How to Fill Out a Schedule E Form as a Landlord
Did you know that over 40% of rental units in the US are owned by small, individual investor landlords?
The rental industry is dominated by giant mega-corporations managing dozens or hundreds of properties. For those that rent from corporations, it can be a cold, impersonal experience. For many of those owners, it's just a business, a way to make money from people they may never have met.
But many renters prefer to rent from “mom-and-pop" landlords. Individual owners offer more personal attention. It's a one-on-one relationship that has obvious benefits. Repairs can happen quicker, problems can be solved in person, rent renewal negotiations can be lower stress and more. And a single property owner is more invested in the condition and look of the house or apartment, particularly if they also live there.
The benefits of being an individual investor landlord
That relationship goes both ways. Small property landlords also benefit from personal attention, intimate knowledge of the property and easy communication with the tenant. And while it seems like every property is a giant corporate complex, it's really not the case. In fact, over 40% of rental units in the US are owned by “individual investor landlords."
Then there's the money. Small owners most often use rental properties as investments or a means of earning some extra money. It can be a real estate asset, a vacation home or even just an empty nester spare room. Any type of property qualifies as a rental if you lease it out for profit.
Paying taxes on your private income property
As an income property, mom-and-pop individual investor landlords have to file and pay taxes on rental income differently than those corporations. It's a difference between supplemental income and owning rental property as a primary business resulting in earned income.
So come tax prep time, how do you claim your rental income on your taxes? Just like you do your regular personal income tax, but with the addition of a Schedule E form.
What is a Schedule E form?
A Schedule E form is a supplemental form for your standard Form 1040 Individual Income Tax Return. You'll use it to report passive income or loss. What that means is income in which the filer had no “material participation," or income that is not regular, continuous or substantial. It also covers earnings from royalties, partnerships, S corporations, trusts and estates.
In other words, these are earnings that aren't the filer's primary means of making money or a standard job. The government considers this extra income, not self-employment.
Determining if you qualify as a Schedule E
For landlords, that means reporting rental earnings (and losses, and expenses) as supplemental income. But how do you know if you're supplementing your income or you have crossed over into a small business owner? You're a Schedule E form filer if you meet these three qualifications:
- You are not otherwise a real estate professional
- Your rental property (or properties) is in your own personal name, in you and your spouse's name or are owned through a single-member LLC
- You don't offer or provide additional, substantial or out-of-the-ordinary services
While the first two cases are self-explanatory and fairly concrete, the third qualification is a little more fluid. Out-of-the-ordinary services include those that are not typically offered by lease agreements. Such services would include cleaning, food service, elder care, business assistance and the like. It does not cover items such as utility payment or trash collection.
How to fill out a Schedule E form
And now it is tax time. How do you prepare and file a Schedule E form? First thing is to remember that this is a supplemental form. It is a part of the standard Form 1040 you file normally. It's just one more sheet to fill out. If you have more than one rental property, you'll list each one separately on the same Schedule E form.
The Schedule E form itself contains five parts, but you need only fill in the relevant portions. For most individual investor landlords, this will only require you to fill out Part 1, the first page. That section is titled “Income or Loss from Rental Real Estate."
The remainder is three sections for Partnerships and S Corporations, Estates and Trusts and Real Estate Mortgage Investment Conduits. Don't worry about those if they are not pertinent. The final section is the summary.
The first page, the piece important to you, is divided into three sections in which you enter information about your rental business.
Section 1: About your rental property
The first section of Part 1 starts with simple questions like forms you have filled out in the past and the physical addresses of your property or properties.
The first tricky question is 1B. This asks for the type of property. Your options include single-family residence, vacation/short-term rental, multi-family residence, self-rental, commercial, land, royalties and “other."
Then question 2 requires you to list the number of Fair Rental Days and Personal Use Days for each of your properties. Fair Rental Days are the number of days of the year your unit was actually rented out. Do not include days it was available for rent but unrented. Personal use days are the number of days the unit was being used by you personally, or by someone not paying rent.
Section 2: Your rental property income
The next section is your rental property income information. This is simply the total yearly amount you earned from rent for each property. Gross, not net, not adjusted.
The question itself is split between rents received and royalties received. In most cases, 100% of income is in rent. Royalties are earned through income like copyrights, patents and energy-producing properties.
Section 3: Your rental property expenses
The third and final section of Part 1 is where you list your expenses. These are divvied up among a number of categories relating to all acceptable expenses. Some include cleaning, repairs, landlord and property insurance, fees, taxes, utilities and many more. You can find a full list and comprehensive descriptions online.
The remainder of Part 1 is restatements and calculations that determine your final net income between profits, loss and exceptions. It also includes instructions on further forms for you to submit if you have received a net loss.
Attaching your 1040 and submitting your Schedule E
Congratulations, you have completed Page 1. And unless you have income from the aforementioned items such as partnerships, trusts and estates or you are a real estate professional, you've finished your Schedule E form.
The next step is attaching your Schedule E form to your standard Form 1040. There is one relevant line that connects them both. Line 8 on the first page of your Form 1040 asks for “Other income." That is the amount from Line 26 of your Schedule E.
Now you can file the completed form, which includes your Schedule E as an attachment. Be sure to do so before the sole proprietorship filing deadline. For 2023, that date is Monday, April 17. If you can't make that date, be sure to file for an extension, which can be as late as October 16.
Keep accurate records and detailed transactions
Filling out a Schedule E form sounds complicated and it can feel overwhelming, but it really isn't. The first step is assuring you qualify to submit a Schedule E. Then it is just a matter of following the steps as long as you kept accurate and detailed records.
And if you haven't been keeping precise records, you can always start now. You can purchase specialty accounting software, or just record your income and expenses in a spreadsheet.