If you have supplemental income, understanding the Internal Revenue Service (IRS) Schedule E: Supplemental Income and Loss form can make an impact on your tax return. When it comes to Schedule E vs. Schedule C filings, it’s important to know the difference, as well as how rental income and rental property play into the equation.
Let’s take a closer look at what Schedule E is, how it’s used to catalogue passive activity and supplemental income and what you need to know about recording rental income for tax purposes.
A Schedule E form is used as a supplement document that’s filed alongside a 1040 tax form to report any income or loss that you have incurred from rental real estate, royalties, partnerships, S corporations, estates or trusts. It’s commonly utilized for reporting rental-related activities from both residential and commercial properties.
Noting this, you may be asking yourself: “How does an IRS Schedule E: Supplemental Income and Loss tax form play into my tax filings, and will I need to fill one out?” If you’re a real estate investor or have received real estate income, the odds are that you will need to fill this form out.
No matter if you rent out a room of your house via online short-term rental services or own multiple rental properties with dedicated tenants, you’re obliged to report this income to the Internal Revenue Service.
A Schedule E makes the IRS aware of how much you’ve earned in rental income from each of these various holdings – and helps you understand how large of a tax bill that you can expect to incur in having done so.
View our affiliate disclosure policy here.
Schedule E is used for reporting passive rental income, or income relating to business activities that owners do not participate in on a regular, substantial and continuing basis.
Mind you: You may very well put a great deal of effort into upkeeping and maintaining your properties. However, rental real estate income is considered passive income by the IRS – and self-employment tax (which Schedule E does not apply) is therefore not levied on real estate investors.
On the other hand, Schedule C is used for reporting expenses or deductions relating to any rental income that you have brought in. In effect, a schedule C form (which tracks profit and loss from small business) may be a required filing depending on the exact nature of your business activities.
For example, say you’re a landlord who rents out properties and buildings that provide basic services as categorized under Internal Revenue Service guidelines (heating, lighting, trash removal, water, etc.). In this instance, you can expect to report your rental income and expenses on a Schedule E tax form.
On the flip side, if you instead provide substantial services (defined by the IRS as cleaning, food delivery, or other perks beyond those that a landlord would traditionally provide), it’s a different story. Under this scenario, you’d be expected to report your rental income and expenses on Schedule C of your Form 1040 tax document.
If your business is classified as a partnership, you will need to report these items on a Form 1065 form instead. What’s more, if you do provide your rental tenants with substantial services (like routine meal or maid service), and need to file a Schedule C tax form, you’ll also be subjected to self-employment tax as well.
Schedule E is a commonly used tax form that applies to individuals with real estate holdings of all kinds. Here’s how the different tax forms break down for individual investors versus a business like an S Corporation.
Both professional and armchair real estate investors will need to file a Schedule E form. This includes those who own apartment complexes as well as those who Airbnb a room. This Schedule E document will be attached to your Form 1040 – a basic form which individual taxpayers must file for purposes of determining how much money that they owe in taxes each year to the IRS.
Individual taxpayers need to file a Schedule E if they’ve earned supplemental income from rental real estate, partnerships, S corporations and other activities.
Things operate a little differently for partners and shareholders of S corporations. These businesses must file Form 8825 with the IRS instead. If you do happen to be a shareholder or owner of such a firm, you’ll must file a copy of the company’s Schedule K-1 with the Internal Revenue Service as well.
Your firm’s Schedule K-1 operates in similar fashion for the business as a W-2 form (which reports employment income) does for an individual. In other words, every year, a Schedule K-1 form is provided by business entities to partners and owners, which informs them about information concerning the company’s profits and losses. You’ll need to then pass this information along with a Form 8825 to the federal government.
You can file online or via mail with the IRS. When submitting the document, complete only the sections that apply to you and attach your Schedule E to your personal 1040 Form. Be sure to submit by the assigned deadline.
Naturally, there are many frequently asked questions (FAQs) surrounding a Schedule E document, which isn’t always the most straightforward tax form to complete. We’ll take a closer look at several below. Should you have other topics that you’re wondering about, or further questions about any queries below, be sure to speak with a qualified tax professional, who can also provide assistance if needed with completing these forms.
You must submit information regarding the type of real estate being rented out. These details are used determine if the property qualifies for any special IRS taxation rules such as those relating to certain land types or forms of self-rental.
Typically, yes – you need to file a Schedule E form for vacation rentals, including if you own a second home that you rent out to others. If you’re generating income through even an occasional rental, it must be accounted for on Schedule E.
However, in select cases (for example, those relating to second and vacation homes), it’s possible to prorate based on how much of the year that you’re personally using the property versus renting it out to others.
Generally, no, schedule E is not subject to self-employment taxation. At the same time, if you own a short-term rental and provide substantial services (above and beyond the norm that most landlords provide), you may potentially trigger self-employment taxes. Also be aware: Short-term rental property owners may face the possibility of having to pay state or local taxes as well.
You’ll find enough room to submit information on up to three rental properties on a Schedule E form. If you have more than three rental properties, you can use multiple Schedule E documents. As many as four partnership or S corporation businesses can also be included on the same Schedule E form.
A Schedule E is the official tax form the IRS asks taxpayers to use to report supplement income or loss from a wide range of sources, including real estate investments.
Need to report income or loss from rental real estate, such as royalties, partnerships, S corporations, estates, trusts and interest in real estate mortgage investment conduits (REMICs)? You’ll be attaching a Schedule E to your IRS Form 1040, which helps determine how much you’ll owe to the government.
Mind you, Forms 1040, 8825, Schedule E and other documents aren’t always the simplest to understand. If you’re looking to learn more about real estate investing and taxes, and get a better handle on how real estate accounting works, you can get started by visiting our Learning Center today.
View our affiliate disclosure policy here.
Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. A strategic adviser to four-star generals and a who’s-who of Fortune 500s, he’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD. The CEO of BIZDEV: The Intl. Association for Business Development and Strategic Planning™, his website is www.AKeynoteSpeaker.com.