What the Form Is For

Schedule E (Form 1040) is the IRS form used to report supplemental income and losses from various passive income sources. You'll use this form if you earned money from rental real estate, royalties (from oil, gas, minerals, copyrights, or patents), partnerships, S corporations, estates, trusts, or residual interests in Real Estate Mortgage Investment Conduits (REMICs). This form attaches to your main Form 1040 or 1040-SR and helps the IRS understand income you earned outside of regular wages or self-employment.

The form is divided into three main parts: Part I covers rental real estate and royalty income, Part II reports income from partnerships and S corporations, and Part III handles income from estates and trusts. Most individual taxpayers will primarily use Part I for rental properties. Schedule E is specifically designed for passive activities where you're not actively running a trade or business with substantial services to customers.

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

For the 2019 tax year, the original filing deadline was April 15, 2020 (extended to July 15, 2020 due to COVID-19 relief). If you received income from any sources requiring Schedule E but didn't file, you can still file a late return. While you can file 2019 returns beyond the deadline, be aware that penalties may apply if you owed taxes.

If you need to file an amended return to correct Schedule E information from 2019, use Form 1040-X. Generally, you must file an amended return within three years after the date you filed your original return or two years after the date you paid the tax, whichever is later. For 2019 returns filed by the July 15, 2020 extended deadline, the amendment deadline would typically be July 15, 2023, to claim any refund.

Common reasons for amending Schedule E include discovering missed rental expenses, correcting income amounts, or adjusting passive loss calculations. If you receive corrected Schedule K-1 forms from partnerships or S corporations after filing, you'll need to amend your return to reflect the accurate information.

Key Rules for 2019

Several important rules governed Schedule E for the 2019 tax year. First, the standard mileage rate for rental activities was 58 cents per mile, which you could use instead of tracking actual vehicle expenses.

The passive activity loss rules are crucial for Schedule E filers. Rental real estate is generally considered a passive activity, meaning losses can only offset passive income, not your regular wages or business income. However, there's a special 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. This special allowance phases out completely at $150,000 MAGI, reduced by 50% of the amount over $100,000. For married couples filing separately who lived apart all year, these limits are halved to $12,500 and $50,000.

Active participation means you made management decisions like approving tenants, setting rental terms, and approving repairs—but you don't need regular, continuous, substantial involvement. You also must own at least 10% of the property.

The at-risk rules apply to rental real estate placed in service after 1986. Generally, you can only deduct losses up to the amount you have at risk in the activity—meaning amounts you could actually lose. This typically includes cash invested, property contributed, and certain qualified nonrecourse financing secured by the rental property itself.

Real estate professionals have special status. If more than half your personal services were performed in real property trades or businesses AND you worked more than 750 hours in those businesses during 2019, your rental activities aren't automatically passive if you materially participated. This allows full deduction of losses without the $25,000 limitation.

Step-by-Step (High Level)

Step 1: Gather Your Documents

Collect all Forms 1099-MISC showing rental or royalty income, records of rental income received, receipts for all rental expenses, mortgage interest statements (Form 1098), property tax bills, depreciation schedules, and Schedule K-1 forms from any partnerships, S corporations, estates, or trusts.

Step 2: Complete the Header Information

Answer line A about whether you made payments requiring Forms 1099 (if you paid anyone $600 or more for services related to your rental property, answer "Yes"). Answer line B if you're a real estate professional meeting both the 50% and 750-hour tests.

Step 3: Fill Out Part I for Rental Properties

For each rental property, enter the street address (line 1a), property type code (line 1b), and indicate if it's a qualified joint venture with your spouse (line 2). Report the number of fair rental days and personal use days. In columns A, B, and C, list your income and expenses separately for up to three properties.

Report gross rents received on line 3 and royalties on line 4. Then list expenses: advertising (line 5), auto and travel (line 6), cleaning and maintenance (line 7), commissions (line 8), insurance (line 9), legal and professional fees (line 10), management fees (line 11), mortgage interest paid to financial institutions (line 12), other interest (line 13), repairs (line 14), supplies (line 15), taxes (line 16), utilities (line 17), and depreciation (line 18). Add other expenses on line 19 and total everything on line 20.

Calculate your net income or loss on line 21 for each property. Transfer totals to line 23 and combine with any Part II and III amounts to reach your final Schedule E total on line 26.

Step 4: Apply Loss Limitations

If you have losses, you must apply three sets of rules in order: basis rules (for partnerships and S corporations), at-risk rules (Form 6198 if applicable), and passive activity loss rules (Form 8582 if your losses exceed the special allowance or you don't meet the active participation requirements).

Step 5: Transfer to Form 1040

Your final Schedule E total from line 26 transfers to Schedule 1 (Form 1040), which then flows to your main Form 1040.

Common Mistakes and How to Avoid Them

Mistake #1: Mixing Personal and Rental Use Incorrectly

If you used your rental property personally for more than 14 days or 10% of rental days (whichever is greater), you used it as a "home" and must allocate expenses between rental and personal use. Many taxpayers forget to make this allocation and deduct 100% of expenses. Always track personal use days carefully and prorate expenses accordingly.

Mistake #2: Deducting Improvements Instead of Capitalizing Them

Repairs maintain property in operating condition (fixing a broken lock, painting a room) and are immediately deductible on line 14. Improvements better the property or adapt it to new uses (replacing an entire HVAC system, adding insulation) and must be depreciated over time on line 18. Misclassifying improvements as repairs is a common audit trigger.

Mistake #3: Ignoring Passive Loss Limitations

Many taxpayers simply deduct all rental losses without checking if they qualify for the $25,000 special allowance. If your MAGI exceeds $100,000 or you didn't actively participate, you must complete Form 8582 to determine how much loss you can actually deduct. Excess losses carry forward to future years.

Mistake #4: Forgetting Depreciation

Depreciation is mandatory, not optional. If you don't claim it, the IRS still treats your property basis as if you did claim it, meaning you'll pay more tax when you sell without receiving any benefit. For 2019, residential rental property is depreciated over 27.5 years using the straight-line method. Complete Form 4562 if the property was first placed in service in 2019 or if you're claiming any special depreciation.

Mistake #5: Incorrect Allocation of Land vs. Building Cost

You cannot depreciate land, only buildings and improvements. When you buy rental property, you must allocate the purchase price between land and building based on their relative fair market values. Using property tax assessments is a reasonable method. Failing to make this allocation or allocating too little to land can cause problems in an audit.

Mistake #6: Missing the Form 1099 Requirement

If you paid $600 or more to any service provider (property managers, contractors, attorneys), you generally must file Form 1099-MISC. Check "Yes" on line A and ensure you filed the required forms by January 31 following the tax year.

What Happens After You File

Once you file Schedule E with your Form 1040, the IRS processes your return and matches the information against third-party reports (like Schedule K-1 forms from partnerships reporting distributions to you). Processing typically takes 6-8 weeks for paper returns and 3 weeks for e-filed returns.

If you claimed rental losses using the $25,000 special allowance or as a real estate professional, keep excellent documentation. The IRS may request proof of active participation, time logs showing hours worked, or records of management decisions made. Rental property deductions face higher scrutiny than many other tax areas.

Any passive losses you couldn't deduct in 2019 carry forward indefinitely on Form 8582. You can use them in future years when you have passive income or when you dispose of the property in a fully taxable transaction. Track these carryforward losses carefully—they represent real tax savings in future years.

If you have rental income reported on Schedule E, this income may qualify for the Qualified Business Income (QBI) deduction on Form 1040, line 10, potentially allowing you to deduct up to 20% of your qualified rental income. Review whether your rental activity rises to the level of a trade or business for QBI purposes.

FAQs

Q1: 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 2019, you don't report the rental income at all and cannot deduct rental expenses (though you can still deduct mortgage interest and property taxes on Schedule A if you itemize). If you rented it for 15 days or more, you must report the income on Schedule E.

Q2: Can I deduct losses from my rental property against my job income?

It depends. If you actively participated, your MAGI is $100,000 or less, and you own at least 10% of the property, you can deduct up to $25,000 in rental losses against your wages or other income. This allowance phases out between $100,000 and $150,000 MAGI. Above $150,000, rental losses can only offset passive income unless you're a real estate professional.

Q3: What's the difference between Schedule E and Schedule C for rental income?

Use Schedule E for typical rental situations where you provide space to tenants. Use Schedule C if you provide substantial services to tenants (like a bed-and-breakfast with daily maid service and meals) or if you're in the business of renting personal property like equipment. Schedule C income is subject to self-employment tax; Schedule E rental income generally is not.

Q4: Do I need to file Form 4562 for depreciation?

You must attach Form 4562 if you're claiming depreciation on property first placed in service in 2019, claiming a Section 179 expense deduction, or reporting depreciation on any listed property (like a vehicle). If you're only claiming depreciation on rental property placed in service before 2019 and have no listed property, you can calculate depreciation and enter it directly on line 18 without filing Form 4562.

Q5: How do I report income from an Airbnb or vacation rental?

Short-term rentals are reported on Schedule E just like traditional rentals. However, if you provided substantial services (cleaning between each guest, providing breakfast, concierge services), the IRS may consider it a business requiring Schedule C. Additionally, if your average rental period is 7 days or less, different passive activity rules apply—you may need to materially participate to avoid passive loss limitations.

Q6: What if I own rental property with my spouse?

If you're married filing jointly and both materially participate as co-owners, you can elect to be treated as a qualified joint venture by checking the "QJV" box on line 2. This allows you to avoid filing a partnership return (Form 1065) and instead report your respective shares directly on Schedule E. Each spouse reports their percentage share as separate properties on Schedule E.

Q7: Can I deduct travel expenses to visit my out-of-state rental property?

Yes, ordinary and necessary travel expenses related to your rental activity are deductible on line 6, including 50% of meal expenses while traveling away from home. Use the standard mileage rate of 58 cents per mile for 2019, or deduct actual vehicle expenses. Keep detailed records showing the rental property purpose of each trip and any time spent on personal activities at the destination.

All information in this guide comes from official IRS sources: 2019 Instructions for Schedule E (Form 1040), IRS Publication 527 (Residential Rental Property), and IRS Publication 925 (Passive Activity and At-Risk Rules). Source: IRS.gov.