What Tax Form Is Used for Rental Property?

Understanding the specific forms required by the Internal Revenue Service (IRS) simplifies navigating the tax implications of owning rental property. Rental property taxation in the U.S. involves reporting income, deducting permissible expenses, and accounting for the property’s declining value. Proper documentation and accurate form submission are necessary for compliance and to potentially minimize tax obligations. This guide provides an overview of key tax forms and considerations for rental property owners.

Reporting Rental Income and Expenses on Schedule E

IRS Schedule E, “Supplemental Income and Loss,” is the primary form for individual rental property owners to report income and expenses. For each property, you will list its type, street address, percentage of ownership, and the number of days it was rented at fair rental value, along with any personal use days.

Income reported on Schedule E includes rent received, advance rent, and expenses paid by the tenant on your behalf. Deductible expenses commonly reported include advertising, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, other interest, repairs, supplies, taxes, and utilities. It is important to distinguish between deductible rental expenses, which are routine operating costs, and capital improvements, which add value or prolong the property’s life. Capital improvements, such as a new roof or a kitchen remodel, are not fully deductible in the year incurred but are added to the property’s cost basis and depreciated over time. The net income or loss from Schedule E is then transferred to your main tax return, Form 1040.

Claiming Depreciation with Form 4562

Depreciation is a significant tax deduction for rental property owners, allowing them to recover the cost of the property over its useful life. IRS Form 4562, “Depreciation and Amortization,” is used to calculate and claim this deduction. Generally, only the building and certain assets within it, such as appliances and furniture, can be depreciated; land is not depreciable.

Residential rental property is typically depreciated using the Modified Accelerated Cost Recovery System (MACRS) over 27.5 years. To calculate depreciation, you need the property’s cost basis, which is generally its purchase price plus certain closing costs, minus the value of the land. The placed-in-service date also matters, as a mid-month convention applies. Once calculated on Form 4562, the total depreciation amount is then transferred to Schedule E.

Understanding Passive Activity Loss Limitations with Form 8582

Rental real estate activities are generally considered passive activities by the IRS, which means that losses from these activities can only offset passive income. IRS Form 8582, “Passive Activity Loss Limitations,” is used to determine how much of a passive loss can be deducted in a given tax year. This form is necessary if you have an overall loss from passive activities.

A special allowance allows some taxpayers to deduct up to $25,000 of rental real estate losses against non-passive income, such as wages or portfolio income. This allowance begins to phase out when your modified adjusted gross income (MAGI) exceeds $100,000 and is completely phased out once MAGI reaches $150,000. If your losses exceed this allowance or your MAGI is too high, the disallowed losses are carried forward to future tax years and can offset future passive income or be used when the activity is disposed of. Form 8582 helps taxpayers calculate the deductible passive loss amount and is attached to Form 1040.

Additional Forms for Specific Rental Scenarios

Beyond the primary forms, other IRS forms may be necessary depending on specific circumstances related to your rental property. When paying independent contractors, such as plumbers or electricians, $600 or more for services during the year, you are generally required to issue Form 1099-NEC, “Nonemployee Compensation.” For payments like commercial rent, Form 1099-MISC, “Miscellaneous Information,” might be required. You should obtain a Form W-9 from the contractor or service provider to gather the necessary taxpayer identification information for these forms.

Selling a rental property involves different tax forms to report any gain or loss. The sale is typically reported on IRS Form 4797, “Sales of Business Property,” and Schedule D, “Capital Gains and Losses.” Form 4797 is used for business property and helps account for depreciation recapture, which is the portion of the gain on sale that represents previously claimed depreciation and is often taxed at a higher rate. Schedule D then summarizes capital gains and losses, which are ultimately reported on Form 1040. For properties rented for fewer than 15 days during the year, income is generally not taxable, and expenses are not deductible.

Assembling and Submitting Your Rental Property Tax Return

Once Schedule E, Form 4562, Form 8582, and any other relevant forms are completed, the net income or loss from your rental activities is transferred from Schedule E to your main individual income tax return, Form 1040. This integration ensures all rental-related financial outcomes are included in your overall tax calculation. You should carefully review all forms for accuracy before submission.

Tax returns can be submitted electronically through tax software or with the assistance of a tax professional. Alternatively, paper forms can be mailed directly to the IRS. It is advisable to keep copies of all submitted forms and supporting documentation for your records. After submission, you can typically track the status of your return through IRS online tools.