Income from rental properties is reported on Schedule E. Property owners are subject to income tax only on the net amount of rental income after various rental-related expenses have been taken into account. Here's some tips for preparing a Schedule E a little more understandable.
It's first helpful to have a summary of rental income and expenses. Income and expenses should be separated out for each property if you have more than one property to report. Expenses should be categorized to match the line items found on Schedule E. Any expenses that don't fit neatly into one of the categories pre-printed on the Schedule E can be written in separately. I create additional expense categories for homeowner's association dues, sheriff's fees for evictions, security service or any other type of expense that doesn't logically fit the categories listed.
You could collate this information on paper, or by using any number of financial software programs. Some of my clients have successfully used Quicken Property Manager for keeping track of their rentals, while others prefer to rely on Excel spreadsheets. The main point is that having your income and expenses organized ahead of time makes preparing the Schedule E much easier, whether you're filling out the form by hand or using tax software.
Higher income persons may find that any losses on their rental properties are limited by the passive activity loss limitation rules. This rule limits the amount of rental losses that are currently deductible against your other income to $25,000 if your other income totals $100,000 or less; offers a prorated loss if your other income falls between $100,000 and $150,000; and provides for no immediate tax deduction of the loss if your other income is $150,000 or more. Rental losses that are limited by the passive activity rules aren't completely eliminated however. Any unused rental losses carry forward to the following year where they function to offset any positive rental income. Unused rental losses carryforward like this year after year until either absorbed by rental income or become deducted in full when the property is sold.
There's some new questions found on the 2011 version of Schedule E. At the very top of the form, you'll notice questions A and B, which ask if you're required to issue any 1099-MISC forms. This particular question was relevant prior to the repeal of the expanded 1099 reporting for landlords. Property owners are not required to issue Form 1099-MISC to report payments for services or goods. Accordingly, property owners can safely answer "no" to question A and skip question B.
Notice also next to line 1, the IRS asks what type of property is being described. Taxpayers will use a numeric code to indicate whether the property was a single-family residence, a multi-family residence, vacation rental, commercial rental, unimproved land, royalties, self-rental or some other type of property.
There's also a new line item 2, which asks how many days a property was rented out and how many days the property was used for personal use. I'm actually really glad this information is on the Schedule E, as it greatly facilitates prorating expenses in the case where a property was used part of the year as a rental and part of their year as a personal residence.
The IRS also asks a new question on line 3a about income reported on Form 1099-K, which relates to sales by credit or debit cards. For 2011, the IRS is instructing us to ignore this line and report total rental income directly on line 3b.
At the bottom of the Schedule E, the IRS now asks us to perform subtotals for various line items for all properties on line 23 before moving onto the grand totals on lines 24, 25, and 26.
More tips for rental income: