Schedule E is the IRS form where you report supplemental income and loss from rental properties, partnerships, S corporations, estates, and trusts. You attach it to your Form 1040 when filing your individual tax return. The form has multiple parts, but most people filling it out for the first time are dealing with Part I (rental real estate) or Part II (income passed through from a business entity). Here’s how to work through each section.
What Schedule E Covers
Schedule E has four parts, and you only fill out the ones that apply to you:
- Part I: Income or loss from rental real estate and royalties
- Part II: Income or loss from partnerships and S corporations
- Part III: Income or loss from estates and trusts
- Part IV: Income or loss from real estate mortgage investment conduits (REMICs)
Parts I and II are by far the most common. If you own rental property or receive a Schedule K-1 from a partnership or S corporation, those are the sections you need.
Part I: Rental Real Estate and Royalties
Part I is where you report income and expenses for up to three rental properties. If you have more than three, you use additional copies of Part I and combine the totals.
Property Details (Lines 1-2)
For each property, enter the street address and the type of property (single family residence, multi-family residence, vacation/short-term rental, commercial, land, royalties, or self-rental). You also need to report how many fair rental days and how many personal use days the property had during the year. This matters because the IRS uses these numbers to determine whether the property qualifies as a rental activity or a personal residence, which changes how losses are treated.
Reporting Rental Income (Line 3)
On line 3, enter the total rents received for each property. This includes all rent payments from tenants plus any advance rent, regardless of what period it covers. If a tenant paid you January rent in December, that counts as income for the year you received it. Security deposits count as income only if you keep them or apply them to rent, not if you plan to return them.
Deducting Expenses (Lines 5-19)
The form lists specific expense categories, each on its own line. You enter the amount you spent in each category for each property. The categories include:
- Advertising
- Auto and travel
- Cleaning and maintenance
- Commissions
- Insurance
- Legal and professional fees
- Management fees
- Mortgage interest paid (reported to you on Form 1098)
- Other interest
- Repairs
- Supplies
- Taxes (property taxes, not income taxes)
- Utilities
- Depreciation expense or depletion (line 18)
- Other expenses (line 19, where you list anything not covered above)
Keep receipts and records for every expense. The IRS can ask you to substantiate any deduction, and without documentation, you lose it.
Calculating Your Profit or Loss (Lines 20-26)
Line 20 totals your expenses. Line 21 subtracts total expenses from total income to give you net income or loss for each property. If you have a loss, the passive activity rules come into play (more on that below). The totals from all properties flow to line 26, which carries over to your Form 1040.
How Depreciation Works on Schedule E
Depreciation is the biggest deduction most rental property owners claim, and it’s not optional. The IRS requires you to deduct the cost of a rental building over its useful life, whether or not you want to. For residential rental property, the recovery period is 27.5 years. For commercial property, it’s 39 years.
You can only depreciate the building itself, not the land underneath it. When you buy a property, you need to split the purchase price between land and building. The standard approach is to use the ratio of each component’s fair market value to the total value at the time of purchase. Your property tax assessment often breaks this out, or you can use an appraisal.
For example, if you bought a rental house for $300,000 and the land is worth $75,000, your depreciable basis is $225,000. Divided over 27.5 years, that gives you roughly $8,182 per year in depreciation expense, which you enter on line 18.
You need to attach Form 4562 (Depreciation and Amortization) only if you placed new property into service during the current tax year, you’re claiming depreciation on listed property like a vehicle, or you’re taking a Section 179 deduction. If you’re simply continuing to depreciate a property you already owned in prior years, you calculate the amount yourself and enter it directly on line 18 without attaching Form 4562.
Passive Activity Loss Rules
Rental real estate is generally treated as a passive activity, which means losses from rental properties can usually only offset other passive income. You can’t automatically use a rental loss to reduce your wages or other non-passive income.
There’s one important exception. If you actively participate in managing your rental property (making decisions about tenants, repairs, and lease terms, even if you hire a property manager), you can deduct up to $25,000 in rental losses against your non-passive income. This $25,000 allowance phases out as your modified adjusted gross income rises above $100,000 and disappears entirely at $150,000.
If your losses exceed what you’re allowed to deduct, the disallowed portion carries forward to future years. You calculate the allowable loss using Form 8582, Passive Activity Loss Limitations, which you attach to your return along with Schedule E.
Part II: Partnerships and S Corporations
If you’re a partner in a partnership or a shareholder in an S corporation, the entity sends you a Schedule K-1 each year showing your share of income, deductions, and credits. You transfer that information into Part II of Schedule E.
Entity Information (Line 28)
For each entity, you enter:
- Name of the partnership or S corporation
- Entity type: “P” for partnership, “S” for S corporation
- Employer Identification Number (EIN)
- Foreign partnership checkbox: mark if applicable
- Basis computation checkbox: check this if you’re reporting a loss, received a distribution, disposed of stock, or received a loan repayment from an S corporation
- At-risk checkbox: check if any amount of a reported loss is not at risk
Splitting Passive and Nonpassive Income
Part II requires you to separate income and losses into passive and nonpassive categories. Your Schedule K-1 and its instructions will tell you which amounts fall into each bucket.
- Column (g): Passive loss allowed (you may need Form 8582 to calculate this)
- Column (h): Passive income from your K-1
- Column (i): Nonpassive loss from your K-1
- Column (j): Section 179 expense deduction, if any
- Column (k): Nonpassive income from your K-1
The IRS cross-references what you report on Schedule E with the K-1 data the entity filed. Make sure your numbers match exactly. If you receive a corrected K-1 after you’ve already filed, you’ll need to amend your return.
Totaling Part II (Lines 30-32)
Line 30 adds up all passive and nonpassive income. Line 31 adds up all allowed losses. Line 32 combines income and losses into a single total that eventually flows to your Form 1040.
Parts III and IV
Part III works similarly to Part II but covers income from estates and trusts. You’ll receive a Schedule K-1 from the estate or trust (Form 1041 K-1 rather than the Form 1065 or 1120-S K-1 used for partnerships and S corporations). Enter the estate or trust name, EIN, and your share of income or loss in the appropriate passive and nonpassive columns.
Part IV applies only if you receive income from a real estate mortgage investment conduit, which is uncommon for most individual filers. If it applies, your REMIC will provide a Schedule Q with the figures you need.
Bringing It All Together (Part V)
Part V is where you add up the totals from all four parts. Line 41 combines the net income or loss from rental properties, partnerships, S corporations, estates, trusts, and REMICs into a single number. This is the figure that transfers to Schedule 1 of your Form 1040, where it becomes part of your total income for the year.
If you have net losses that were limited by the passive activity rules, keep track of those carryforward amounts. You’ll need them when you fill out Schedule E next year, and they become fully deductible in the year you sell the property or dispose of your interest in the passive activity.
Records to Keep on Hand
Before you sit down to fill out Schedule E, gather the following:
- Rental income records: lease agreements, bank deposit records, rent payment logs
- Expense receipts: organized by category (repairs, insurance, property taxes, utilities, etc.)
- Mortgage interest statement: Form 1098 from your lender
- Depreciation records: purchase price, date placed in service, land/building allocation, prior year depreciation taken
- Schedule K-1 forms: from every partnership, S corporation, estate, or trust in which you have an interest
- Form 8582 worksheets: if you have passive losses that may be limited
The IRS recommends keeping records related to rental property for at least three years after filing the return, though records supporting your property’s cost basis should be kept for as long as you own the property plus three years after you report the sale.