Form 1040, Schedule E is used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates and trusts. This form is commonly used to report income or loss from rental real activities both residential real estate and commercial real estate.
Schedule E is not used to report the rental of personal property unless the property is leased with real estate. The income and expenses associated with the rental of personal property (such as a car or equipment) would normally be reported on a Schedule C if the rental activity is conducted as part of a business. If the rental activity of personal property is not associated with a business it would be considered Other Income reported on Schedule 1, Line 21 (and any expenses associated with the personal property rental activities would be entered as an adjustment to income on Schedule 1, Line 36).
To Enter Rental Real Estate Income on Schedule E from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- Select 'New' (to enter a property not previously entered) or double-click the entry you wish to 'Edit' the property. Select 'Pull' if you prepared the return using the tax program in the previous year and wish to pull the data forward.
- Select the type of property using the drop down box (Single Family Residential, Multi-Family Residential, etc.,), then enter the address for the rental property.
- Enter the number of days during the tax year that the property was rented in the Fair Rental Days box, and the number of days the rental property was personally used in the Personal Use Days box.
- If the rental property qualifies for the Qualified Business Income Deduction (Section 199A Deduction), select the QBI Reason from the drop down box. For additional information on the Qualified Business Income Deduction and rental property see Qualified Business Income Deduction - Overview and QBID - Rental Property and Electing the Safe Harbor.
- Once the basic information concerning the rental property has been entered select 'OK' and the Schedule E - Rents & Royalties Edit Menu will become available where the Income and Expenses can be entered on Schedule E
On the Schedule E - Rents & Royalties Edit Menu, the Percentage of Ownership and Percentage of Occupancy should be entered. If the percentage of either ownership or occupancy is less than 100% it will impact any rental income or expense amounts that should be prorated based on the taxpayer's ownership of the rental property or the percentage of the property that is available for rental occupancy.
When entering Rental Income on a Schedule E, the user will typically enter the total gross amount of rent received for the property. If the taxpayer percent of ownership is less that 100%, the total gross rental income should be entered as Pro Rated Rents Received and the tax program will automatically calculate the taxpayer's portion of the rental income.
All Expenses incurred from the rental property can be deducted inside the Expenses Menu. If the Percentage of Occupancy is less than 100%, the total amount of any direct expenses that were incurred to maintain the rental property (such as advertising, commissions or management fees to real estate rental agent, etc.,) can be entered at 100%. For any indirect expenses or expenses that are associated with the entire rental property (such as the real estate taxes, utilities, mortgage interest, etc.,), the entire gross expense amount should be entered as a Pro Rated Expense and the tax program will automatically calculate the portion of the indirect expense that is associated with the rental property activity and exclude the portion that is not deductible as a business expense associated with this rental property.
When entering expenses, the user can also create supporting notes to keep track of each expense. For example, when entering Advertising expenses, select the F10 key on your keyboard. Select the 'New' button and type in a description of the expense, such as newspaper advertisement. Enter the amount paid and select the < ENTER > key. If you have more than one item that falls under the advertising expense category, repeat the steps above to enter those items into the program. The amounts entered will be totaled together and will carry back to the expense line. When you print the return, a supporting statement will be generated listing each of these items.
Prior Year Unallowed Loss - If the taxpayer has a prior year unallowed loss on the rental property due to Passive Activity Loss Limitations, this prior year unallowed loss can be entered on Expense Menu. For more information on how rental real estate losses can be allowed or not allowed see Publication 925 - Passive Activity & At-Risk Rules and Instructions for Form 8582 - Passive Activity Loss Limitations.
Entering Depreciation Expenses - All capital assets that are associated with the rental property are depreciated to recognize the expense. If you are renting a residential rental home, you can depreciate the residential dwelling and any of the fixtures within the home. The underlying value of the Land associated with the real property is not expensed and should be entered separately in the depreciation module in order to be accounted for in the event the property is later disposed or sold. To enter an asset to be depreciated, from the Expenses Menu, select:
- Depreciation Module
- Select 'New' or double-click the entry you wish to 'Edit'. Select 'Pull' if you prepared the return using the software in the previous year and wish to pull the data forward.
- Input the Depreciation Data
- This will lead you to the Depreciation Data Entry Screen
- Type a description of the asset, date placed in service, cost, and business percentage. The user can also enter any Section 179 Deduction if applicable and the taxpayer is taking this deduction for non real estate assets.
- Enter any accumulated depreciation, (if any) and then select the depreciation method. For residential rental property use MACRS 27.5 Years.
- After entering the above information, select 'OK
- The next screen will calculate the depreciation expense.
This menu will also allow you to select Mid Quarter, Listed Property, and Disposition. If the property has been sold, be sure to select Disposition, answer 'YES' to being disposed of, enter the disposition date, and then indicate if you want the asset to be carried to Form 4797. If you are carrying the amount to Form 4797, enter the 'Sale Price to Carry to Form 4797', and select where to carry the asset, 'Part I, Part II, or Part III'. For more information on Depreciation, see Publication 946.
NOTE: This is a guide on entering Rental Real Estate on a Schedule E in the TaxSlayer Pro program. This is not intended as tax advice.