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William Perez

Reporting Rental Income

By February 21, 2012

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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:

Comments
March 5, 2012 at 4:39 pm
(1) Santa says:

William,
This article is really a godsend for me…as I am first time tax filer as landlord ;-) and filing my own taxes as always.. I am doing lot of reading and going through this on IRS website and the way you have explained the basics here are really useful for novice like me….
The only thing that is not yet clear to me on the depreciation piece.. It talks about land value and building value and how one can be while other cannot be depreciated. But say if I bought a condo for 100K and the assessed value is @ 75/25 split… I can say value of my structure is 75K and land is 25K.. but then 75K also includes the value of appliances which have different life expectancy vs the structure itself. So how do we deal with this? or you simply take 75K as is and any new appliances you add you can then start to depreciate then as and when you purchase them.
It will be worth while if you can put a article covering that subject related to rental properties and show a worked example.
Again appreciate the excellent work you have done in this article.
Regards
Santa.

March 15, 2012 at 9:51 pm
(2) James says:

Excellent article! Exactly answered my question.

March 22, 2012 at 5:56 pm
(3) Dorothy LeClair says:

I am in the middle of a divorce and filing married individual. How do we split the rental income & expenses? H&R Block told my to be ex that this cannot be done.

March 23, 2012 at 12:56 pm
(4) William Perez says:

Dorothy, how have you agreed to split the rental income and expenses? If you haven’t agreed on a method of allocation, here are some factors to consider. Who owns the property (“on title”)? Do you live in a community property state? Do you have a separate property agreement? Essentially, the rental income and expenses will go to the person or persons who own the property, either in fact (“on title”) or by force of law (community property). How to make this allocation depends on the circumstances. In a community property state, we’ll split the rental income and expenses 50-50. In a non-community-property state, we’ll allocate based on ownership percentages (who owns what percentage of the property). See, for example, the all-too-brief one-line instruction in Publication 527, chapter 1, and scroll or control-F to find “Part interest,” where it reads “Part interest. If you own a part interest in rental property, report your percentage of the rental income from the property.”

April 14, 2012 at 12:49 pm
(5) Bill says:

On 2010 and older Schedule E forms, if you had more than 3 rental properties (for example 4 rental properties), you could elect to just fill in the totals sections. On the current 2011 year Schedule E, can I just fill out lines 23 through 26? Or do I have to enumerate every expense from lines 3 through 22 for all 4 rental properties?

April 14, 2012 at 7:50 pm
(6) William Perez says:

From the IRS’s instructions for Schedule E, “If you have more than three rental real estate or royalty properties, complete and attach as many Schedules E as you need to list them. But fill in lines 23a through 26 on only one Schedule E. The figures on lines 23a through 26 on that Schedule E should be the combined totals for all properties reported on your Schedules E. If you are also using page 2 of Schedule E, use the same Schedule E on which you entered the combined totals for Part I. “

April 16, 2012 at 7:22 pm
(7) Debra says:

How do you calculate number of fair rental days and personal days when you own a multi-unit building and you (owner) lives in one of the units (all other units are rented)?

July 14, 2012 at 9:50 pm
(8) Asok says:

you have NOT explained how and where do we state the amount of carryover loss, especially if it is cumulative?

July 27, 2012 at 1:14 am
(9) Joe says:

If I take out a mortgage on my primary residence and use the money to pay off the mortgage on my rental property can I still deduct the mortgage interest on Schedule E for the rental property or would I only be able to deduct the interest for the new mortgage as an itemized deduction on my form 1040 Schedule A? (I know I can’t deduct it both places).

August 5, 2012 at 6:03 pm
(10) JB says:

If I use my rental for 12 days and it is available for rent for the remaining 353 days are those the 2 figures I use to allocated personal use? Or would I use the actual day rented for the allocation?

November 15, 2012 at 11:29 am
(11) Mike says:

if I own a home and rent it out will i have to pay taxes on that income??? I want to show that I have income from this home, but dont want to lose money for reporting this..

please help

January 9, 2013 at 7:19 pm
(12) Jason Peters says:

My wife and I recently incurred property cost associated with preparing our principal residence for conversion to a rental property. The cost included marketing; new HVAC; new roof; state licenses; cleaning; landlord policy; etc. However, the new property tenants did not officially start rent until March 1, 2013. How do we claim these expenses in 2012 and take personal income deductions associated with principal residence, or defer until 2013?

January 29, 2013 at 4:28 pm
(13) Vee says:

My brother and I own a rental unit. I am only in name on the title and he is actually taking the income (gain and loss). How should we filing for tax?

February 10, 2013 at 2:44 pm
(14) Jill says:

Great article.

I still have one question though….what line on schedule E do I record my loss carryforward from the previous year?

February 10, 2013 at 2:55 pm
(15) Jill says:

What line do I report my prior year loss I want to carry forward?

February 19, 2013 at 9:48 pm
(16) Jason says:

My wife and I had marketing fees payed in the amount of $500 for lead inspection and $2,150 for Coldwell Bankers for preparing our principal residence for a rental in 2012. However, the renters which signed a contract in December 2012, do not move in until March 1, 2013. How do I capture these expenses and still claim interest and property taxes on principal residence?

March 2, 2013 at 3:22 am
(17) Drew says:

William

What happens when you have Schedule E rental active participation losses that don’t offset income, are these lost forever ? I read that they can’t create an NOL for an individual.

Also, what about depreciation in those year where it never offset any income, do those amounts have to come off the basis and create more gain in the year of sale of the property ?

Thanks
Drew

March 3, 2013 at 1:35 pm
(18) Craig says:

Simple question. I have a rental property in another state. My mortgage is roughly $1200. The rent that I get is $1000. So yes, I have rental income but I’m still taking a $200 loss here. What do I have to report?

Thanks for the help!

Craig

March 11, 2013 at 9:38 pm
(19) JellyBeanJean says:

Thank you for the prespective of income activity loss carryforwards.

Unfortunately (or fortunately), I’ve been in the position of rental activity loss carryfowards since 2008, which exceed USD 50,000, to date. I’ve received conflicting “reports” regarding the treatment of the “gains” in the event that I can sell the property that resulted in the loss.

For example, I have multiple rental properties with a FMV of USD 400k. Current basis (after PY depreciation) is USD 220k. Original cash outlay for the combined properties was USD 350k (yrs for purchase range from 1998 to 2007). Based on this information, I’ve been told (if FMV is today’s Net Proceed Selling Price), two “conflicting” things–which is closer to the truth?

a) The “passive activity” CF loss from the operating expenses will NOT have any impact on the reportable gain or loss in the final sale. I would have a USD 180k gain to pay taxes one (at the capital gains rate).

b) The “gain” of USD 180k would be reduced by the CF loss that was not previously used; so in the example, there would be a capital gains amount of USD 130k ($ 400k – $ 220k – $50k); Ordinary gain of USD 50k.

These are the “comments” from various individuals . . . . what is your opinion? Both cannot be correct, but both could be incorrect.

Thank you for any advise or comments that would assist in the complete reconciliation of this account.

(I’m certain that I have MANY more questions, but for the asnwering, at this time, that would be sufficient.)

Kind Regards.

March 23, 2013 at 5:26 pm
(20) ellie says:

excess rental loss above $25,000
I had a rental incocme of 1$1,555 in 2012 and rental expenditures of $40,371, leaving me with a rent a net rental loos of $28,816. I have rented the property since 1986 and have never taken any depreciation. Only $25,000 carries from sch E to line 17 on the 1040. I will have a positive rental income in 2013. What forms do I fill out for the tax year 2012 so that I can carry the extra loss of $3,816 ($28,816-$25,000) agianst my rental income in 2013? Or is the $25,000 a “lifetime” maximum? Are there any special forms (besides Sch E) that I have to fill out for the tax year 2012 and 2013? What is form 8582 all about- I am totally confused. Can any one help with carry forward rental losses? I am not a realtor- the rental property is my prior residence.

March 23, 2013 at 8:16 pm
(21) William Perez says:

Your excess rental loss (above the $25,000 limit) is carried forward using Form 8582. Form 8582 is used to calculate your passive activity losses, the amount that is deducted in the current year, the amount that is carried forward to the subsequent year, and keeps track of losses per property. Also, you may want to consider adding in the depreciation expense, as this will increase your rental expenses, and correspondingly increase the loss carry-forward.

April 4, 2013 at 6:36 pm
(22) Suzanne says:

William,

Thank you for the information that you have provide. My question has to do with my beach front condo. I have it listed for rent with a management company 365 days per year. In 2012 it was rented for 171 days and the personal use was 35 days. I did the Sch E worksheet 5-1 but am still confused as to why I have to use the ratio 171+35/196. Logic tells me that I need to prorate all of my rental expenses by 171/365, a much lower ratio. When I subtract my expenses from my gross rent that is reported to me on a misc-1099, I have a $5000 loss on paper. Do I really have to file Form 8582 or do I just keep that for my records? The example that the IRS gives in their corresponding publication on the fictional Donovans show that they zero out their rental income with their expenses and do not show a loss that they incur on Sch E line 21. Instead, it is shown on worksheet 5- which is not filed with their tax return. Is this because my condo is really my second home that I try to rent out to offset my expenses? I know that I can not take the loss on the front of my 1040 form. Any explanation will be greatly appreciated. Thank you.

April 8, 2013 at 10:40 pm
(23) Tom says:

I have rental property that i own with someone else. in 2012, i wanted to short sell it, and the other owner did not. I stopped receiving any payments related to the rental income, but still paid expenses of roughly 1K. Since i never received any payment, the the house was fully rented for 365 days, and the only thing related to the investment house was expenses of 1K which i paid out of pocket. I feel that if i put down no income with expenses and it was rented for the whole 365 days this might send up a red flag. Advice?

April 8, 2013 at 11:00 pm
(24) William Perez says:

Tom, thanks for posting your question. In general, when two or more taxpayers own rental property, we add up the rental income and associated expenses, and allocate each item to the owners using their percentage of ownership. So the primary concern is to make sure that the income and the expenses are accurately stated. As long as the income and expenses are accurately stated, I would not be overly worry about “red flags” with the IRS since you’ll have documents to support the figures on your tax return.

April 9, 2013 at 9:36 am
(25) Chip says:

I’ve been carrying over passive losses for several years now, and have finally disposed of two of my rentals. Can you give more detail on exactly what the process is to finally bring those losses over to my 1040? Thanks.

April 10, 2013 at 12:12 am
(26) William Perez says:

See the Instructions for Form 8582 (pdf) pages 7 and 8.

April 15, 2013 at 10:29 am
(27) Deborah says:

I own and live-in a multi-family residence. Shouldn’t “fair rental days” and “personal use days” = 365? Thanks!

April 22, 2013 at 1:14 pm
(28) Katheryn says:

I don’t see where I can claim my mortgage payments on my rental as an expense. There is a line for interest on my mortgage payments, but not the mortgage payments themselves. I am paying nearly $400/mo. on my mortgage. Where do I claim it?

April 22, 2013 at 4:51 pm
(29) William Perez says:

Katheryn, you can deduct the interest on the mortgage loan and the property taxes on the Schedule E. The cost of the house is deducted as depreciation.

May 15, 2013 at 4:40 pm
(30) Lori says:

we give our parents 1/2 mths. rent on property they gave us. 900.00/mth. They r in there 80′s and it helps them. If we sill the house, can we use that 900.00/mth additional to the mortgage balance to offset capital gains tax?

September 9, 2013 at 6:40 am
(31) Jennifer says:

1) My non-resident alien husband and I jointly own a rental property. Can I allocate all the profits and expenses to him?

March 2, 2014 at 7:59 am
(32) Sam says:

I have rental income of $16k in IL and a loss of $4k in SC. I am a CT resident. I know I have to file state tax retun in CT and IL. The question is do I file a retun SC? When I file in IL do I claim $16k income or the net income of $12k? Do I file in SC using the -$4k? Any help would be appreciated.

March 13, 2014 at 11:54 am
(33) justin says:

Are you sure that landlords do not have to issue 1099s? I paid a few people over $600 last year, and my CPA recommended I issue 1099s to be safe, as it seems like a grey area.

If you are positive that landlords are exempt can you show me the link to the IRS website that shows this.

I have spent a few hours trying to figure this out, and there is conflicting information all over the internet.

Thanks

March 24, 2014 at 9:16 am
(34) DZ says:

If someone simply owns a rented property in the US but does not earn any other US income (salary or otherwise) beyond it, do <$25K losses get carried over into future years (since they have no other income to credit it against today)? Do they need to set up an LLC to carry it forward? For how long could it be carried forward?

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