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Publication 527

Chapter 3
Rental Income, Expenses, and Losses(p12)

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.

Which Forms To Use(p12)

The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). 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.

Schedule E (Form 1040)(p12)

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, later.
If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms.
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).

Form 4562.(p12)

You must complete and attach Form 4562 for rental activities only if you are claiming: Otherwise, figure your depreciation on your own worksheet. You do not have to attach these computations to your return, but you should keep them in your records for future reference.
See Publication 946 for information on preparing Form 4562.

Schedule C (Form 1040), Profit or Loss From Business(p12)

Generally, Schedule C is used when you materially participate in your residential rental activity.

Providing substantial services.(p12)

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 unless it is a qualified joint venture). 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.

Qualified joint venture.(p12)

If you and your spouse each materially participate (see Material participation, later) 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. This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage.
If you make this election, instead of filing Schedule E or Form 1065, U.S. Return of Partnership Income, 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, unless it is a trade or business. 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.
For more information on qualified joint ventures, go to Enter "QJV election" in the search box and select "Benefits of Qualified Joint Ventures for Family Businesses."