What the Form Is For

Schedule E (Form 1040) is the IRS form you use to report "supplemental" income and losses—money you earn outside your regular paycheck from sources like rental properties, royalties, and business partnerships. Think of it as the reporting hub for passive income streams.

Specifically, Schedule E captures income and losses from five main sources: rental real estate properties (such as houses, apartments, or commercial buildings you rent out), royalty income (payments for use of your patents, copyrights, oil/gas rights, or mineral properties), partnerships and S corporations (your share of business profits or losses), estates and trusts (income from inherited or trust property), and real estate mortgage investment conduits (REMICs).

The form attaches to your main Form 1040 tax return and flows into line 17, affecting your overall adjusted gross income. For 2014, the form came with specific rules about deducting losses, especially for rental properties, due to passive activity limitations and at-risk rules that prevent taxpayers from writing off unlimited losses.

When You'd Use It (Late or Amended Filing)

You would file Schedule E with your original 2014 tax return if you had any supplemental income or losses during that year. The standard deadline was April 15, 2015 (or October 15, 2015 if you filed for an extension).

If you missed reporting rental income, forgot to claim rental expenses, or discovered errors after filing your 2014 return, you need to file Form 1040X (Amended U.S. Individual Income Tax Return) along with a corrected Schedule E. Generally, you have three years from the original filing deadline to amend your return and claim a refund—meaning for 2014 returns, the deadline would have been April 15, 2018.

Late filing situations also arise when you receive a corrected Schedule K-1 from a partnership or S corporation after you've already filed. These K-1 forms report your share of business income and sometimes arrive late, requiring you to amend your return to include the accurate figures.

Key Rules for 2014

Several important rules governed Schedule E in 2014. The standard mileage rate for rental property activities was 56 cents per mile—you could use this rate instead of tracking actual vehicle expenses for trips related to your rental properties.

The passive activity loss rules were critical in 2014. Most rental real estate activities are considered "passive," meaning you can generally only deduct rental losses up to the amount of your passive income. However, there was a special exception: if you actively participated in managing your rental property (approving tenants, setting rental terms, approving repairs) and your modified adjusted gross income (MAGI) was $100,000 or less, you could deduct up to $25,000 in rental losses against your regular income. This allowance phased out between $100,000 and $150,000 of MAGI, disappearing completely at $150,000. If married filing separately, the threshold dropped to $50,000 MAGI with a maximum $12,500 deduction.

Real estate professionals had different rules. If you spent more than 750 hours per year in real property trades or businesses and more than half your working time in such activities, your rental real estate wasn't considered passive, potentially allowing full loss deductions without the $25,000 limit.

The at-risk rules also applied, limiting deductible losses to amounts you could actually lose. For example, if you used non-recourse financing (loans where you're not personally liable), those borrowed amounts generally weren't considered "at-risk" unless they qualified as qualified nonrecourse financing secured by the rental property.

Personal use limitations were another key rule for 2014. If you rented out a dwelling unit (house, condo, vacation home) that you also used personally for more than 14 days or 10% of rental days (whichever was greater), you "used it as a home," limiting your deductible expenses. If you rented it fewer than 15 days annually, you didn't report the rental income at all—but you couldn't deduct rental expenses either.

Step-by-Step Overview (High Level)

Filing Schedule E involves a systematic process organized into distinct parts based on your income type.

Part I: Rental Real Estate and Royalties

For each property, you list its address, property type (single-family, multi-family, vacation rental, commercial, land, or royalty), and the number of fair rental days versus personal use days. Then you report rental income on line 3 (or royalty income on line 4) and deduct all ordinary and necessary expenses: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, other interest, repairs, supplies, taxes, utilities, depreciation, and other expenses. After subtracting expenses from income, you get your net income or loss for each property on line 21. If you have a loss, you must determine whether it's limited by the at-risk rules (Form 6198) or passive activity rules (Form 8582). The allowable loss (if any) goes on line 22. Finally, you total all properties' results on lines 23-26.

Part II: Partnerships and S Corporations

Report income and losses from Schedule K-1 forms you receive from business entities. You enter each entity's name, employer identification number, and whether it's a partnership or S corporation. Then you separate the income into passive and nonpassive categories based on your participation level. These amounts flow through to lines 29-32.

Part III: Estates and Trusts

Works similarly to Part II, reporting income from Schedule K-1 (Form 1041) received from estates or trusts of which you're a beneficiary.

Part IV: REMICs

Used only if you hold residual interests in these specialized real estate financing vehicles.

Part V: Summary

Combines all parts, creating your total supplemental income or loss on line 41, which transfers to Form 1040, line 17.

Attachments: Throughout the process, you must attach supporting forms: Form 4562 for depreciation if you placed property in service in 2014 or claimed Section 179 expensing, Form 6198 if you have at-risk limitations, Form 8582 if you have passive activity losses exceeding passive income, and any relevant K-1 forms.

Common Mistakes and How to Avoid Them

Mistake #1: Confusing repairs with improvements

Repairs maintain property in working condition (fixing a broken lock, patching a hole) and are fully deductible in 2014. Improvements add value, prolong useful life, or adapt property to new uses (replacing an entire HVAC system, adding insulation) and must be capitalized and depreciated over many years. To avoid this error, ask: "Does this restore the property to its previous condition, or does it make it better than before?" Only the former is a deductible repair.

Mistake #2: Deducting personal use expenses

If you used your rental property personally for part of the year, you must allocate expenses between rental and personal use based on days. Many taxpayers mistakenly deduct 100% of expenses. Calculate the percentage: rental days ÷ total days used. Only the rental portion is deductible on Schedule E.

Mistake #3: Failing to separate land from buildings

Land never depreciates, but buildings do. When you purchase rental property, you must allocate the purchase price between land and buildings based on their relative fair market values (often using property tax assessments). Depreciating the entire purchase price—including land—is an error that will be caught in an audit.

Mistake #4: Ignoring passive loss limitations

Many first-time rental property owners assume all losses are immediately deductible. Unless you qualify for the $25,000 special allowance (with active participation and MAGI under $100,000) or are a real estate professional, rental losses can only offset passive income. Deducting disallowed passive losses triggers IRS adjustments. Always complete Form 8582 if you have net passive losses.

Mistake #5: Not filing required Forms 1099

If you paid $600 or more in 2014 to a contractor, property manager, attorney, or other service provider for your rental property, you must file Form 1099-MISC. Failure to do so can result in penalties. Keep excellent records of all payments to vendors and file 1099s by the deadline (typically January 31 for paper filing).

Mistake #6: Reporting in the wrong year

Cash-basis taxpayers (most individuals) report rental income when received and expenses when paid—not when earned or billed. If you received December 2014 rent in January 2015, it's 2015 income, not 2014.

What Happens After You File

Once you attach Schedule E to your Form 1040 and file your 2014 return, the IRS processes it as part of your overall tax return. Your supplemental income or loss from line 41 of Schedule E combines with wages, interest, and other income sources to determine your adjusted gross income and ultimately your tax liability or refund.

The IRS uses computer matching to compare your reported Schedule E income with information returns it receives. For example, if a partnership sent you a Schedule K-1 showing $10,000 of income, the IRS expects to see that amount on your Schedule E Part II. Discrepancies trigger automated notices (CP2000) proposing adjustments, additional tax, and potential penalties.

For rental properties, the IRS pays particular attention to passive activity losses. If you claimed large losses that offset other income, your return might be selected for examination to verify you qualified for the special $25,000 allowance or real estate professional status. You'll need documentation proving active participation (rental agreements, repair receipts, correspondence with tenants) or time logs showing 750+ hours in real property trades.

If you have suspended passive losses (losses you couldn't deduct in 2014 due to limitations), you carry them forward to future years. They remain suspended until you have sufficient passive income to offset them or until you dispose of the property in a fully taxable transaction, at which point all suspended losses typically become deductible.

The IRS has three years from your filing date to audit your 2014 return (six years if you substantially underreported income by 25% or more). Keeping thorough records—receipts, bank statements, mileage logs, lease agreements, repair invoices—is essential for this entire period.

FAQs

Q1: Can I deduct rental losses if I have a full-time job and rent out one property part-time?

Yes, but with limitations. If you actively participated in managing the rental (approved tenants, set rental terms, approved repairs) and your modified adjusted gross income was $100,000 or less in 2014, you could deduct up to $25,000 of rental losses against your job income. Between $100,000 and $150,000 MAGI, this allowance phases out by 50 cents for each dollar over $100,000. Above $150,000, rental losses are fully suspended and can only offset future passive income or become deductible when you sell the property.

Q2: What if I rented out my vacation home for only two weeks in 2014?

If you rented your home fewer than 15 days during the year, you don't report the rental income at all—it's completely tax-free. However, you cannot deduct any rental expenses on Schedule E. You can still deduct mortgage interest and property taxes on Schedule A if you itemize deductions, but rental-specific expenses (advertising, repairs) aren't deductible. This is sometimes called the "Masters exception" because homeowners near the Masters golf tournament rent their homes for the week and keep the income tax-free.

Q3: Do I need to depreciate my rental property, or is it optional?

Depreciation is mandatory, not optional. The IRS requires you to depreciate rental property even if you choose not to claim the deduction. This matters because when you sell the property, you must recapture all "allowed or allowable" depreciation as ordinary income taxed at up to 25%. For 2014, residential rental property depreciated over 27.5 years using the straight-line method. If you fail to claim depreciation on your returns, you should amend them to include it—otherwise you'll owe recapture tax on depreciation you never benefited from.

Q4: I received a Schedule K-1 from my S corporation. Do I owe self-employment tax on that income?

No. Income passed through from S corporations on Schedule K-1 is not subject to self-employment tax—this is one advantage S corporations have over partnerships. You report the S corporation income on Schedule E Part II, and it's subject to income tax but not the 15.3% self-employment tax. However, if you're an employee of your S corporation, you must pay yourself reasonable wages subject to payroll taxes before taking distributions.

Q5: Can I deduct the cost of improvements I made to my rental property in 2014?

Not immediately. Improvements that add value, prolong useful life, or adapt property to new uses must be capitalized and depreciated over their applicable recovery periods. For example, a new roof on residential rental property depreciates over 27.5 years, starting when you place it in service. Using the straight-line method, you'd deduct 1/27.5 of the cost each year. The improvement increases your property's depreciation deduction going forward, and you recover the full cost over time.

Q6: I have losses from multiple rental properties. How do I report them?

List each property separately in its own column (A, B, or C) on Schedule E Part I. If you have more than three properties, attach additional Schedules E using continuation pages. Calculate income or loss for each property individually on line 21. Then combine all properties on lines 23-26. Total all income from profitable properties on line 24 and all losses on line 25, then net them on line 26. The passive loss rules apply to your combined rental real estate results, not property-by-property.

Q7: What records should I keep for my 2014 rental property?

Maintain comprehensive records for at least three years after filing (longer is better). Essential documents include: all rental income records (checks, bank deposits, rent rolls), receipts for every expense claimed, mileage logs with dates and purposes of trips, purchase documents and closing statements showing your property's cost basis, receipts for improvements (kept permanently to adjust basis), lease agreements and correspondence with tenants, Form 1099-MISC for any contractors paid $600+, and bank and credit card statements. If you claimed real estate professional status or the $25,000 special allowance, document your hours and activities throughout the year.

Sources

• 2014 Instructions for Schedule E (Form 1040)
• 2014 Form 1040 Schedule E
• IRS Publication 527 (2014) - Residential Rental Property
• About Schedule E (Form 1040), Supplemental Income and Loss - IRS.gov

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