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Instructions for Schedule E (Form 1040)

General Instructions(p1)


Other Schedules and Forms You May Have To File(p1)

Single-member limited liability company (LLC).(p1)
In most cases, a single-member domestic LLC is not treated as a separate entity for federal income tax purposes. If you are the sole member of a domestic LLC, file Schedule E (or Schedule C, C-EZ, or F, if applicable). However, you can elect to treat a domestic LLC as a corporation. See Form 8832 for details on the election and the tax treatment of a foreign LLC.
Information returns.(p1)
You may have to file information returns for wages paid to employees, certain payments of fees and other nonemployee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. You generally use Form 1099-MISC, Miscellaneous Income, to report rents and payments of fees and other nonemployee compensation. For details, see the 2010 General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G).
If you received cash of more than $10,000 in one or more related transactions in your trade or business, you may have to file Form 8300. For details, see Pub. 1544.

Reportable Transaction Disclosure Statement(p1)

Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. The following are reportable transactions.
See the Instructions for Form 8886 for more details.

At-Risk Rules(p2)

In most cases, you must complete Form 6198 to figure your allowable loss if you have:
The at-risk rules in most cases limit the amount of loss (including loss on the disposition of assets) you can claim to the amount you could actually lose in the activity. However, the at-risk rules do not apply to losses from an activity of holding real property placed in service before 1987. They also do not apply to losses from your interest acquired before 1987 in a pass-through entity engaged in such activity. The activity of holding mineral property does not qualify for this exception.
In most cases, you are not at risk for amounts such as the following.
Qualified nonrecourse financing.(p2)
Qualified nonrecourse financing is treated as an amount at risk if it is secured by real property used in an activity of holding real property subject to the at-risk rules. Qualified nonrecourse financing is financing for which no one is personally liable for repayment and is:
Qualified person.(p2)
A qualified person is a person who actively and regularly engages in the business of lending money, such as a bank or savings and loan association. A qualified person cannot be:
For more details about the at-risk rules, see the Instructions for Form 6198 and Pub. 925.

Passive Activity Loss Rules(p2)

The passive activity loss rules may limit the amount of losses you can deduct. These rules apply to losses in Parts I, II, and III, and line 40 of Schedule E.
Losses from passive activities may be subject first to the at-risk rules. Losses deductible under the at-risk rules are then subject to the passive activity loss rules.
You can deduct losses from passive activities in most cases only to the extent of income from passive activities. An exception applies to certain rental real estate activities (explained later on this page).

Passive Activity(p2)

A passive activity is any business activity in which you did not materially participate and any rental activity, except as explained later on this page. If you are a limited partner, you in most cases are not treated as having materially participated in the partnership's activities for the year.
The rental of real or personal property is a rental activity under the passive activity loss rules in most cases, but exceptions apply. If your rental of property is not treated as a rental activity, you must determine whether it is a trade or business activity, and if so, whether you materially participated in the activity for the tax year.
See the Instructions for Form 8582 to determine whether you materially participated in the activity and for the definition of rental activity.
See Pub. 925 for special rules that apply to rentals of:

Activities That Are Not Passive Activities(p2)

Activities of real estate professionals.(p2)
If you were a real estate professional for 2010, any rental real estate activity in which you materially participated is not a passive activity. You were a real estate professional for the year only if you met both of the following conditions.
If you are married filing jointly, either you or your spouse must meet both of the above conditions without taking into account services performed by the other spouse.
A real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Services you performed as an employee are not treated as performed in a real property trade or business unless you owned more than 5% of the stock (or more than 5% of the capital or profits interest) in the employer.
For purposes of this rule, 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. To make this election, attach a statement to your original tax return that declares you are a qualifying taxpayer for the year and you are making the election under section 469(c)(7)(A). The election applies for the year made and all later years in which you are a real estate professional. You can revoke the election only if your facts and circumstances materially change.
If you were a real estate professional for 2010, complete Schedule E, line 43.
Other activities.(p2)
The rental of your home that you also used for personal purposes is not a passive activity. See the instructions for line 2 on page E-4.
A working interest in an oil or gas well you held directly or through an entity that did not limit your liability is not a passive activity even if you did not materially participate.
Royalty income not derived in the ordinary course of a trade or business reported on Schedule E in most cases is not considered income from a passive activity.
For more details on passive activities, see the Instructions for Form 8582 and Pub. 925.

Exception for Certain Rental Real Estate Activities(p2)

If you meet all of the following conditions, your rental real estate losses are not limited by the passive activity loss rules. If you do not meet all of these conditions, see the Instructions for Form 8582 to find out if you must complete and attach Form 8582 to figure any losses allowed.
  1. Rental real estate activities are your only passive activities.
  2. You do not have any prior year unallowed losses from any passive activities.
  3. All of the following apply if you have an overall net loss from these activities:
    1. You actively participated (defined below) in all of the rental real estate activities;
    2. If married filing separately, you lived apart from your spouse all year;
    3. Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately);
    4. You have no current or prior year unallowed credits from passive activities; and
    5. Your modified adjusted gross income (defined below) is $100,000 or less ($50,000 or less if married filing separately).
Active participation.(p3)
You can meet the active participation requirement without regular, continuous, and substantial involvement in real estate activities. But you must have participated in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense. Such management decisions include:
You are not considered to actively participate if, at any time during the tax year, your interest (including your spouse's interest) in the activity was less than 10% by value of all interests in the activity. If you are a limited partner, you are also not treated as actively participating in a partnership's rental real estate activities.
Modified adjusted gross income.(p3)
This is your adjusted gross income from Form 1040, line 38, or Form 1040NR, line 37, without taking into account:


You must keep records to support items reported on Schedule E in case the IRS has questions about them. If the IRS examines your tax return, you may be asked to explain the items reported. Good records will help you explain any item and arrive at the correct tax with a minimum of effort. If you do not have records, you may have to spend time getting statements and receipts from various sources. If you cannot produce the correct documents, you may have to pay additional tax and be subject to penalties.