Schedule E (Form 1040), Supplemental Income and Loss is used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates and trusts, and REMICs.
On the individual tax return, Schedule E is not used to report the rental of personal property unless the property is included with real estate. For personal property rental, follow these guidelines:
- If the personal property rental is conducted as part of a business, the income and expenses associated with the rental would normally be reported on Schedule C.
- If the personal property rental is not associated with a business, it is considered Other Income reported on Schedule 1 Line 8, and any expenses associated with the personal property rental are entered as an adjustment to income on Schedule 1 Line 22 notated "PPR".
To enter real estate rental income in Schedule E, from the Main Menu of the tax return (Form 1040) select:
- Rents, Royalties, Entities (Sch E, K-1, 4835, 8582)
- Rents and Royalties - select either New (for a new entry) or Pull (if the property is in last year's return and you want to pull its data forward).
- For new property, enter several important bits of information:
- Type of property - Select as appropriate using the dropdown menu.
- Address - Enter the address. If not a US address, click the Foreign Address check box.
- Fair Rental Days - Enter the number of days during the year the property was available for rent or rented.
- Personal Use Days - Enter the number of days during the year the property was not rented but used for personal activity. (There are several kinds of use that qualify as "personal". See the Schedule E instructions for the specifics. Personal use doesn't include time when the property is being repaired or maintained, nor when it is being used as the main home before or after having rented it subject to certain time qualifications.)
- Qualifies for QBI Reason - If the rental activity qualifies for the Qualified Business Income Deduction, select the reason from the dropdown menu, either that it fits the definition of a Section 162 business or that it falls under the safe harbor provisions of Revenue Procedure 2019-138. For additional information on the QBID 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 to arrive at the Schedule E - Rents & Royalties Edit Menu where the Income and Expenses can be entered on Schedule E.
In addition to the income and expenses, two important percentages need to be entered:
- Percentage of Ownership - If the taxpayer owns less than 100%, enter the percentage owned.
- Percentage of Occupancy - If the renter is occupying only a portion of the property rather than the entire property, enter the percentage they are occupying.
If the percentage of ownership is less than 100%, you will have the option to either let the program prorate the income and expense to the taxpayer or enter the exact amount of income or expense for the property. Likewise, if the percentage of occupancy is less than 100%, you will have the option to either let the program prorate the expense to the portion occupied or enter the exact amount of expense for the portion occupied.
If the percentage of ownership is less than 100%, rental income will have two entry points:
If the rental income being entered is fully for this owner, enter it in the 100% field. If the rental income is to be prorated among more than one owner, enter it in the prorated field and this owner's rental income will be calculated like this:
If either the percentage of ownership or occupancy is less than 100%, each expense category except for depreciation and prior year unallowed loss will have two entry points. Here is advertising expense, for example:
If the advertising expense relates fully to this property, enter it in the 100% field. If it is to be prorated based on the percentages of ownership and occupancy, enter it in the prorated field and the prorated portion will be calculated like this:
Itemizing income and expenses
Rental income and each expense category can be itemized if desired as follows:
- At the item's entry field, press the F10 key.
- Select New.
- Enter a Description and Amount, then click Ok.
- Select New again and repeat if needed.
The total of the entries will carry back to the entry field, and Schedule E will include a supporting statement listing the detail in the F10 menu.
Note: To avoid an e-file rejection, be sure to include both a description and an amount for each item in the supporting statement. If either or both are missing, the return will reject.
Prior Year Unallowed Loss
If the taxpayer has a prior year unallowed loss on the rental property due to passive activity loss rules, enter it in the Expenses menu. (For more information on passive losses see Publication 925 - Passive Activity & At-Risk Rules and Form 8582 - Passive Activity Loss Limitations.)
All capital assets associated with the rental property should be depreciated. For example, if the taxpayer is renting a residential home, they will depreciate the building and the fixtures within the home. The underlying value of the land associated with the home is not depreciated, so when using the depreciation module enter the value of the land separately, choosing "Land" as the depreciation method so that no depreciation will be calculated on it.
If you are new to the subject of depreciation and are uncertain about what items can be depreciated, what method to choose, and eligibility for bonus depreciation and section 179 deduction, IRS Publication 946 is both helpful and authoritative.
Note: If you are keeping track of assets and calculating depreciation outside of TaxSlayer Pro, complete Form 4562 directly rather than using the depreciation module. In any case, depreciation is included in the tax return via one method only, not both. Using the depreciation module is advantageous for not only completing Form 4562 but also to assist completing Form 4797 when the asset is disposed of.
To enter assets to be depreciated, from the Expenses Menu select:
- Depreciation Module - select either New (for a new entry) or Pull (if the property is in last year's return and you want to pull the assets forward).
- For new assets, enter several important bits of information:
- Description - Describe the asset to make it distinguishable from similar items. If it's rental property, use the street address.
- Date Placed in Service - The date placed in service may or may not be the same as the date purchased. For real property, it's the date the property was ready and available to be rented.
- Cost - Cost basis includes shipping and installation charges, and it also includes sales tax but only if sales tax is not being included as an itemized deduction on Schedule A.
- Business Percentage - Enter the percentage of business use if less than 100%, and the basis being depreciated will be adjusted accordingly. Note that you can't elect the section 179 deduction for property used for business 50% or less.
Federal Section 179
State Section 179 - Section 179 deduction is only available to the taxpayer if they are in the business of renting property.
- Accumulated Depreciation - For a new asset, leave this blank. (If this is an asset from a prior year and/or prior tax software, enter the accumulated depreciation.)
- Depreciation Method - Select the appropriate method for the asset. For a residential home, use MACRS 27.5 Years, otherwise see Publication 946 for if you're not sure what to choose.
- After entering the above information, select OK to arrive at the depreciation data entry screen where you can make corrections as well as make two other important indications:
- Mid-Quarter - Change Mid-Quarter from No to Yes if the mid-month convention does not apply and the total depreciable bases of MACRS property placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property placed in service during the entire year. (If you don't indicate this but should based on this calculation, you will be warned after exiting the depreciation module that the mid-quarter convention may apply.)
- Listed Property - If this is listed property, change to Yes and indicate what type of property. See Publication 946 for an explanation of what constitutes listed property. If it's a vehicle, you will be queried for the mileages and actual expenses.
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.