What Schedule E Is For

Schedule E (Form 1040) is an IRS tax form used to report supplemental income and losses from sources other than your regular wages or business operations. Think of it as the form where you declare passive income streams and flow-through income from business entities you own but don't actively run day-to-day.

Specifically, you'll use Schedule E to report income or losses from rental real estate properties (including vacation rentals), royalty payments (from copyrights, patents, or oil and gas interests), partnerships, S corporations, estates, trusts, and residual interests in Real Estate Mortgage Investment Conduits (REMICs). The form is divided into three parts: Part I covers rental real estate and royalty income, Part II handles income from partnerships and S corporations, and Part III addresses income from estates and trusts.

Schedule E attaches to your main Form 1040 tax return. The net income or loss you calculate on Schedule E flows directly to your Form 1040, affecting your total taxable income. For 2018, this form became particularly important as the Tax Cuts and Jobs Act introduced new rules affecting how rental losses and business income are treated, including the qualified business income deduction and new excess business loss limitations.

IRS Schedule E Instructions 2018

When You’d Use Schedule E (Including Late or Amended Returns)

You must file Schedule E with your 2018 Form 1040 if you received any income from the sources listed above during the 2018 tax year. The original deadline for 2018 returns was April 15, 2019 (or October 15, 2019, if you filed for an extension).

Late Filing

If you missed the original deadline but are owed a refund, good news—there's no penalty for filing late, though you forfeit interest on your refund for the delay period. However, if you owe taxes, you'll face penalties and interest that accumulate from the original due date. You generally have three years from the original filing deadline to claim any refund, meaning the deadline for 2018 refunds was April 18, 2022.

Amended Returns

If you need to correct information on Schedule E after filing your 2018 return, you'll file Form 1040-X (Amended U.S. Individual Income Tax Return) with a corrected Schedule E attached. Common reasons for amending include discovering unreported rental income, finding additional deductible expenses you missed, or correcting depreciation calculations. You have three years from the date you filed your original return (or two years from when you paid the tax, whichever is later) to file an amended return and claim a refund. For most 2018 filers, this deadline expired in April 2022. Note that amended returns for 2018 must be filed by paper—electronic filing for amended returns wasn't available for that tax year.

IRS Amended Returns Information

Key Rules or Details for 2018

The 2018 tax year brought significant changes affecting Schedule E filers due to the Tax Cuts and Jobs Act. Here are the crucial rules:

Loss Limitation Rules

Your Schedule E losses may be limited by three sets of rules applied in sequence. First, basis rules limit partnership and S corporation losses to your investment in the entity. Second, at-risk rules prevent you from deducting losses exceeding your actual economic risk in the activity. Third, passive activity loss rules generally restrict your ability to offset passive losses against regular income. For rental real estate, however, there's a special allowance: if you actively participated in managing your rental property and your modified adjusted gross income is $100,000 or less, you can deduct up to $25,000 in rental losses against your other income. This allowance phases out completely at $150,000 of modified AGI.

Real Estate Professional Exception

If you qualified as a real estate professional in 2018—meaning you spent more than 750 hours and more than half your working time in real estate trades or businesses where you materially participated—your rental activities aren't automatically passive. This lets you deduct rental losses without the usual passive loss limitations.

New Excess Business Loss Limitation

A new rule for 2018 limited total business losses (including Schedule E losses from partnerships, S corporations, and rental activities treated as trades or businesses) to $500,000 for married couples filing jointly or $250,000 for other filers. Losses exceeding these thresholds were disallowed and carried forward as net operating losses.

Business Interest Limitation

For 2018, business interest expense deductions were limited to 30% of adjusted taxable income for certain taxpayers, though this generally didn't apply to small businesses or most residential rental activities.

Excess Farm Loss Rules

The excess farm loss limitation didn't apply in 2018, though prior year excess farm losses could be deducted in 2018.

Qualified Business Income Deduction

While reported on Form 1040 rather than Schedule E, income from Schedule E rental activities and pass-through entities might qualify for a new deduction of up to 20% of qualified business income, subject to various limitations.

IRS About Schedule E

Step-by-Step (High Level)

Part I – Rental Real Estate and Royalties

First, list each rental property separately, providing the address and property type (single-family, multi-family, vacation rental, land, etc.). For each property, indicate how many days it was rented at fair market value and how many days you used it personally. This matters because if you used a dwelling unit as a home (personal use exceeded the greater of 14 days or 10% of rental days) and rented it fewer than 15 days, you don't report the income or deduct expenses at all.

Next, report your rental income on line 3, including all rent received and the fair market value of any services or property received instead of cash. Report royalty income on line 4. Then, deduct your expenses in lines 5-19, including advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, repairs, supplies, taxes, utilities, and depreciation. Be careful to separate repairs (deductible immediately) from improvements (capitalized and depreciated over time).

Calculate your net income or loss for each property, then total all properties. If you have an overall loss, you may need to complete Form 6198 (for at-risk limitations) and/or Form 8582 (for passive activity loss limitations) before entering your final figures.

Part II – Income from Partnerships and S Corporations

List each partnership or S corporation, using the information from your Schedule K-1 forms received from these entities. Report your share of income or loss, even if you didn't actually receive the money. These amounts flow through to you from the entity's operations. Again, basis, at-risk, and passive loss rules may limit your deductions.

Part III – Income from Estates and Trusts

Similarly, report income from estates or trusts using your Schedule K-1 forms from these entities.

Finally, combine all income and losses from Parts I, II, and III, and transfer the net amount to your Form 1040. If you have losses, you may need to complete Form 461 (for excess business loss limitations) after completing Schedule E.

IRS Schedule E Form 2018

Common Mistakes and How to Avoid Them

Mistake #1: Reporting Personal Use Properties Incorrectly

Many taxpayers rent out vacation homes or properties they occasionally use personally. If you used the property for more than 14 days or 10% of rental days (whichever is greater), you used it as a "home," and your deductible expenses are limited. Worse, if you rented it fewer than 15 days while using it as a home, you shouldn't report the rental income or expenses at all—though many taxpayers mistakenly do. Keep a detailed log of rental versus personal use days.

Mistake #2: Confusing Repairs with Improvements

Repairs maintain your property's current condition (fixing a broken window, patching a roof leak, painting a room) and are fully deductible in the year paid. Improvements enhance value or extend useful life (new roof, room addition, HVAC system replacement) and must be depreciated over many years. Mistakenly deducting improvements as repairs triggers IRS scrutiny. When in doubt, consult IRS Publication 527 or a tax professional.

Mistake #3: Ignoring Passive Loss Limitations

Many taxpayers simply report rental losses on Schedule E without realizing their loss may be limited or suspended under passive activity rules. If your modified AGI exceeds $150,000, you can't use the $25,000 special allowance at all, and your rental losses are suspended until you have passive income or dispose of the property. You must file Form 8582 to properly calculate your allowed loss. Failing to do so results in incorrect tax returns.

Mistake #4: Not Tracking Depreciation Properly

Depreciation is mandatory, not optional—you must claim it even if you choose not to. If you don't take depreciation deductions, the IRS still requires you to reduce your property's basis as if you had, meaning you lose the tax benefit. Keep detailed records of your property's original cost, purchase date, improvements, and prior depreciation to calculate it correctly each year using Form 4562.

Mistake #5: Misreporting Partnership and S Corporation Income

Simply copying numbers from Schedule K-1 to Schedule E without understanding basis limitations causes errors. You can't deduct losses exceeding your investment basis in the entity. You must track your basis annually by adding income and additional investments, then subtracting losses and distributions. Many taxpayers overlook this, claiming losses they're not entitled to deduct.

Mistake #6: Forgetting Information Returns

If you paid $600 or more in rents, services, or other payments to contractors or property managers, you're required to file Form 1099-MISC. Schedule E specifically asks whether you made such payments. Failing to file required 1099 forms can result in penalties.

What Happens After You File

After filing your 2018 return with Schedule E, the IRS processes your return and typically issues refunds within 21 days for electronically filed returns (longer for paper returns). However, Schedule E returns often face additional scrutiny because rental losses are frequently audited items.

IRS Matching and Review

The IRS matches the income you report from partnerships, S corporations, estates, and trusts against the Schedule K-1 forms those entities filed. Discrepancies trigger automated notices. For rental income, the IRS receives copies of any Form 1099-MISC issued to you and will notice unreported income.

Passive Loss Tracking

If your passive losses were limited or suspended in 2018, you must track these carryforward losses on your own records and on Form 8582 in future years. When you eventually have passive income or sell the property, you can use these accumulated losses. The IRS doesn't send you annual reminders about your suspended losses—it's your responsibility to maintain proper records.

Audits

Rental real estate is a common audit target, especially when large losses are claimed. The IRS may request documentation including rental agreements, expense receipts, bank statements showing rental deposits, logs of personal versus rental use, and depreciation schedules. Keep these records for at least three years after filing (longer if substantial issues exist).

Qualified Business Income Deduction Impact

Your Schedule E income may affect your qualified business income deduction claimed elsewhere on Form 1040. The IRS may review whether your rental activity qualifies as a trade or business and whether you correctly calculated this deduction.

State Tax Implications

Don't forget that your Schedule E income and losses also flow through to your state tax return in most states. State rules on passive losses may differ from federal rules, requiring separate calculations.

IRS Tips on Rental Real Estate

FAQs

1. Do I need to file Schedule E if my rental property breaks even or shows no activity?

If you received any rental income during 2018, you must report it on Schedule E, even if your expenses exactly offset that income. However, if the property was vacant all year with no rental income and no rental activity, you don't need to file Schedule E—though you can still deduct property taxes and mortgage interest on Schedule A if you itemize.

2. Can I deduct rental losses if I have a full-time job and manage my rental property on the side?

Yes, but with limitations. If you actively participated in managing your rental (making management decisions like approving tenants, setting rental terms, approving repairs) and your modified AGI is $100,000 or less, you can deduct up to $25,000 in rental losses against your salary or other income. This special allowance phases out between $100,000 and $150,000 of modified AGI. Above $150,000, your rental losses are passive and can only offset passive income, with unused losses carried forward.

3. What's the difference between Schedule E and Schedule C for rental property?

Schedule E is used when you rent out real estate and provide only basic services like utilities, trash collection, and common area cleaning. Schedule C is required when you provide substantial services to renters, such as maid service, concierge services, or meals—essentially operating a hotel or bed-and-breakfast business. Schedule C income is subject to self-employment tax, while Schedule E rental income typically isn't.

4. How do I report income from an Airbnb or vacation rental?

Short-term vacation rentals are generally reported on Schedule E, though you must carefully track personal use versus rental days. The personal use rules are strict: even days spent making repairs count as personal use unless you worked substantially full-time on repairs that day. If your rental activity includes substantial services (like a bed and breakfast with meals), you may need Schedule C instead. For 2018, some courts and IRS guidance suggested that very short-term rentals (average stays of seven days or fewer) where you provide substantial services might not be subject to passive loss rules if you materially participated.

5. What if I inherit rental property during 2018—how do I report it?

You report rental income received after the date of death on Schedule E. Your basis in inherited property is generally the fair market value on the date of death (stepped-up basis), which affects depreciation calculations. The estate may have received some rental income before you inherited it—that income is reported on the estate's Form 1041, not your Schedule E. Make sure you understand which period you're reporting and obtain proper documentation of the property's date-of-death value for depreciation purposes.

6. Can I claim the $25,000 rental loss allowance if I hire a property manager?

Yes, as long as you still actively participated. Active participation requires making significant management decisions (approving tenants, rental terms, capital expenditures) in a bona fide sense, but doesn't require regular, continuous, or substantial involvement. Hiring a property manager to handle day-to-day operations doesn't disqualify you, provided you remain involved in major decisions. However, limited partners and most passive investors (owning less than 10% interest) cannot meet the active participation test.

7. Do I need to attach Form 8582 with my Schedule E?

You must file Form 8582 if you have passive losses from rental activities and don't qualify for the simplified $25,000 special allowance exception (which requires meeting all six conditions listed in the Schedule E instructions). If you do qualify for that exception, you can skip Form 8582. Most taxpayers with straightforward rental situations and modest incomes qualify for the exception, but high-income taxpayers, those with multiple passive activities, or those with prior year suspended losses must complete Form 8582.

Important Resources:

2018 Schedule E Form
2018 Schedule E Instructions
IRS Publication 527 (Residential Rental Property)
IRS Publication 925 (Passive Activity and At-Risk Rules)

This summary provides general information based on IRS publications and should not be considered tax advice. Consult a qualified tax professional for guidance specific to your situation.