Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). First, there are those activities which do not qualify to use Schedule E.
Then there are the limitations which may need to be applied if you have a net loss on Schedule E. There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities.
You may also have a loss (or gain) related to your rental property from a casualty or theft. This is considered separately from the income and expense information on Schedule E. taxmap/pubs/p527-007.htm#en_us_publink100027389
The basic form for reporting residential rental income and expenses is Schedule E. However, do not use that schedule to report a not-for-profit activity. See Not Rented For Profit, in chapter 4. There are also other rental situations in which forms other than Schedule E would be used.taxmap/pubs/p527-007.htm#en_us_publink100069596
Generally, Schedule C is used when you materially participate in your residential rental activity.taxmap/pubs/p527-007.htm#en_us_publink100069597
If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C, Profit or Loss From Business, or Schedule C-EZ, Net Profit From Business. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse). Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For information, see Publication 334, Tax Guide for Small Business. Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. For a discussion of "substantial services," see Real Estate Rents in Publication 334, chapter 5. taxmap/pubs/p527-007.htm#en_us_publink100069598
If you and your spouse each materially participate (see Material participation on this page) as the only members of a jointly owned and operated rental real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership.
If you make this election, instead of filing Schedule E or Form 1065, you and your spouse must each file a separate Schedule C or C-EZ reporting the appropriate share of income and deductions. Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive loss limitation rules. Electing qualified joint venture status and using the Schedule C or C-EZ does not alter the application of the self-employment tax or the passive loss limitation rules.
If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.taxmap/pubs/p527-007.htm#en_us_publink100027377
If you meet the qualifications discussed on this page, report your rental income and expenses on Schedule C or C-EZ (or Form 1065 if a partnership). Use Schedule SE to figure your self-employment tax. Also, complete line 43 of Schedule E.
You qualify as a real estate professional for the tax year if you meet both of the following requirements.
- More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate.
- You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.
For purposes of meeting these qualifications, each interest in rental real estate is a separate activity, unless you elect to treat all your interests in rental real estate as one activity.
Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest.
Do not count your spouse's personal services to determine whether you met the requirements listed above. However, you can count your spouse's participation in an activity in determining if you materially participated. taxmap/pubs/p527-007.htm#en_us_publink100027378
A real property trade or business is a trade or business that does any of the following with real property.
- Develops or redevelops it.
- Constructs or reconstructs it.
- Acquires it.
- Converts it.
- Rents or leases it.
- Operates or manages it.
- Brokers it.
If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. You can make this choice for any year that you qualify as a real estate professional. If you forgo making the choice for one year, you can still make it for a later year.
If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. This is true even if you are not a real estate professional in any intervening year. (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules.)
See the instructions for Schedule E for information about making this choice.taxmap/pubs/p527-007.htm#en_us_publink100027379
Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. For details, see Publication 925 or the instructions for Schedule C. taxmap/pubs/p527-007.htm#en_us_publink100027380
If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Do this even if your spouse owns no interest in the activity or files a separate return for the year. taxmap/pubs/p527-007.htm#en_us_publink100027390
If you rent buildings, rooms, or apartments, and provide only heat and light, trash collection, etc., you normally report your rental income and expenses on Schedule E, Part I.
List your total income, expenses, and depreciation for each rental property. Be sure to answer the question on line 2.
If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Complete lines 1 and 2 for each property. However, fill in the "Totals" column on only one Schedule E. The figures in the "Totals" column on that Schedule E should be the combined totals of all Schedules E.
On Schedule E, page 1, line 20, enter the depreciation you are claiming for each property. To find out if you need to attach Form 4562, see Form 4562, below.
If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms.
- Form 6198, At-Risk Limitations. See At-Risk Rules on this page. Also see Publication 925.
- Form 8582, Passive Activity Loss Limitations. See Passive Activity Limits on this page.
Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. If you need to use page 2 of Schedule E, use page 2 of the same Schedule E you used to enter the combined totals in Part I. Also, include the amount from line 26 (Part I) in the "Total income or (loss)" on line 41 (Part V).taxmap/pubs/p527-007.htm#en_us_publink100069599
You must complete and attach Form 4562 for rental activities only if you are claiming:
- Depreciation, including the special depreciation allowance, on property placed in service during 2008;
- Depreciation on listed property (such as a car), regardless of when it was placed in service; or
- Any other car expenses, including the standard mileage rate or lease expenses.
Otherwise, figure your depreciation on your own worksheet. You do not have to attach these computations to your return.
See Publication 946 for information on preparing Form 4562.