Desktop: Schedule E for Rental Real Estate

Income or Loss from partnerships, real estates, S corporations, royalties, estates and trusts, and REMICs are reported on Schedule E (Form 1040), Supplemental Income and Loss.

On an individual tax return, personal rental property must include real estate for it to be reported on Schedule E. Use the guidelines below for personal property rental:

In the event that the personal property rental is managed as part of a business, the rental income and expenses are generally reported on Schedule C.

If there is no association of the personal property rental to a business, it is regarded as Other Income and reported on Line 8 of Schedule 1. Personal property expenses are entered as income adjustments on Line 22 of Schedule 1, notated as PPR.

To enter real estate rental income in Schedule E:

• Go to the Main Menu of the tax return (Form 1040)
• From the menu, select Income
• Then select Rents, Royalties, Entities (Schedule E, K-1, 4835, 8582)
• Proceed to Rents and Royalties - For a new entry, select New. In case the property was in the return for the previous year, select Pull to have its data pulled forward
• If it is new property, ensure that you enter all the information required:
  • Type of Property - Choose as may be appropriate from the dropdown menu
  • Address - Key in the address. In case that it is not a US address, click on the checkbox for Foreign Address
  • Fair Rental Days - Key in the number of days in the year in which the property was rented or was available for rent
  • Personal Use Days - Key in the number of days in the year, that the property was used for personal activity and not rented. (Several uses can be considered “personal”. Check out Schedule E instructions for more information on the same.)
  • Qualifies for QBI Reason - in the event that the rental activity is eligible for the Qualified Business Income Deduction, choose the reason for the same from the dropdown menu; it is either it conforms to the meaning of a Section 162 business or it fits into the safe harbor provisions of Revenue Procedure 2019-138
• After entering the basic information, click OK. You will be taken to the Schedule E - Rents & Royalties Edit Menu where you can enter the Income and Expenses on Schedule E

You will need to enter the following percentages in addition to the income and expenses:

• Percentage of Ownership - Enter the percentage which is owned by the taxpayer if they do not have 100% ownership
• Percentage of Occupancy - Enter the percentage occupied by a renter in the event that occupy only part of the property

You can either enter the property’s exact amount of income or expense or let the program prorate the amount of income and expense to the taxpayer in the event that the ownership percentage is below 100%. Similarly, if the occupancy percentage is not 100% then, you will either have to enter the exact amount of expense incurred for the occupied portion or let the program prorate the portion’s expense.

In case the ownership percentage is below 100%, the rental income is to be entered in two places:

Enter the rental income that is entirely for its owner in the 100% field. Enter the rental income that is to be prorated amongst several owners in the prorated field where the rental income of this owner will be calculated as follows:

If the percentage of ownership or occupancy is below 100%, there will be two entry points for all the expense categories with the exclusion of the depreciation and previous year unallowed loss. Here is an advertising expense, for instance:

In the event that the advertising expense is entirely related to this property, have it entered in the 100% field. If the expense is to be prorated depending on the occupancy or ownership percentages, enter it in the prorated field. The calculation for the prorated portion will be:

Itemizing Income and Expenses

You can follow the steps below to itemize rental income and every expense category:

• Go to the entry field of the item then press the F10 key
• Select New
• Enter a Description and Amount then click on OK
• If need be, select New again and repeat

The sum of the entries will be carried to the entry field. Schedule E will have a supporting statement that lists the detail in the F10 menu.

Prior Year Unallowed Loss

Enter previous year unallowed loss in the Expenses menu. Check out Publication 925 - Passive Activity & At-Risk Rules and Form 8582 - Passive Activity Loss Limitations for more information.

Depreciation

Every capital asset that is related to rental property should be depreciated. For instance, in case a taxpayer rents a residential home, the taxpayer will depreciate the building as well as the fixtures in the home. Note that the value of the land on which the home is not depreciated. Therefore, when using the depreciation module, the land value is entered separately. To do so, choose “Land” as the depreciation method. No depreciation will be calculated on it.

Check out IRS Publication 946 to know items that can be depreciated, the methods used, bonus depreciation and Section 179 Deduction.

NOTE: in case you keep track of assets and calculate depreciation outside the Taxx Savage Pro, complete Form 4562 directly instead of using the depreciation module. Only one method is used to enter depreciation in the tax return. Using the depreciation saves you from completing Form 4562 and also helps you complete Form 4797 if the asset gets disposed of.

To enter assets to be depreciated:

• Go to the Expenses Menu
• From the menu, select Depreciation
• Select Depreciation Module - for a new entry, select New. If the property was in the return for the previous year, select Pull to pull the assets forward
• For new assets, provide the following information:
  • Description - Describe the item to distinguish it from other items. Use the street address if it is a rental property
  • Date Placed in Service - This date may or may not be similar to the purchase date. For real property, this date is when the property was ready and available for renting
  • Cost - Is inclusive of the charges for shipping and installation as well as sales tax if the sales tax is not included on Schedule A as an itemized deduction
  • Business Percentage - if less than 100%, enter the percentage of business use. Adjustments will accordingly be made for the basis being depreciated. For property that was used for business for 50% or does not qualify for the Section 179 Deduction
  • Federal Section 179
  • State Section 179 - Taxpayers in the business of renting property are the only ones eligible for Section 179 deduction
  • Accumulated Depreciation - Leave this blank for new assets. For assets from a prior year, enter the accumulated depreciation
  • Depreciation Method - choose the appropriate method for the asset. Check out Publication 946 for more information on the depreciation methods
• Click OK after entering the information above. You will land on the depreciation data entry screen from where you can edit and make the following indications:
  • Mid-Quarter - In the event that the mid-month convention is inapplicable while the total of MACRS property’s depreciable basis placed in service at any time within the prior 3 months of the tax year are more than 40% of the entire MACRS property depreciable basis for the whole year. A warning will appear upon exiting the depreciation module in the event that you do not indicate that the calculation is based on this
  • Listed Property - Change to Yes if this is listed property then indicate what type of property it is. Check out Publication 946 to get the definition and examples of listed property

Additional Information:

• IRS: Publication 527, Residential Rental Property
• IRS: Publication 535, Business Expenses
• IRS: Publication 946, How To Depreciate Property
• IRS: Instructions for Form 4562, Depreciation and Amortization