Schedule E: What People Who Rent Out Properties Need to Know

Are you earning extra income from rentals — even a room in your home? Many people have the opportunity today to earn extra income from renting out space for others to live in.

Whether you’re renting out just a room or an entire home, get ready to fill out Schedule E. (This IRS form’s title is Supplemental Income and Loss.)

What the Form Does and Who Uses It: Schedule E Basics

Schedule E exists for taxpayers to report their passive income. And that’s quite relevant to our favorite subject: deeds.

If you’re a deed holder, chances are high that you could earn passive income from renting out a property, or even just a room. Today’s home-sharing platforms make this form of income accessible to many homeowners. And so many homeowners have rooms to spare!

A recent study from the National Association of REALTORS® through Realtor.com® shows the number of deed holders with extra bedrooms reaching an all-time high: 31.9 million. (Compare this to just about 4 million in 1970).

Why? The answer could be two-fold. We already know that many people have hesitated to downsize because buying a small home is not as easy as it used to be. Listing prices and mortgage rates are high. The Realtor.com® study points to another factor. U.S. Census figures show that fewer people are living in each home. In other words, family sizes are shrinking.

Those who opt to rent out the extra space they own will use IRS Form 1040 to file individual tax returns. Schedule E gets submitted along with Form 1040. Whether you own apartments or just use a home-share platform to rent out a room, whether you’re a pro or a newbie, you’ll need to fill out a Schedule E form.  

Here, we explore the art of reporting rentals on Schedule E. Let’s take a brief look at income, then at losses. For case-specific tax questions, always consult your tax expert.

What Counts: “Passive” Rental Income  

A Schedule E form lets a taxpayer add up and report any income or losses from rental real estate (or other passive income, like royalties and so forth). Rental income can come either from residential or commercial renters.

You must report rental property income to the IRS if you:

• Rent out a room through Airbnb or another homestay platform.

• Rent a vacation home to guests part of the year.

• Collect income from long-term renters.  

Note that Schedule E exists for adding up and reporting supplemental income and losses. This is in contrast to Schedule C. Schedule C comes into the picture when you’re reporting income and losses from substantial services (such as providing breakfasts, or cleaning as a service). Schedule E would be for reporting just what an owner would be expected to offer to a renter. So, if you’re an investor-owner who also provides comprehensive services for renters, Schedule C may be the appropriate form, not Schedule E.

You would also use Schedule C if your core business is running rental properties. But unless you have registered a property management company with the state, you’re getting passive income to be reported on Schedule E. The IRS categorizes payments from renters as passive income — even though it might not feel so “passive” to the investor owner who runs the rental units!

Unless the taxpayer’s situation changes fundamentally, Schedule E or Schedule C should be selected consistently from year to year. 

Accounting for Losses: Reducing Taxes Through Schedule E

Helpfully, you can report certain losses to reduce your taxable income (up to -$25K, currently).

Deductible expenses include:

• Taxes. State and local property taxes, up to the allowed total for the type of rental property.

• Operating expenses. Money to hire property managers, landscaping teams, attorneys and other professionals, as well as services like utilities, waste pickups, and water.

• Repairs. The costs of replacing appliances and repairing or maintaining systems.

Your accountant or tax pro can point out important details in the IRS passive activity loss rules and exceptions, and walk you through the finer points of reporting depreciation to the IRS. Roughly speaking, this involves recovering losses from the property’s wear and tear as a rental home.

On the flip side, upgrades and additions are known as capital improvements. They are not losses, because they add value to the property. You’ll add to your original cost basis for the property to offset taxes when you sell your home.

What if your losses amount to more than your gains over the past year? Unfortunately, you can’t claim the amount of losses that exceeded your gains. In other words, you can’t deduct more in losses than your total passive earnings.

For most taxpayers with an adjusted gross income of $150K or more, losses can’t be claimed on Schedule E at all, and should be carried forward instead. Other taxpayers might opt to carry losses into future years as well, depending on the income they currently draw, and how they might want to reduce the income they report in future years. Double-check the IRS website for current caps and new details.

Not renting much at all these days? Here’s how to know if your home counts as a rental property or a primary residence.

Getting It Done: Will You File on Your Own, or Seek Expertise?

After filling in the sections that apply to your situation, the taxpayer files Form 1040 with the necessary additional forms and schedules. Filing for the appropriate reductions helps to offset income from a job, or to offset other income, whether job-related or retirement-related.  

Forms can be submitted online or by mail before the IRS deadlines.

We hope this brief coverage of the Schedule E tax form has been helpful today. Many variations exist on this topic, including things such as using Form 1065 for partnerships or LLCs opting to be classified as partnerships on their returns. Yes, as you know, individual taxpayers who earn supplemental income need to file a Schedule E. It’s also used by those who receive earnings from partnerships and S corporations as well.

You may find that some of today’s discussion applies to you. For individualized guidance, speak with an accountant well before the April rush. The tax return software that’s on the market today may not always offer the best answers to advanced tax strategy questions in particular situations.

Important note: Deeds.com is not a financial advisor. This material is not intended as, and should not be relied upon as, tax advice.