rental properties, you will need to attach additional Schedule E forms. The combined totals for all properties are entered on only one Schedule E on lines 23a through 26.