IRS Schedule E is a catchall form for several types of income. You need to attach Schedule E to your Form 1040 (or Form 1040NR) if you earn rental income, receive royalties, or have income from a pass-through entity, such as a partnership, LLC, or S corporation.
Although reporting these types of income on your tax return can be confusing, Schedule E is actually pretty simple. You only need to fill out the sections that pertain to you.
Reporting Rental Income on Schedule E
You use Part I of Schedule E to report income or loss from rental real estate, as well as royalty income. If you rent other types of property, such as a car or equipment, the Internal Revenue Service considers that to be business income, and it goes on Schedule C rather than Schedule E.
Rental income can come from renting out a commercial building, house, apartment, or even a room in your home. Whether you rent out one property or many, you’ll use Schedule E to report rental real estate activities on your federal income tax return. Part I includes three columns — A, B, and C — for listing the address of each property, and the income and expenses of each.
Schedule E also asks for the number of days you owned the property, how many days it was rented or available to rent, and how many days you used the property for personal use.
For each property, you’ll list the total rental income received for the year in box 3. Beneath the space for listing income are several lines for listing common rental expenses, which include:
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- Mortgage interest
- Other interest
- Depreciation expense
If you have any deductible rental expenses that don’t fit into the provided categories, you can enter the total expenses on line 19. You may need to attach an itemized list of those expenses to your return. If you use online tax software like H&R Block, the software will create and attach the list for you.
If you have more than three rental properties, you can complete and attach as many Schedule Es to your return as you need to list each of the properties you rent out. Lines 23a through 26 can be used to combine totals from all of your other Schedule Es.
Keep in mind that the IRS classifies all rental real estate property as a passive activity. If your rental activities resulted in a rental real estate loss, passive activity loss rules state you can only use that loss to offset income from another passive activity.
The IRS provides two exceptions to the passive activity loss limitations, which allow taxpayers to use passive losses to offset earned income (such as salary or wages):
- Taxpayers with a modified adjusted gross income (MAGI) less than $100,000 can deduct up to $25,000 of passive losses against other income.
- Taxpayers who qualify as a real estate professional can deduct passive activity losses.
You can read more about passive activity losses and who qualifies as a real estate professional in IRS Publication 925.
Pro tip: If you want to make sure your taxes are done accurately without spending a fortune, use tax prep software like H&R Block. They have real CPAs who can do a line-by-line review, giving you peace of mind that you’re filing a 100% accurate return.
Reporting Royalty Income on the Schedule E Tax Form
Royalty income is payment you receive for the use of your property. The most common types of royalties are for:
- Use of intellectual or artistic property, such as copyrights, trademarks, and patents
- Extraction of oil, gas, or minerals from your property
If you receive at least $10 in royalties for the tax year, the payer should send you a Form 1099-MISC with royalty income reported in box 2.
There are two ways to report royalty income. If the royalty comes from your ordinary business operations, it should be included in your gross revenues on Schedule C. For example, if you are an author who receives royalties from books, that income goes on Schedule C.
On the other hand, if you receive royalties from an investment in a mining operation, and mining is not a part of your business, you would report the income from royalty income on Schedule E.
Royalty income also goes in Part I of Schedule E. Under Type of Property, enter code 6 to indicate the income is coming from a royalty rather than a rental. Enter your total royalty income on line 4.
If you have expenses related to producing your royalty income, you can enter them on lines 5 through 20 of Part I. One of the most common types of royalty expenses is depletion.
Depletion expense is the using up of natural resources due to mining, drilling, felling trees, etc. There are two ways to calculate depletion.
With cost depletion, your depletion expense is based on the number of units extracted. For example, say you purchased a piece of land for $200,000 and then discover oil on the property.
You hire an expert to survey the oil well, and they estimate 30,000 barrels of oil can be pumped from the ground. That year, you pump 1,000 barrels of oil. Your depletion deduction would be:
$200,000 value of land / 20,000 barrels x 1,000 barrels = $10,000
The percentage depletion method multiplies your income from the royalty by a percentage (in most cases, 15%). Returning to the oil well example above, assume you collect $50,000 from the sale of oil in the first year. Your depletion deduction would be:
$50,000 x 15% = $7,500
Whichever method you use, you would claim your depletion expense on line 18 in Part I of Schedule E.
Reporting Partnership & S Corporation Income on IRS Schedule E
Part II of Schedule E is for reporting taxable income or loss from a partnership or S corporation. If you are a member or shareholder of one of these pass-through entities, you should receive a Schedule K-1 at the end of the year reporting your share of the business’s net income or loss and deductions. You or your tax preparer use the information from Schedule K-1 to prepare Part II of Schedule E.
There are three rows in Part II, labeled A through D, to enter the name, employer identification number, and other information from up to four Schedule K-1s. If you need more space, you can complete and attach as many Schedule Es to your return as you need.
Reporting Trust, Estate, & REMIC Income on Schedule E
Part III of Schedule E is for reporting income or losses from trusts and estates. Like partnerships and S corporations, trusts and estates issue a Schedule K-1 to each beneficiary, reporting their share of income, losses, and deductions. You’ll use that K-1 to complete Part III of Schedule E.
Part IV of Schedule E is for reporting income or loss from a Real Estate Mortgage Investment Conduit (REMIC). A REMIC buys residential and commercial mortgages with investor money and collects mortgage payments. If you are an investor in a REMIC, you should receive Schedule Q telling you how much of the REMIC’s profit you are responsible for reporting on your tax return.
Completing Schedule E can be daunting if you aren’t familiar with the process. If you’re unsure of where to enter information, it’s a good idea to work with a qualified tax professional. They can prepare your return correctly and help you take advantage of every available deduction.
Have you ever received income from a rental, royalty, or pass-through business?