Schedule E (Form 1040): Instructions you cannot miss

February 11, 2023by MAS Editorial Team0

Schedule E is one of the many schedules and helps in explaining the supplemental income/losses occurred to an individual in the US. This schedule is filled and submitted along with Form 1040, used for Federal Individual Income Tax Return.

Income or loss from rental real estate, estates, partnerships, royalties, S Corporations, trusts or residual interests in REMICs are reported in Schedule E (Form 1040). If you have incurred any income or loss from the mentioned sources, then the IRS is expecting Schedule E from you as well. To clarify the losses, the figure must be put in parentheses.


Why must you file Schedule E?

As per IRS, Schedule E must be filed if an individual has income from renting spaces or royalties. For rental spaces, it could be a residential or commercial property. Even the income or loss from renting the space in your own house calls for filing a Schedule E.

Many people can confuse renting a space as a form of self-employment, but in most cases, it is not true. If your primary business is renting real estate properties or if you give a wide variety of services to the tenants, then you might fall in the self-employment category. In that case, you must file Schedule C and not Schedule E.


What happens if you are a Shareholder or Partner in an S Corporation?

You are considered a separate entity as a shareholder or partner of an S Corporation. Therefore, you need to file a separate Schedule E. In this, your personal Income from the business gets reported. In other words, every shareholder or each partner must file a separate Schedule E.

For the income from the business, one receives Schedule K-1, which can be used to report the business incomes/losses.


Is there a limit on deduction of losses?

To save you from going through an additional pressure, the IRS does limit the amount in cases of loss. Your “at-risk” amount is the amount which can be deducted. In partnerships, the deductible amount is usually the amount invested by you in the business. 

For example, if the loss is US $10,000 and you invested US $6,000, then the amount deductible is US $6,000. This is because the IRS doesn’t consider you responsible for another US $4,000.

The IRS also has a passive activity rule for such deductions which can be considered to check the deductions & limitations on that.


Filing Schedule E

The best part of filing Schedule E is that you only need to file the parts related to the type of income/loss you incurred. The type of income is separated by the type of businesses; like partnerships, S corporations, personal tax returns, etc.

However, this part can get confusing as there are various lines and segments which can become complicated for an individual. However, you can always get the guidance you need from the US Tax experts. You can also check out the instructions on the IRS website for filing this form, but it can get overwhelming if you are not familiar with a lot of tax related terms. That is why, we have put the general instructions below.


Instructions for filling out Schedule E

The income or loss incurred from rental real estate or royalties are explained in the first part of the schedule. Be it the personal property on lease with the real estate, it is important to mention the income or loss.

If it’s an estate or a trust, the income & losses made from the crops or livestock also get mentioned in this section. This happens as the estates and trusts do not fill Form 4835 or Schedule F.

In case you are wondering, what to do if you own a part interest in a real estate property, then you need to fill your part of income or loss in the Schedule E.


IMPORTANT: For more than three properties (either rental real estate or royalty), you can use as many Schedule E forms as required. However, lines A, B, and 23a through 26 need to be filled only once. 

This was the crux of Schedule E but the summaries can’t match the whole story. So, in case of any queries or concerns which do not get answered above, feel free to reach out to our experts.


Written by – Priyanka Rampal


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