What Schedule E (Form 1040) Is For

Schedule E (Form 1040) is the IRS form you use to report “supplemental income and loss”—essentially, money you earn (or lose) from investments and business interests where you're not the primary day-to-day operator. Think of it as the form for passive income streams.

You'll use Schedule E if you receive income from rental properties (houses, apartments, vacation homes), royalties (from oil/gas wells, patents, copyrights, or mineral rights), or if you own part of a partnership, S corporation, estate, or trust. For example, if you rent out a condo you own or receive royalty checks from an oil well on your property, Schedule E is where you report this income and claim related expenses. The form attaches to your main Form 1040 and the net income or loss flows through to your overall tax return.

The 2017 version of Schedule E consists of multiple parts:

• Part I handles rental real estate and royalty income.
• Part II covers income from partnerships and S corporations.
• Part III deals with estates and trusts.

Most individual taxpayers primarily use Part I for rental properties.

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

Original Filing

Schedule E for 2017 should have been filed along with your Form 1040 by the original April 17, 2018 deadline (or October 15, 2018 if you filed for an extension). Even if you're reading this years later, understanding the 2017 requirements helps if you need to correct or amend that year's return.

Late Filing

If you never filed your 2017 return and owe taxes, there's no statute of limitations—the IRS can pursue you indefinitely. However, if you're owed a refund, you generally have three years from the original due date to file and claim it. For 2017 returns, that deadline has passed (April 15, 2021), meaning any unclaimed refunds are forfeited.

Amended Returns

If you need to correct your 2017 Schedule E—perhaps you discovered unreported rental income or forgot to claim legitimate expenses—you use Form 1040-X (Amended U.S. Individual Income Tax Return). Generally, you must file Form 1040-X within three years after filing your original return or within two years after paying the tax, whichever is later. For most 2017 filers, the amendment deadline has expired unless special circumstances apply. When amending, attach a corrected Schedule E showing the proper figures and explain the changes on Form 1040-X.

Key Rules or Details for 2017

Passive Activity Loss Rules

The IRS treats most rental real estate as “passive activities.” Generally, you can only deduct passive losses up to the amount of passive income you have. However, there's an important exception: if you actively participated in managing your rental property and your modified adjusted gross income (MAGI) was $100,000 or less, you could deduct up to $25,000 in rental losses against your other income (like wages). This allowance phases out between $100,000 and $150,000 of MAGI. Active participation means you made significant management decisions—approving tenants, setting rental terms, approving repairs—even if you hired a property manager to handle day-to-day operations.

At-Risk Rules

You can generally only deduct losses up to the amount you have “at risk” in the activity—essentially, your actual economic investment that you could lose. This prevents you from deducting losses funded by non-recourse loans (loans where you're not personally liable). However, qualified non-recourse financing for real estate—typically from commercial lenders—is treated as an amount at risk.

Basis Limitations

For partnerships and S corporations, you can't deduct more than your basis (your investment) in that entity. This prevents partners and shareholders from claiming losses exceeding what they've actually invested.

Personal Use Limitations

If you rented out a dwelling unit that you also used personally, special rules apply. If you used the property as a “home” (personal use exceeded the greater of 14 days or 10% of rental days), you must allocate expenses between personal and rental use. You can never deduct expenses related to personal use days.

Standard Mileage Rate

For 2017, the rate was 53.5 cents per mile for business-related driving, including trips to manage rental properties.

Step-by-Step (High Level)

Step 1: Gather Your Documents

Collect all income records (rent received, royalty statements, Schedule K-1 forms from partnerships/S corporations) and expense documentation (receipts, invoices, bank statements, property tax bills, mortgage interest statements).

Step 2: Complete Property Information (Lines 1–2)

For each rental property, enter the street address, property type code (single-family, multi-family, vacation home, etc.), and report the number of days rented at fair rental value versus days of personal use. This information determines whether special limitations apply.

Step 3: Report Income (Lines 3–4)

Enter rental income on line 3 and royalty income on line 4. Report the gross amount received—don't reduce it by expenses yet. If you received services or property instead of cash, report the fair market value.

Step 4: Enter Expenses (Lines 5–19)

Deduct ordinary and necessary expenses in the appropriate categories: advertising, auto and travel, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, repairs, supplies, taxes, utilities, depreciation, and other expenses. Each expense must be properly documented and allocable to the rental activity (not personal use).

Step 5: Calculate Depreciation (Line 18)

Depreciation allows you to recover the cost of your rental property (excluding land) over time. For residential rental property placed in service in 2017, you typically use a 27.5-year depreciation period. You may need to complete Form 4562 if you're claiming depreciation on property first placed in service in 2017.

Step 6: Total Your Income or Loss (Lines 20–22)

Subtract total expenses from total income for each property. If you have a loss, you may need to complete additional forms (Form 8582 for passive activity limitations, Form 6198 for at-risk limitations) to determine how much loss you can actually deduct in 2017.

Step 7: Report Pass-Through Income (Parts II & III)

If you received Schedule K-1 forms from partnerships, S corporations, estates, or trusts, report your share of income or loss in Parts II and III. Simply transfer the amounts from your K-1 to the appropriate lines.

Step 8: Calculate Net Income or Loss

Combine all income and losses from Parts I, II, and III to arrive at your total supplemental income or loss, which flows to Form 1040, line 17.

Common Mistakes and How to Avoid Them

Mistake #1: Mixing Personal and Rental Expenses

Many taxpayers deduct 100% of expenses for properties they also use personally.
Solution: Carefully allocate expenses based on the ratio of rental days to total days used. Keep a calendar showing rental versus personal use days.

Mistake #2: Forgetting to Claim Depreciation

Depreciation is mandatory, not optional. Failing to claim it means you still must reduce your property's basis (for future gain calculations) without getting the current tax benefit.
Solution: Always calculate and claim depreciation. If you forgot in prior years, you may need to file Form 3115 to correct your depreciation method.

Mistake #3: Treating Improvements as Repairs

Repairs (painting a room, fixing a broken lock) are immediately deductible. Improvements (new roof, HVAC system replacement, room additions) must be capitalized and depreciated over time.
Solution: Understand the distinction: repairs maintain the property's current condition, while improvements better it or adapt it to new uses.

Mistake #4: Ignoring Passive Loss Limitations

Deducting rental losses without considering passive activity rules can trigger IRS adjustments.
Solution: Complete Form 8582 if your losses exceed passive income, unless you qualify for the $25,000 active participation exception.

Mistake #5: Not Keeping Adequate Records

The IRS may disallow expenses if you can't provide documentation during an audit.
Solution: Maintain organized records for at least three years (six for substantial underreporting), including receipts, invoices, canceled checks, bank statements, and a mileage log.

Mistake #6: Reporting in the Wrong Place

If you provided substantial services to renters (like maid service or concierge services), that's a business, not rental activity, and belongs on Schedule C, not Schedule E.
Solution: Review the “significant services” test in IRS Publication 527.

Mistake #7: Missing Required Information Returns

If you paid $600 or more for services (to contractors, property managers, etc.), you're required to issue Form 1099-MISC.
Solution: Track all payments to service providers and file required information returns by the deadline.

What Happens After You File

Processing Timeline

The IRS typically processes e-filed returns with Schedule E within 21 days, while paper returns can take 6–8 weeks or longer. You can track your refund status using the “Where's My Refund?” tool on IRS.gov.

Automated Review

Every return undergoes automated computer screening. The IRS system checks for mathematical errors, missing information, and consistency with information returns (like Forms 1099 and W-2) it receives from third parties.

Refunds or Balances Due

If you're entitled to a refund, the IRS will process it according to your election (direct deposit or check). If you owe additional tax, you'll receive a notice with payment instructions and any applicable penalties and interest.

Audit Possibilities

Schedule E returns, particularly those showing rental losses, face higher audit scrutiny. The IRS has three years from your filing date (or the due date, whichever is later) to audit your return. Complex situations—like real estate professional status claims or large passive loss deductions—increase audit risk. If selected for audit, you'll receive a notice by mail (the IRS never initiates audits by phone or email). You'll need to provide documentation supporting your Schedule E income and expenses.

Amended Return Processing

If you file Form 1040-X to amend your Schedule E, expect processing to take 8–12 weeks or longer. You can track amended return status using the “Where's My Amended Return?” tool after three weeks.

Carryforward Amounts

If passive activity loss rules or at-risk limitations prevent you from deducting all your losses in 2017, those disallowed amounts carry forward indefinitely to future years when you have sufficient passive income or meet other qualifying conditions.

FAQs

1. Do I need Schedule E if I only rented my property for a few weeks?

If you rented your home for fewer than 15 days during 2017, you don't report the rental income at all, and you can't deduct rental expenses (though you can still deduct mortgage interest and property taxes on Schedule A if you itemize). This is sometimes called the “Masters exception.” If you rented for 15 days or more, you must report the income and can deduct allocable expenses on Schedule E.

2. Can I deduct rental losses if I have a full-time job and just own one rental property?

Yes, potentially. If you actively participated in managing the rental and your MAGI is $100,000 or less, you can deduct up to $25,000 in rental real estate losses against your wage income. This special allowance phases out between $100,000 and $150,000 MAGI. Above $150,000, your rental losses are fully passive and can generally only offset passive income.

3. What's the difference between repairs and improvements, and why does it matter?

Repairs keep your property in good operating condition (fixing a leaky faucet, repainting, replacing broken windows) and are immediately deductible on Schedule E. Improvements substantially increase the property's value, prolong its life, or adapt it to new uses (new roof, room addition, new HVAC system) and must be capitalized and depreciated over time. The distinction affects when you get your tax benefit—immediately or spread over many years.

4. I received a Schedule K-1 from a partnership. Where does it go on Schedule E?

Report partnership income or loss on Schedule E, Part II. The K-1 provides your share of the partnership's income, deductions, and credits. Simply transfer the amounts from the K-1 to the appropriate lines in Part II. Keep the K-1 with your tax records but don't attach it to your return unless it shows special items requiring additional forms.

5. What records do I need to keep for my rental property?

Maintain documentation for all income received (rent checks, payment app records, lease agreements) and all expenses (receipts, invoices, bank statements, credit card statements, mileage logs, property tax bills, mortgage interest statements). Also keep records of the property's purchase price, improvements made, and depreciation claimed—you'll need this when you eventually sell the property to calculate gain or loss. Retain records for at least three years after filing, or six years if substantial income underreporting is involved.

6. I'm a real estate professional. Do different rules apply to me?

Yes. If you qualify as a real estate professional under IRS rules—meaning you spent more than 750 hours and more than half your working time in real property trades or businesses where you materially participated—your rental real estate activities are not automatically passive. This means rental losses aren't subject to the passive activity loss limitations. However, you must still demonstrate material participation in each rental activity (or elect to treat all rental properties as a single activity). The requirements are strict, and proper documentation is essential.

7. What happens if I made a mistake on my 2017 Schedule E?

For tax year 2017, the standard three-year window for filing an amended return to claim a refund has generally expired (April 15, 2021 for most taxpayers). However, if you owe additional tax due to the mistake, you should still file an amended return using Form 1040-X with a corrected Schedule E to avoid potential penalties for underreporting. If the IRS owes you money but the amendment window closed, unfortunately, you've forfeited that refund. For current and recent tax years, always file amendments as soon as you discover errors.

Sources & Additional Resources

• IRS Publication 527: Residential Rental Property
• IRS Publication 925: Passive Activity and At-Risk Rules
• IRS Publication 946: How to Depreciate Property
• 2017 Schedule E Form and Instructions
• IRS.gov – About Schedule E
• IRS.gov – File an Amended Return
• IRS.gov – IRS Audits

This guide provides general information based on 2017 tax law. Tax situations vary significantly, and complex scenarios may require consultation with a qualified tax professional. Always refer to official IRS publications and instructions for authoritative guidance.