IRS Schedule E is the schedule used to report activity from your rental property. This page is designed to help you gather the necessary information for your Form 1040.
Investment properties can be an excellent investment, but it’s important to have a basic understanding of how an investment property works tax-wise.
Yes. You are required to report all your rental income and your qualified rental expenses on Schedule E. Depending on those numbers, you could have a taxable profit or a loss. The result gets reported on the first page of your annual Form 1040.
You do not file a separate income tax return for your rental property. The Schedule E gets attached to your annual Form 1040 and filed with the annual Form 1040.
A commercial or residential rental property owned by you personally, whether this property is used as a long-term rental or as a vacation/short-term rental.
Yes. You are required to report each property separately on Schedule E.
You still need to fill out this worksheet and, in addition to that, please provide us with the closing statement from when you purchased the house. The closing statement should have been given to you by your real estate agent when the house closed.
The closing statement establishes your tax basis in the property. You are allowed a tax deduction called depreciation for the purchase price of the home. The closing statement gives us most of the information we need to properly record your tax basis and depreciation.
The short answer is yes. Watch this video for an explanation.
Fixing the property up (improvements, renovations, remodels, etc) add to your tax basis and can be depreciated.
This brings up another important point that the IRS wants us to be aware of.
Repairs/maintenance vs improvements/renovations/remodels. Repairs/maintenance are common, required upkeep of the property—for example, if you pay someone to mow the grass. This is an expense that does not add to the tax basis of the property.
But if you pay that same company to re-do the backyard and do landscape construction, this is now an improvement to the property and must be depreciated.
Yes, there are. Any money you spent preparing the rental can be deducted. Any money you spent researching rental properties, looking for rental properties, or placing renters are all deductible. These include but are not limited to miles driven, finder fee to property manager, renovations/repairs (as mentioned above), travel, and conferences.
Here’s the link to the worksheet. We’ve listed the common deductions there.
The cost of the loan can be amortized, so the answer is yes. You’ll need to send us the closing statement from the re-finance.
No. The security deposit may become taxable income in the future if it is not returned to the tenant when they move out.
You can deduct mileage from your personal residence to the hardware store then to the rental. It’s a good idea to have a way to track this type of mileage. You can also deduct whatever you bought from the hardware store for the rental property. But you cannot deduct your ‘time’ invested in this repair job.
Not necessarily. You are going to have a few additional deductions that a long-term renter won’t have.
It’s important to track these costs—some of which need to be recorded as depreciable assets and some of which can be deducted as they are paid.
Yes. We recommend that you open a separate checking account and have all rental related transactions (income/expenses) run through that checking account. You should also have some sort of system to track these income/expenses. If you only have a few transactions each month, using a Spreadsheet is recommended. If you have a complex situation (like a short-term rental), look at software like QuickBooks Online or https://www.stessa.com/.
Rental profit is subject to state and federal income taxes. The tax rate is your marginal income tax rate. For an ‘average’ taxpayer, this is around 22% to the IRS and 9.3% to the state of California.
Your rental income gets mixed in with all your other income reported on the Form 1040—income like wages, interest income, business income, etc. When you add all your income up, you get your adjusted gross income.
Good question. Losses CAN reduce your adjusted gross income—but your rental loss may be suspended if your other income is too high.
If your other income is too high, the rental loss will have no impact on the tax return for the current year, but this loss doesn’t just go away. It gets carried over to the next tax year. If your income falls below the required amount, you can deduct the loss. If not, it carries over again to the next year.
This is called the “passive activity loss limitation”.
A copy of your previous year income tax return with the depreciation schedule for the rental property.