The schedule E tax Form is used by businesses to declare the generation or loss of supplemental income. Schedule E relates to supplemental income from royalties, rentals, S corp, and more. This guide gives you a foundational understanding of how investors can utilize Form 1040 schedule E for rental properties.
Learn everything you need to know about schedule E filing and how it relates to your 1040. And, find out how the IRS uses a Form 1040 schedule E to determine your taxable passive income from real estate investments.
Form 1040 Schedule E Tax Form: What is It and Why Does It Matter?
Schedule E reports business income from any type of business. Schedule C, on the other hand, is a business that generates earned income, but it is not a legal entity. Rental properties always come through on schedule E. Page 1 of Schedule E is rental properties.
No matter the level at which you are investing in real estate, tax laws for property investors can get complicated. Therefore, in this article, you learn how a Form 1040 schedule E affects your taxes, and how schedule E helps reduce taxes on passive income from real estate.
The Internal Revenue Service (IRS) uses a Form 1040 to document your annual income and determine your income tax liability. A Schedule E Tax Form is an optional addition to Form 1040, for claiming supplemental income or loss of various business activities. Schedule E includes income from rental property, trusts, royalties, estates, investment partnerships, and S-corporations.
The big thing that necessitates the use of a schedule E tax Form is declaring business income. The IRS taxes supplemental income from the above-listed investments in various ways. Because rental income is treated differently than other sources of income, it is often subject to a lower tax bracket.
How Does a Schedule E Tax Form Affect Your Taxes?
Looking at your IRS Form schedule E, line 21 shows your net income or loss, by property. Your total taxable income is on line 26 of your Schedule E tax form. But, there is a limit to the number of rental losses, however, that can show up on your 1040, due to Passive Activity Loss Limitations.
Your Adjusted Gross Income (AGI), dictates how much Passive Activity Loss you can claim. If your AGI is under $100,000, the maximum amount of loss you can report on the Schedule E tax Form is $25,000. If your AGI is over $150,000, the IRS does not allow you to claim a passive loss on real estate – with one exception.
The IRS allows you to report passive activity losses on schedule E if you are considered a real estate professional.
What About the Passive Losses Over $25,000?
This depends on if you are considered a real estate professional or not. A real estate professional does not have a limitation on losses. That means, regardless of their income, a real estate professional can deduct all of their losses.
Passive real estate income losses, exceeding $25,000, are called “unallowed losses.” And, as long as you report them on IRS Form 8582, you can claim them in the future. Form 8582 serves as an ongoing ledger, keeping track of your annual unclaimed passive loss.
That means you don’t worry about losing out on claiming your losses. They simply roll-over to the next year’s Form 1040 schedule E tax Form. Unallowed losses, reported on Form 8582, remain until it can offset your net real estate income, or, offset a gain from selling the property which generated the unallowed loss, to begin with.
Report it – or Lose it: Making Use of Passive Loss
So, your losses don’t disappear – unless you fail to make use of the Schedule E tax Form and Form 8582. The Form 1040 schedule E allows you to claim passive investment income losses, up to $25,000, if your AGI is under $100,000. And, Form 8582 is storage for excess loss which you cannot claim in the same year.
Filing the correct paperwork makes all the difference in reducing the size of your real estate income tax liability. And, you still have plenty of time before the 2019 tax return filing deadline in October. So, contact a tax professional today and get help filing your 1040 schedule E and Form.