If you've earned income from rental properties, collected royalties, or invested in partnerships, S corporations, estates, or trusts, the IRS wants to know about it. Schedule E (Form 1040) is where you report this "supplemental" income—essentially, money flowing to you from sources other than your regular paycheck or self-employment business. For the 2020 tax year, understanding this form is crucial for landlords, investors, and passive business owners alike. IRS Schedule E Instructions

What Schedule E Is For

Schedule E—officially titled "Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)"—is an attachment to your Form 1040 individual income tax return. Think of it as the IRS's way of tracking income you receive from investments and passive business activities that don't fit neatly into wages (W-2) or active business income (Schedule C).

The form is divided into parts to handle different income sources. Part I covers rental real estate and royalties—this is where most individual taxpayers spend their time if they own rental properties or receive royalty payments from intellectual property like patents, copyrights, or mineral rights. Part II reports your share of income or losses from partnerships and S corporations (you'll receive a Schedule K-1 from these entities showing your portion). Part III handles income from estates and trusts (again, you'll get a K-1). Parts IV and V deal with specialized situations involving Real Estate Mortgage Investment Conduits (REMICs).

The key purpose: Schedule E aggregates your supplemental income and calculates any allowable losses, then transfers the net result to your Form 1040, affecting your overall taxable income. IRS Form 1040 Schedules

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

Original Filing

You attach Schedule E to your 2020 Form 1040 when you file your federal income tax return. For most taxpayers, the deadline was April 15, 2021 (or October 15, 2021 if you filed for an extension). If you had rental income, received a Schedule K-1, or earned royalties in 2020, you should have filed Schedule E with that return—even if you had a loss rather than income.

Late Filing

If you missed the deadline entirely and never filed your 2020 return, you'll still need to file Schedule E along with Form 1040 as soon as possible. The IRS can assess penalties for late filing, especially if you owe taxes. However, if you're due a refund, there's no penalty for filing late—you simply need to file within three years of the original deadline to claim your refund.

Amended Returns

Discovered an error after filing? Perhaps you forgot to report rental income, miscalculated depreciation, or found new documentation for expenses. You'll need to file Form 1040-X (Amended U.S. Individual Income Tax Return) with a corrected Schedule E attached. Generally, you must file Form 1040-X within three years after the date you filed your original 2020 return, or within two years after you paid the tax, whichever is later. Good news: As of recent years, you can e-file amended returns for the current and two prior tax years. IRS Amended Returns

Key Rules or Details for 2020

Several special rules shaped Schedule E reporting for the 2020 tax year:

COVID-19 Relief Credits

The 2020 tax year fell right in the heart of the pandemic, and Congress passed relief legislation. If you owned rental properties and had employees, you may have claimed Families First Coronavirus Response Act (FFCRA) credits for qualified sick and family leave wages on Form 941 or 944. If so, you must report both the nonrefundable and refundable portions of those credits as income on Schedule E, line 3 or 4. Similarly, if you claimed the Coronavirus Aid, Relief, and Economic Security (CARES) Act employee retention credit, you had to reduce your wage deduction by the credit amount (but notably, you did not reduce your Social Security and Medicare tax deductions). IRS 2020 Schedule E Instructions

Standard Mileage Rate

For 2020, the standard mileage rate for rental property activities was 57.5 cents per mile. If you drove to inspect properties, meet tenants, or pick up supplies, you could claim this deduction.

Three Critical Loss Limitation Rules

If you reported a loss on Schedule E, the IRS applied up to three separate "gatekeepers" that could reduce or eliminate your deduction:

• Basis Rules (for partnerships/S corporations): You can't deduct more than your investment (basis) in the entity.
• At-Risk Rules (Form 6198): You can only deduct losses up to the amount you could actually lose—generally, your own cash investment plus certain loans you're personally liable for. Nonrecourse loans (where you're not personally on the hook) typically don't count, except for qualified nonrecourse financing on real estate.
• Passive Activity Loss Rules (Form 8582): Rental activities are usually "passive," meaning you can only deduct losses against other passive income unless you qualify for an exception.

The $25,000 Rental Real Estate Exception

Many small landlords benefited from a special rule: if rental real estate was your only passive activity, you actively participated in managing it, your modified adjusted gross income was $100,000 or less (gradually phasing out to $150,000), and you owned at least 10% of the property, you could deduct up to $25,000 of rental losses against your ordinary income without needing Form 8582. IRS Publication 925

Real Estate Professionals

If you qualified as a real estate professional (spending more than 750 hours and more than half your working time in real property trades or businesses, with material participation), your rental real estate activities weren't treated as passive, potentially allowing full loss deductions.

Step-by-Step (High Level)

Here's the bird's-eye view of completing Schedule E for rental real estate (Part I), the most common scenario:

Step 1: Property Information (Lines 1a-2)

List each rental property's address
Indicate property type (single-family, multi-family, vacation home, commercial, land, royalty, or self-rental)
Report the number of "fair rental days" and "personal use days" for each property

Step 2: Income (Lines 3-4)

Line 3: Record all rental income received
Line 4: Record royalty income if applicable

Step 3: Expenses (Lines 5-19)

Report allowable expenses for each property in separate columns:

• Advertising, auto/travel, cleaning/maintenance
• Commissions, insurance, legal/professional fees
• Management fees, mortgage interest, repairs
• Supplies, taxes, utilities
• Depreciation (you may need Form 4562)
• Other expenses (with details)

Step 4: Calculate Net (Lines 20-22)

Line 20: Total expenses for each property
Line 21: Subtract expenses from income for each property
Line 22: Sum all properties' net income or loss

Step 5: Summary (Lines 23-26)

Report totals for all properties combined
Line 26: Your final net income or (loss) transfers to Form 1040

For Partnerships/S Corporations (Part II): You'll report information from Schedule K-1 forms you received, entering your share of income, losses, and other items. Keep the K-1s for your records but don't attach them to your return.

For Estates/Trusts (Part III): Similar process using K-1 information from the estate or trust.

Common Mistakes and How to Avoid Them

Mistake #1: Mixing Personal and Rental Use

Many people rent out vacation homes or second properties they also use personally. The trap: You cannot deduct expenses for days of personal use. If you used a property 30 days personally and rented it 90 days, only 75% of expenses (90÷120) are deductible. Worse, if you rented it fewer than 15 days, you report no rental income or expenses on Schedule E at all. How to avoid: Keep a detailed calendar marking rental days versus personal use days, including use by family at below-market rates.

Mistake #2: Deducting Capital Improvements as Current Expenses

Replacing an entire roof, installing a new HVAC system, or adding a room are capital improvements, not repairs. You can't deduct these in full the year you pay for them—they must be depreciated over many years (typically 27.5 years for residential rental property). How to avoid: Understand the difference: repairs maintain existing condition (fixing a broken lock, painting a room); improvements better the property or adapt it to new uses (new appliances, major renovations). When in doubt, depreciate it.

Mistake #3: Forgetting to Report CARES Act Credits as Income

This was unique to 2020: If you claimed pandemic-related employment credits for rental property employees, those credits are taxable income on Schedule E. How to avoid: Review any Forms 941/944 you filed and properly report the credit amounts on Schedule E, line 3 or 4.

Mistake #4: Not Maintaining Adequate Records

The IRS is clear: if you can't document expenses during an audit, you may lose deductions and face penalties. How to avoid: Keep receipts, invoices, bank statements, mileage logs, and repair records organized by property and year. Cloud-based bookkeeping software can be a lifesaver.

Mistake #5: Ignoring Loss Limitation Rules

Many taxpayers report losses on Schedule E without checking whether at-risk or passive activity rules apply, leading to IRS adjustments later. How to avoid: If you have losses, determine whether you need Form 6198 (at-risk) or Form 8582 (passive losses). The $25,000 exception helps many small landlords, but high earners or limited partners often can't use it.

Mistake #6: Depreciating Land

Land never wears out, so the IRS never allows depreciation on it—only on buildings and improvements. How to avoid: When you buy property, allocate the purchase price between land (not depreciable) and buildings (depreciable). Use the assessed values from property tax statements as a reasonable guide.

Mistake #7: Deducting Prepaid Interest

You can only deduct mortgage interest in the year it accrues, not when you prepay it. How to avoid: Check your Form 1098 and only deduct interest allocable to 2020.

What Happens After You File

Once you submit your 2020 Form 1040 with Schedule E attached, here's what to expect:

IRS Processing

The IRS processes your return and matches information from third-party sources (Forms 1098 for mortgage interest, 1099s for payments, K-1s from entities). Discrepancies can trigger automated notices.

Refunds and Payments

If Schedule E showed net income, it increased your tax liability. If it showed a loss (and you qualified to deduct it), it reduced your tax. Your Form 1040 reflects the net effect. Refunds typically arrived within 21 days for e-filed returns in 2020-2021, though pandemic processing delays stretched timelines significantly.

Record Retention

Keep your Schedule E, supporting documents, and receipts for at least three years from the filing date (the IRS's standard audit window). For property you still own, keep depreciation schedules and purchase/improvement records until at least three years after you sell the property.

Potential Audits

Schedule E is an area the IRS scrutinizes because rental losses are commonly claimed. Red flags include:

• Large losses year after year without apparent business purpose
• Unusually high expenses relative to income
• Missing depreciation on obvious capital assets
• Significant personal use mixed with rental activity

If audited, you'll receive a notice requesting documentation. Respond promptly with organized records showing income received, expenses paid, and the business purpose of activities.

Corrections and Math Errors

The IRS may send a CP2000 notice if income reported on K-1s or 1099s doesn't match your Schedule E. Sometimes the IRS automatically corrects "math errors" (like misadded totals) and sends you an adjusted bill or refund notice. If you disagree, you can dispute it.

Carryforward Losses

If loss limitations prevented you from deducting all your losses in 2020, those excess losses typically carry forward to future years. Form 8582 tracks suspended passive losses, which you can deduct when you have passive income or dispose of the activity.

FAQs

Q1: Do I use Schedule E or Schedule C for my rental property?

A: Use Schedule E for standard residential or commercial rental real estate. You'd use Schedule C only if you provide "substantial services" to tenants beyond typical landlord duties—think running a bed-and-breakfast with daily housekeeping and meals, or renting equipment as a business. Most landlords use Schedule E. IRS Schedule E Instructions

Q2: I received a Schedule K-1 from a partnership. Do I attach it to my return?

A: No. Keep the K-1 for your records, but don't attach it to Form 1040. You'll use the information from the K-1 to complete Part II of Schedule E, but the K-1 itself stays in your files in case of an IRS inquiry.

Q3: Can I deduct losses from rental property against my W-2 income?

A: Sometimes. If you qualify for the $25,000 exception (actively participated, owned 10%+, modified AGI under $100,000, rental real estate is your only passive activity), yes. Real estate professionals who materially participate can also deduct losses. Otherwise, rental losses are "suspended" and can only offset passive income or be deducted when you sell the property.

Q4: What if I rented out my home for just 10 days?

A: If you rented your home fewer than 15 days during the year, you don't report the rental income at all, and you can't deduct any rental expenses. It's tax-free income! If you rented 15 days or more, you must report all rental income and allocate expenses between rental and personal use.

Q5: I forgot to claim depreciation on my 2020 Schedule E. Can I catch up on a future return?

A: Unfortunately, you can't simply claim "missed" depreciation in future years. The IRS requires you to file Form 3115 (Change in Accounting Method) to correct the issue, or you'll be treated as if you claimed depreciation even if you didn't (affecting your basis when you sell). It's best to amend your 2020 return with Form 1040-X to claim the depreciation properly.

Q6: How do the CARES Act and FFCRA credits affect my Schedule E?

A: For 2020, if you claimed employment credits related to pandemic relief for employees of your rental activities, you must report those credits as income on Schedule E. Additionally, reduce your wage deduction by any employee retention credits claimed. This was a special 2020 rule tied to COVID-19 relief legislation.

Q7: What's the difference between "active participation" and "material participation"?

A: Active participation is easier to meet—you make management decisions like approving tenants, setting rental terms, and approving repairs in a "significant and bona fide" way. You need this for the $25,000 rental loss exception. Material participation is a higher standard (generally 500+ hours of involvement) required for real estate professionals to avoid passive activity treatment. Most landlords can actively participate but don't materially participate. IRS Publication 925

Sources

Authoritative Sources Referenced:

• IRS Schedule E Form and Instructions (2020)
• IRS About Schedule E
• IRS Publication 925: Passive Activity and At-Risk Rules
• IRS Publication 527: Residential Rental Property
• IRS Amended Returns Information