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The Ultimate Guide to IRS Schedule E for Real Estate Investors

Whether you’re a brand new investor trying to do it yourself or you have a million dollar portfolio and have a team of professionals, it’s always a good idea to have foundational knowledge of each aspect of your business. I developed this comprehensive guide to allow real estate investors on every level better understand IRS Schedule E.  

While real estate tax can be complex, this guide is written for investors of all skill levels. I could have made it cumbersome and technical, but then my audience would be other CPAs which isn’t the intent of this article, much less The Real Estate CPA™ as a whole.

Let’s begin by highlighting all the great knowledge you’ll walk away with after you get through this article:

  • What IRS Schedule E is and how it interacts with your tax return
  • Why we report rental property on IRS Schedule E
  • Calculating the basis and depreciation of your rental property
  • A walk through of IRS Schedule E
  • How to report auto expenses

To get the most out of this post, it will be helpful to download a copy of the IRS Schedule E and its instructions here. Hopefully the combination of IRS Schedule E, its instructions, and this awesome post will make it clear as day; that is, if you think taxes can ever really be “clear.”

What IRS Schedule E is Used For

IRS Schedule E is the form where you will report “supplemental income and loss” related to rental real estate, royalties, estates, trusts, partnerships, and S-Corporations. Emphasis on the fact that we are reporting “supplemental income and loss” and not “earned income.”

Think of earned income as business income. Earned income is generated from an active trade or business. You pay self-employment tax on earned income. Real estate, royalties, partnerships, and S-Corporations can all generate earned income.

For example, you may run a real estate business where you are flipping or developing properties where you’d be required to report your income on IRS Schedule C; the schedule in which you report earned income.

Or you may be an owner in a partnership or S-Corporation and have a combination of earned income and supplemental income. In this case, one business can be reported on both IRS Schedule C and E.

IRS Schedule E is used for supplemental income which is generally considered passive income. As an investor, this is important because rental real estate generates passive income and, as such, we will report the income and loss from rental real estate on Schedule E.

 

How IRS Schedule E Interacts With the Rest of your Return

When you report income or loss on Schedule E, that income or loss is “re-routed” to different areas within your tax return. Your total taxable income or loss is reported on line 26 of Schedule E.

The first and most important place you will see the end result of IRS Schedule E appear is line 17 of your IRS Form 1040. Here you should see the full amount of net income or loss from your rental properties.

If your activities on IRS Schedule E created a loss and your loss is not showing up on line 17 of IRS Form 1040, you may be limited by the Passive Activity Loss limitations. While the Passive Activity Loss limitations demand an entirely separate post on their own, here’s a high level overview:

  • If your adjusted gross income (line 37 of IRS Form 1040) is less than $100,000, you are able to take the loss reported on line 26 of Schedule E up to a maximum amount of $25,000 annually.
  • If your adjusted gross income is between $100,000 and $150,000, the maximum $25,000 is slowly phased out.
  • If your adjusted gross income is over $150,000, you cannot claim the passive loss reported on Schedule E unless you qualify as a real estate professional.

The last point is very important to understand. If your adjusted gross income is above $150,000, you cannot claim your passive losses against your other income unless you are a real estate professional.

Many investors get worried when they hear this. They’ve been told real estate is a beautiful way to shelter income from taxes but now they are being barred from taking the well deserved losses.

What happens to the losses if you cannot claim them? They are called “unallowed losses” and are reported on IRS Form 8582. This form serves as a catchall that will keep track of all the losses you have not been able to claim over the years.

You do not “lose” these losses; they are simply carried forward until they can offset net rental income. These losses can also be used to offset the gain if you were to sell a rental property, regardless of whether or not the rental property you are selling generated the specific loss.

If the losses get carried forward and you can’t use them, doesn’t that defeat the purpose of sheltering income from taxes?

This is where I have to tell you that you’ve been gurued. Real estate is indeed an excellent way to legally avoid taxation, but for high income earners, you will only be avoiding tax on the rental income, not your regular income from your job.

Again, some amount of income or loss from your rentals should appear on line 17 of your IRS Form 1040. If your adjusted gross income is over $150,000, then you should look for IRS Form 8582 and see if the rental loss has been carried over to it.

Determining Property Basis and Depreciation

One of the most important parts about preparing IRS Schedule E is making sure that we are accurately calculating the rental property cost basis.

The most common advice is that the rental property basis is the purchase price plus improvements. So if you buy a property for $100,000 and add $10,000 in improvements, the property basis is $110,000.

This advice, while correct, can be misleading. If you are unaware that you must allocate a portion of the purchase price to land, you will calculate the wrong depreciable basis and therefore deduct an incorrect amount of depreciation.

It’s important to understand how to determine the value of the land of a purchased property. In most cases, the easiest way to get this value is to pull the property’s tax card from the county assessor’s office. Doing so will provide us with a “land ratio” which we will then apply to the purchase price.

For instance, if the property tax card says that the land is worth $10,000 and the improvements are worth $40,000, then our land ratio is 20% [$10,000/($10,000 + $40,000)]. We would then apply this ratio to the purchase price of the property to determine how much value we allocate to land and how much we allocate to improvements.

Why is this important? Because we can only depreciate the value of improvements since land is non-depreciable. Land is ever lasting and does not deteriorate.

A too common mistake I see is depreciating the entire purchase price of the property. This is not correct accounting and will need to be corrected via alternative methods. Don’t make this mistake!

Okay, now that we know we can’t depreciate the land value of the building, let’s figure out how to calculate the property basis.

The first thing that I do when preparing IRS Schedule E is a closing cost analysis. I have developed a calculator that helps me quickly calculate a property’s basis.

The Closing Cost and Depreciation Calculator is an excellent tool to use when calculating a rental property’s basis because it analyzes all sorts of closing costs such as title transfer fees, bank fees, loan origination fees, escrow, and seller credits. It then places them into the appropriate buckets which we’ll discuss below, and calculates depreciation and amortization for the first year and on an annual basis.

I recommend using some sort of tool, calculator, or guide to help you with the analysis of your closing costs and depreciation because you are going to be lumping costs into three distinct categories:

  1. Property basis
  2. Loan cost basis
  3. Currently deductible expenses

The first category, the property basis, consists of the agreed upon purchase price, plus closing costs like title insurance, transfer taxes, inspections, appraisals (if paid outside of closing), travel costs, attorney fees, and notary or bank fees.

From the property basis, we’ll subtract out our land value to determine the total value in which we will begin depreciating. This is called the depreciable basis.

Purchase Price + Closing Costs – Land Value = Depreciable Basis

Depreciation will usually be over a period of 27.5 years. If you are investing in commercial property, you’re looking at a 39 year period.

Related: How to Calculate Rental Property Depreciation Expense

There are several depreciation methods and conventions. We will be using the Modified Accelerated Cost Recovery System (MACRS) for our depreciation purposes.

While it sounds like a mouthful, all you need to know is that when you first place a property into service (i.e. advertise it for rent), you will be granted a half month of depreciation. Then, during the first year, you’ll calculate depreciation on a monthly basis.

So if I buy a property and advertise it for rent on September 29, for the first year I’ll have 3.5 months of depreciation (1/2 September + October + November + December). If my annual depreciation is $1,200, I first divide that value by 12 to get it on a monthly basis, then multiply it by 3.5 to figure my first year of depreciation. In our example, it will be $350.

The second category is the loan cost basis which is the sum of all costs associated with the loan. These can be the origination fee, credit report, bank fees, and appraisal fees if one was required by the lender.

Once we calculate the loan cost basis, we will need to determine our annual amortization. Amortization essentially means the same thing as depreciation, it’s just the depreciation method for “intangible” costs.

You will amortize your loan costs over the life of the loan. So if you have a 15 year loan, your amortization period is 15 years. If you have a 30 year loan, your amortization period is 30 years.

Let’s assume our loan cost basis is calculated to be $3,000 and we have a 30 year loan. Each year, you will write-off amortization expense of $100 ($3,000/30 years).

The first year of amortization is calculated much like depreciation in that you will be granted a half month for the month you place the property into service and then amortize on a monthly basis until the end of the year.

The third category is currently deductible expenses which consist of hazard insurance, property taxes (not transfer taxes), and other miscellaneous expenses. These expenses do not need to be amortized or depreciated (whew!) but are simply deducted in full the first year.

Reporting Rental Property on IRS Schedule E

Finally, what you’ve all been waiting for! Before we begin, click this link to open a copy of IRS Schedule E so that you can follow along.

For the do it yourself investors, this section will be your tax preparation bible. For all of my clients and everyone who already has a CPA, use this section to cross check the CPA’s work.

The first section is seemingly the easiest but trips plenty of folks up. First, we have to determine whether or not we made any payments that required a 1099. As a general rule, you must issue a 1099 to contractors whom you’ve paid over $600 for work during the year. But luckily for most of my readers, landlords are excluded from this rule.

So if you are a landlord, the common practice is to tick the “no” box when asked if you made payments that require a 1099.

Next we’ll enter the property address and the type of property (single family, multifamily, etc). Hopefully this doesn’t require much more explanation.

Now we need to determine fair rental days, personal use days, and whether or not we are operating a qualified joint venture.

For fair rental days, put the number of days the property was actually rented and producing income. This is especially important if you have rented the property for 14 days or less as then your rental income won’t need to be reported.

Personal use days must also be inputted and can sometimes be confusing. You will only input personal use days if you have used the entire building for personal purposes, or anyone in your family has used the entire building for personal purposes.

So, if you are house hacking (living in one unit and renting out the others), you will not report any personal use days. Instead, you will just split common expenses (mortgage, insurance, property taxes) between IRS Schedule A and E.

A qualified joint venture most often occurs when two spouses own a property 50/50 and do not live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin).

If the spouses of a jointly owned rental live in a community property state, there is no need to worry about, or elect, the qualified joint venture status.

When rental property is jointly owned by spouses who are not located in a community property state, we have a problem. The spouses must either report their income and losses on a partnership tax return (complicated!) or elect the qualified joint venture status.

Per the IRS Schedule E instructions: “If you and your spouse each materially participate as the only members of a jointly owned and operated rental real estate business and you file a joint return for the tax year, you can elect to be treated as a qualified joint venture instead of a partnership.”

When you and your spouse jointly own an entity that owns your rental property, it can get complicated fast. That discussion is beyond the scope of this post, but you will need to speak with a CPA to sort everything out.

On to the good stuff.

Next we are going to report the rental income received. This is going to be all gross income received from your tenants throughout the year. Gross rental income should include: rental income, refunds received for utilities, and pro-rated rents when you purchased the property.

Expenses are where the tax avoidance (legally) comes into play. I wrote a quick blurb on what to report per expense item:

Advertising – include all general marketing and advertising costs. These can include the cost to place rent signs in the front yard, to advertise on certain websites or publications, to buy business cards, and to send mailers.

Auto and Travel – include all ordinary and necessary auto (to be discussed later) and travel costs required to maintain your rentals. This should not include auto and travel costs incurred to purchase your first rental or to expand your rental business into a new geographic location. Also include 50% travel meals.

Cleaning and Maintenance – include all cleaning expenses to prepare a unit for a tenant or once a tenant moves out. Include maid expenses here as applicable. You should also include maintenance expenses such as painting, mowing, and small upkeep costs of the building, appliances, and equipment.

Commissions – include realtor or property management commissions paid to find a tenant for your unit.

Insurance – include homeowners, hazard, and flood insurance here. Do not pro-rate your annual insurance. You will only report the amount of insurance that you actually pay to your insurance company, not the amount that you pay into escrow.

**A note about escrow – it’s very common to pay insurance and property taxes into escrow on a monthly basis. This protects the lender from your failure to pay these expenses. It’s important to understand that when you pay these expenses into the lender’s escrow account, this is not a deductible expense for you. It is only deductible once the lender actually pays those expenses to the county/city or the insurance agent. That’s when you can deduct the expenses. Why? Paying into escrow is essentially moving money from pocket A to pocket B. It’s still your money and technically an asset on your balance sheet.

Legal and Professional Fees – include expenses related to attorney fees, accounting, and costs of business/financial planning related to your rentals.

Management Fees – include the cost to hire an agent or property manager to manage your rental. This may also include special service calls that the property manager incurs to check on the rental.

Mortgage Interest Paid to Banks – include the amount of interest reported to you by the bank on Form 1098. This amount will be the entire interest the bank has received from you during the year, including the interest you paid during closing.

Other Interest – include the amount of interest paid to third parties, whether they are private investors, private businesses, crowdfunding platforms, or relatives. Also make sure that you have sent these people or parties a Form 1099 showing the interest you have paid them. Without a Form 1099 in this case, you may not be able to substantiate the deduction.

Repairs – include all repairs made to the property that were not considered capital improvements. Expenses here will be small repairs and not the replacement of floors, roofing, etc. You may also include De Minimis Safe Harbor expenses here if they are less than $2,500 and you make the annual election.

Supplies – include the cost of incidental materials and supplies such as paper for printing, small tools, and other small miscellaneous materials that don’t fit into another category.

Taxes – include all tax expenses incurred as a result of owning and operating the rental property. This can include property taxes, school district taxes, and special easements or land taxes. Do not include income taxes.

Utilities – include utility expenses that you have personally incurred, even if the tenant has reimbursed you for them. Do not include utility expenses that the tenant has paid for without you ever having to pay for it. The reason we include utility expenses here even if the tenant has reimbursed you for them is because we are reporting the reimbursement as income at the top of IRS Schedule E and we want to offset that income with the expense you incurred.

Depreciation Expense – include the depreciation expenses that you calculated. Depreciation is an imperative part of IRS Schedule E; don’t mess it up!

Other (list) – include all other expenses incurred while operating the rental but that did not directly fit into any of the categories above. Examples of these expenses may include bank fees, education, HOA fees, subscriptions, cost of books, De Minimis Safe Harbor (if not reported in repairs), meals and entertainment, and gifts to clients or tenants. You will itemize each of your “other” expenses on a separate page.

Once we have all of the expenses inputted into our IRS Schedule E, we add them up and subtract them from our gross rental income. The income or loss for each property will be reported on line 21; if line 21 is a loss, line 22 will show you how much of the loss you can actually deduct.

Line 24 will show you the total net income each property has produced if each property showed net income. If the property instead showed a loss, and you are able to take that loss, you will see the amount on line 25.

Remember, your losses may be limited due to the Passive Activity Loss rules. All of that information will be reported on Form 8582 so definitely review that form if you are showing rental losses.

Line 26 of IRS Schedule E will show the total income or loss that will be reported on line 17 of our Form 1040. But before we calculate line 26, we need to look at Part 2 of IRS Schedule E to report any partnership or S-Corporation income and losses.

Partnerships and S-Corporations will provide you with an IRS Schedule K-1 at the end of the year. That information will be reported on Part 2 of IRS Schedule E.

Basically, we are reporting the name of the partnership, whether it’s a partnership or an S-Corporation, whether it’s foreign owned, and what the employer identification number (EIN) is.

We will then want to report the passive income and non-passive income received from the partnership or S-Corporation. This information will come directly from IRS Schedule K-1 that the partnership or S-Corporation provides you.

Entities must go through the same type of reporting we are doing here with IRS Schedule E. While they use different forms, they are reporting the same information and then providing that information on a summarized form – IRS Schedule K-1.

If you have not received IRS Schedule K-1 but you have an ownership stake in a partnership or an S-Corporation, you have a couple of options. The easiest thing to do is file an extension and wait to file your returns until you actually receive the IRS Schedule K-1. The other option is to go ahead and file your returns, and then file an amended return once you receive IRS Schedule K-1.

Okay, that wraps up IRS Schedule E for the most part. Whatever appears on line 26 will also appear on line 17 of your Form 1040. Make sure that flow is happening correctly to avoid issues.

Reporting Car Expenses and What You Need to Know

You’ll use IRS Form 4562 (link here) to report your car expenses and claim those beautiful IRS deductions.

First thing first, if it isn’t documented, you can’t take the deduction. Document everything!

Related: The Real Estate CPA Podcast, Episode #1 – Documentation: The Key to Tax Savings

Next, the question is what should we be documenting? That’s a great question and it depends on your overall strategy.

Many tax advisors recommend using the “actual expense” method in which you record all of your car expenses incurred throughout the year and deduct the portion allocable to the business use. However, it’s important to have a good idea of payoff vs. effort.

Recording and documenting actual car expenses can take a considerable amount of effort. Sometimes, the additional deduction the actual expense method will grant you over the “standard mileage” method simply isn’t worth your time.

I know, you’re probably shocked that a CPA is recommending leaving money on the table. I’m just trying to be realistic.

CPAs want to save you every penny possible without regard to the time it takes you to put all of this information together. They do this because they can show you how much more you saved by working with them and then they can charge you a higher rate.

But if it takes you an additional 10 hours throughout the year to document an additional $500 in deductible business expenses, your tax savings will be your marginal rate multiplied by that $500. So if you’re in the 25% bracket, you’re additional 10 hours of work has saved you $125.

Congratulations, you’ve paid yourself an hourly wage of $12.50.

Now, a $12.50 hourly wage is better than many people, but you are a real estate investor. You have a business to run. Your hourly wage should be over $100.

 

Related: Tax Write Offs for Car Business Expenses

So what’s my point?

Spend some time estimating your annual deduction using both the standard mileage rate and the actual expense method. Determine, up front, which method will likely yield higher results.

The standard mileage method is great because is very easy to track and takes no time at all thanks to great smart phone apps like MileIQ.

At the end of the year, you’ll compile all of your car expense documentation and report it on page 2, Part V of IRS Form 4562. The total expense will then flow to IRS Schedule E as an Auto Expense.

Putting it All Together

If you stuck with me through that entire article, give yourself a huge pat on the back. You now have the fundamental knowledge required to look at an IRS Schedule E and understand what is going on.

We talked about what IRS Schedule E is and how it interacts with the rest of your return. On a high level, we went over what costs go into your rental property cost basis and what you need to do to calculate depreciation (see our Cost Basis and Depreciation Calculator here).

We walked through IRS Schedule E and each expense line item and even talked about car expenses.

If you’re hungry for more or looking for a deeper dive, check out the articles referenced throughout this post. If you want to know more about something, contact us at contact @ therealestatecpa.com and throw in a suggestion for a topic. I’d love to hear from you!

About Brandon Hall

As founder and CEO of The Real Estate CPA, Brandon is focused on growing a CPA firm that provides real estate clients with an awesome experience. Brandon was named 40 under 40 by CPA Practice Advisor in 2018. Brandon leverages his personal real estate investing and his Big 4 Accounting experience to offer unique insights to his clients. Brandon enjoys CrossFit and Kiteboarding when he's not crunching numbers.

132 Comments

  1. Andrew on November 15, 2016 at 4:25 pm

    You note that unit cleaning and painting is under maintenance expenses. Can all costs associated with turnover of an apartment (repairs, painting, cleaning) be grouped under REPAIRS?

    • Brandon Hall on November 16, 2016 at 3:36 pm

      Andrew – yes when a unit is turning over, if careful, repair expenses can be classified as repairs and currently deducted rather than having to capitalize.

  2. Larisa on January 17, 2017 at 7:52 pm

    Great article, Brandon, as always. But I have one question. This is the first time I see that the Landlords are not required to do 1099 forms. Brandon, could you please refer me to the IRS document that stating this? I would greatly appreciate it as I am a landlord and have been issuing 1099 forms for years.

    • Brandon Hall on January 26, 2017 at 6:29 pm

      Hi Larisa – there is nothing official, it’s just been interpreted. There’s an AICPA letter to the IRS that offers support and the AICPA’s stance that landlords are not required to file 1099s.

      The problem is that rental real estate does not rise to the level of a “trade of business” but the 1099-Misc is only required to be issued by those operating a “trade or business.”

  3. Tom on January 24, 2017 at 9:43 pm

    You say to use the property tax card to determine the property basis and depreciation. My tax card says the land is worth $76,675 and the building value is $151,407, a ratio of 33.3%.

    I paid $240,000 for the property in November of 2016. I just had a professional appraisal done in January, and it came in at $270,000.

    Can I use the actual amount I paid minus 33.3 percent?
    $160,080 instead of $151,407.

    • Brandon Hall on January 26, 2017 at 6:21 pm

      Hi Tom – yes that’s exactly how to do it. You use the property tax card to find the land-to-improvement ratio. You then apply the ratio to your purchase price.

  4. Alex G on January 29, 2017 at 2:57 am

    Hi Brandon,

    Excellent article! Thank you very much for posting this. Quick question.

    I rent out numerous rooms in my house and currently live in my home. I’m starting to work on the Schedule E for 2016 taxes and am unsure where to put the mortgage interest and property taxes. Should I put them on my Schedule A or the Schedule E? It wouldn’t be both, would it?

    Thanks in advance.

    – Alex

    • Brandon Hall on February 1, 2017 at 10:11 pm

      Hi Alex – you will need to split them up between the “rental” portion and the primary residence portion. The rental portion is reported on Schedule E, the primary residence portion on Schedule A.

      Hope that helps!

  5. Mike on February 4, 2017 at 9:42 pm

    This guide was very helpful to me as a first time investor. Bought my first rental property in Sept 2016. Your free tool for depreciation is great! What I’m not sure about is the amortization of my loan costs. Is this entered on line 42 of Form 4562? The IRS instructions for Form 4562 do not list cost of getting a loan among the items that can be amortized. If I do put this on Form 4562, what code do I use for these costs, and do I have to list each cost individually, or can I just say “Cost of loan”? Thanks so much!

    • Brandon Hall on February 8, 2017 at 6:16 pm

      Mike – thanks for commenting! Yes you are correct on the amortization costs. When we list them on Form 4562, we say “Loan Costs Amortization.”

  6. Jerome Charles on February 8, 2017 at 2:44 am

    Brandon,

    Thanks very much for your article on Schedule E. Very interesting. I actually stayed w you until the end and was happy that I did.

    Would you be able to do an article on cost segregation and how it pertains to rental property & taxes? I’m a new landlord having purchased my property in April 2016 and now I’m doing my first real estate for profit tax return. I have heard people mention it but have never seen anyone do an in-depth article on how to use it, i.e., which schedule to use, what goes on what line, etc.

    Thanks.

    • Brandon Hall on February 8, 2017 at 6:13 pm

      Jerome – funny you mention that; we’re currently working on a cost-seg series. Stay tuned!

  7. James H. Knight,III on February 8, 2017 at 7:46 pm

    Hi Brandon,

    Thank you very much for your excellent and very helpful tutorial! I may well be getting back to you with a question or two.

    Jim

  8. randy on February 9, 2017 at 12:29 am

    Great article, thanks. This is the first year I’ve rented out my property, and in filling out my 1040, I am confused at line 21, which is asking for rental income, whereas Line 26 from Schedule E is put on line 17.

    It seems I’m being asked to list my income twice. What am I missing here?

    • Brandon Hall on February 9, 2017 at 4:27 pm

      Line 26 on Schedule E will flow through to Line 17 on your 1040.

  9. Jenny on February 9, 2017 at 11:43 pm

    Hi Brandon! Where do you put the Sch. E expenses that are not associated with a particular property (office expense, bank service charges, meals & entertainment, professional fees, etc)? Should I create a separate column for these or allocate them to all properties, or just lump them in with one property’s expenses?

    • Brandon Hall on February 15, 2017 at 3:19 pm

      Hi Jenny – you would need to divide them up between your properties and itemize them in the “Other” statement. If you have many properties, you can consider creating a new “property” entry for general expenses, though it’s not recommended.

      • Fred on November 19, 2017 at 3:42 pm

        Thanks fir a great article. Question, where do we put a home office on a return? We have 11 rentals and use TurboTax and every year it says we do not qualify for home office deduction.

  10. Dale on February 16, 2017 at 11:52 pm

    Excellent article. Thank you! I note that for 179 depreciation the appliance must be new or purchased. Is there any way to give a value to two used appliances that I took from one rental to another? If so, how do I claim that expense on a form 8825?

  11. Joe M. on February 26, 2017 at 8:03 pm

    Hi Brandon,

    Thanks for the well-written and informative article. With respect to the amortization of loan costs that are reported on Part VI of Form 4562, does that amount flow through to line 18 (depreciation expense or depletion) or line 19 (other) of Schedule E? Assuming it’s line 18, the annual depreciation amount would be added to the annual amortization amount, correct?

  12. LANA on March 5, 2017 at 7:10 pm

    what about the type of property……so if i am renting out a condo, one single unit in a multy residence building, will that be under multi-family residence type of property or a self-rental type?

    • Brandon Hall on March 9, 2017 at 3:46 pm

      That would be a single-family home.

  13. Cheryl on March 6, 2017 at 6:40 pm

    Hi Brandon, last May I turned my primary residence that I bought in 2009 into a rental. I understand I use the purchase price plus any improvements for the property rental basis but I’m confused on figuring out the depreciation and/or amortization, dates etc. and Tax Act software is a little confusing. Any additional guidance would be most appreciated!

  14. Cheryl on March 6, 2017 at 6:53 pm

    Hi Brandon, thanks for the article. Last May I turned my primary residence (a condo) into a rental. This is my first experience with having a rental. I understand I use the purchase price plus improvements for my basis but I’m confused on how to figure out the depreciation and/or amortization. Do I use the rental date and loan balance at the time as my amortization start date to figure out the depreciation? Any other tips or guidance is very appreciated.

    • Brandon Hall on March 9, 2017 at 3:45 pm

      Yes you will use the date you placed the property into service (rented it out) as the date in which you begin depreciating. Amortizing loan costs is another story, and honestly I’d just suggest not doing that if you are self-preparing as it can be complicated.

  15. Eric Lane on March 8, 2017 at 4:26 am

    Brad,
    I converted my primary residence to a rental in 2016. My AGI is >150K so no passive activity losses allowed. I ran a few models and I generate the lowest tax bill if I continue to report mortgage interest and property taxes on Sch. A. Question, does the IRS require I&T on Sch. E which generates PAL for me or can I report I&T on Sch. A and minimize the PAL?

    Thanks,
    Eric

  16. Victor Stevens on March 18, 2017 at 12:22 am

    How do we claim rental income in a 50/50 brother sister owned rental.?
    If one of us takes 10% of the rental income and the other 90% of the rental income do we report on each of our schedule E our share ?

    Or do we each have to report 50%?

    Seems like as long as it adds up to the total income then each partner should pay tax on their share.

    • Brandon Hall on March 20, 2017 at 1:28 pm

      It depends on how you are splitting profits. If your agreement says 50/50, you split 50/50. If your agreement says 10/90, you split 10/90.

  17. Brad on March 19, 2017 at 2:06 pm

    Does it really matter whether I categorize an expense as Cleaning/Maintenance versus a repair?

    I have a list of ALL of my expenses related to the rental but I’m not sure where to put some expenses like HOA initiation fees, installed kitchen fire extinguisher, Tenant Screening fees paid by me…. are they all other?

    • Brandon Hall on March 20, 2017 at 1:27 pm

      IF an expense doesn’t clearly fit into a Sch E category, you itemize it under “Other Expenses”

  18. Russell on March 19, 2017 at 3:38 pm

    Hi Brandon,
    I really like your articles and follow yours in BiggerPockets site as well.
    I have some rental properties and I have been filing as a Passive investor.

    Can you pl help me with the below question?

    I joined a JV with another person to invest in Mortgage Note business (I formed a Series LLC but need to file the final paperwork). I have put 100% Capital/$ and the other JV person does the rest (working with Attorneys, Servicing, legal stuff). We still working with the borrower (who hasn’t paid anything to use yet).
    We have incurred some Legal/Court/Servicing costs last year.
    Can you pl tell me how should I include it in my Tax return?

    Thanks in advance!

    • Brandon Hall on March 20, 2017 at 1:26 pm

      Hi Russell – I can’t render specific advice here, but I think you guys should explore filing as a partnership (From 1065).

  19. KHanna on March 19, 2017 at 6:36 pm

    1099 need not be issued to Corporations, regardless. As landlord, you do need to issue 1099 if payment of over $600 is made to “individuals”. Any comments?

    • Brandon Hall on March 20, 2017 at 1:24 pm

      Landlords are exempt from issuing 1099s.

  20. Gwen Kaiser on March 24, 2017 at 8:24 pm

    We sold our house last year (hallelujiah), having been reluctant landlords for quite a while. Can I add the repair expenses on form 4797 as part of total improvements instead of on schedule E? I’m not sure if they should be split between the two forms, or if we should just put all the repairs/travel, etc., on 4797 and only take mortgage interest on E.
    We had tenants move out who had not been paying at all, then had to do repairs so we could sell it. What are the fair rental days then?
    And with depreciation, is it different every year? Our taxes have been done by accountants the last few years and the depreciation amount has been the same since 2010 with a jump in 2012. Does that make sense?
    Thank you so much.

    • Brandon Hall on March 26, 2017 at 7:16 pm

      Hi Gwen – all excellent questions, most of which we can answer once under contract. For the repairs, you need to follow the new Tangible Property Regs. This may mean deducting some or all as repairs or capitalizing some or all as improvements.

  21. Arnaud on March 25, 2017 at 5:42 pm

    Dear Brandon,

    Thanks a lot for your self-explanatory and didactive post which we found extremely helpful!

    We are non-residents (we use form 1040NR) and our US income is almost only from real estate rental. Our question regards AGI, should we only include US income or also non-US income?

    If we only consider our US income, our AGI is <$100k and our rental losses should be allowed up to $25k, which means our taxable income will be <0. Does the IRS accept this? Is there a way for us to carry forward these losses in the future until we have some income to offset? Or would we be better off to recognize our real estate losses as unallowed losses on form 8582?

    Thanks in advance for your help!

  22. KHanna on March 25, 2017 at 9:08 pm

    Hi Brandon,
    I need help with the Property Tax deduction for 2016. We bought the rental property in July 2016 in California. Here, the property tax is split into 2 equal bills (one payable in Feb, another in Nov). The assessment is for the Fiscal Year (July-June).

    As the new owners, we received the Property Tax bill based on the previous assessed value in Oct 2016, and then received the ‘Supplemental’ Bill in Jan 2017 (which reflects the value based on our purchase price). Our Supplemental Bill is quite high!

    Anyway, we paid what was due for Nov 2016 on time. And paid the supplemental bill in Feb 2017.

    For Tax deduction purposes, can I claim the “accrued” Property Tax for the 6 months we owned the property in 2016? Or can I only claim what we actually paid? In other words, the accrued amount is twice as much as the paid amount. The County took a long time to send us the supplemental bill, otherwise we would have paid that in 2016.

    What is the IRS rule on this? Thanks !

    • Brandon Hall on March 26, 2017 at 7:18 pm

      Hi – if you are a cash basis taxpayer (most people are) you record as a deduction in the year actually paid.

  23. Russ on March 25, 2017 at 10:58 pm

    I’m confused about how to net out my passive activity gain from one property against the loss on another. Schedule E seems to want me to calculate each property separately, then tells me I can’t deducts the loss from house b (because my income is too high) but never gives me a place to net it against the income from house A before transferring the gain from house A to income on the 1040. What am I doing wrong?

    • Brandon Hall on March 26, 2017 at 7:19 pm

      Hi Russ – I’m not sure how you’re preparing your taxes, but most software will handle this automatically. If you’re doing it by hand, may the gods be with you 🙂

  24. Jack on March 26, 2017 at 12:42 am

    Purchased a multi-family property. Three buildings, (2 single family houses and a duplex), all on one tax parcel. They all share the same utilities, which are included in the rent. Do I have to depreciate and track expenses based on the building or as all buildings (the entire tax parcel) as a whole. The way the property is laid out, I doubt it could ever be subdivided. Thanks!

    • Brandon Hall on March 26, 2017 at 7:20 pm

      We’d probably break it out per building via cost segregation. Allows for more accurate asset tracking.

  25. Ray Buchanan on March 27, 2017 at 1:05 pm

    [email protected]
    Replaced carpet in each of 3 rentals this year. All were under $2500 per installation. Do any of the new safe harbor designations apply? Replacement occurs every 8-9 years. Does this fit in the “routine maintenance ” section?

    • Brandon Hall on March 27, 2017 at 7:41 pm

      Hi Ray – I received your email and figured I’d reply here as well. De Minimis Safe Harbor could likely be utilized as it allows for current expensing of anything under $2,500 (per item on the invoice or per invoice). Be wary of anti-abuse rules.

  26. Vicki on March 27, 2017 at 7:17 pm

    I may be selling my house in the next few years. I am almost 70. I have been renting out 69% of my overall property, sometimes a room/s in my house and a couple separate dwellings over the last 8-27 years. If I stop renting now will I never have to pay back depreciation as capital gains? Is there a change of tax liability if I sell after changing my property back to personal use? Are there time limit considerations?

    • Brandon Hall on March 27, 2017 at 7:42 pm

      You only pay back depreciation when you sell. Once you sell, you will have to recapture the depreciation you had previously taken. This is called Section 1250 recapture and is taxed at a 25% rate.

  27. Lin Xie on March 30, 2017 at 4:12 pm

    Hi Brandon,

    I really need your help with reporting the auto expenses that incurred for several of my rental properties. I placed my van in service in August 2012. According to the instructions for form 4562 expense deduction, the limit on my depreciation and section 179 expense deduction is: $1875 or 1875/0.54=3472 miles. My millage for all of my rental properties in 2016 is more than 5000 miles. Should I reduce the number of miles reported?

    Thanks,
    Lin

  28. Maria on March 30, 2017 at 6:13 pm

    Thank you so much for your very informative and detailed articles and podcasts. We purchased a house in Dec. 2015 and placed it in service in January 2016, so we are new investors. I have a question regarding the “De Minimis Safe Harbor”. We don’t have an applicable financial statement, so we can exclude up to $2,500 as I understood from this article, so if we replaced all the windows in the property at a $1,650 in one invoice including the windows and labor, can we expense it instead of including it on our basis? Keep up the good work and thanks for helping first time investors.

  29. Bob on April 4, 2017 at 12:19 am

    Hello Brandon,

    Thanks very much for the great article.

    My question relates to calculating the depreciable basis:

    House was purchased in 2003 for $120,000. According to property tax card, land value at that time was $20,000.

    We lived there until end of 2015. Mortgage fully paid off. House placed into service for rental in January 2016 and rented out end of February.

    According to 2016 property tax card, total house market value is $143,640 with land value now being $32,000.

    So to calculate depreciable basis, which one of these would be correct:

    1). $120,000 (purchase price) – $20,000 (land value at time of purchase) = $100,000

    2). $120,000 (purchase price) – $32,000 (land value in 2016) = $88,000

    3). $143,640 (2016 market value) – $32,000 (land value in 2016) = $111,640

    Thank you, in advance, for your help.

  30. Charles Williams on April 7, 2017 at 4:13 pm

    We purchased an unfurnished beach condo for rental. We needed to purchase furniture (bed, table & chairs, deck furniture, TVs, etc) and furnish the kitchen (from silverware through counter-top appliances like toaster to pots and pans). I’ve read that furniture needs to be added to the property depreciation basis. How about the small stuff? It doesn’t seem to make sense to amortize a can opener over 27.5 years. Is there some cost threshold between items to be depreciated and items that can be expensed?

    • Brandon Hall on April 20, 2017 at 2:29 pm

      Anything under $2500 can be expensed using the de minimis safe harbor election.

  31. KL on April 8, 2017 at 5:06 pm

    Hello Brandon,
    Can you tell me if one is supposed to insert the same real estate tax paid amount in Form 1040 Schedule E , for rental real estate as an expense, and again in Schedule A as a deduction. It seems like double counting. But everything I read seems to indicate this is the appropriate method.
    Thanks,
    KL

    • Brandon Hall on April 20, 2017 at 2:26 pm

      No, you must pro-rate between the two schedules. You cannot double count the income.

  32. Eagle Locksmith on April 11, 2017 at 3:56 am

    You might be spooking some people (like me) unnecessarily with this line:

    “When rental property is jointly owned by spouses who are not located in a community property state, we have a problem. The spouses must either report their income and losses on a partnership tax return (complicated!) or elect the qualified joint venture status.”

    I think the key issue here is if the spouses are considered to be participating materially, as opposed to holding the rental property as an investment. My wife and I rent out the first floor of our two-family (which we own jointly). And while I put in a lot of labor, it is our only rental property and not our primary source of income. I don’t see how the IRS would consider us either a partnership or a QJV. Simply depositing the rent checks, fixing the occasional issues that come up, and finding a new tenant aren’t involved enough.

    For people like us, can’t we just check “no” for QJV, go ahead and complete our Schedules E and A, etc. and file our joint 1040 without dividing the costs between us and adding in the Cs or Partnership headaches?

    P.S. Really appreciate your articles. Thanks for taking the time to explain so much!

    • Brandon Hall on April 20, 2017 at 2:29 pm

      You should report your activities on Sch E. I think I meant to reference the ownership of an entity there.

  33. rick on April 17, 2017 at 12:05 am

    Hi,

    We have a LLC holding our rental, we also got federal EIN to open a bank account . Is it ok to just file Schdule-E. Looks like we can’t file Schedule -C with LLC & EIN since we are not spending significant time on this supplemental incomes?

    Do we need to file any tax papers for LLC/EIN at state/Fed level?

    Appreciate your help.

    • Brandon Hall on April 20, 2017 at 2:23 pm

      Hi Rick – if a single member LLC, report on Sch E or C. If multi-member, and you’re not in a community property state, report on Form 1065.

  34. Nick on April 21, 2017 at 9:02 am

    Great article Brandon! You had previously posted a response on a forum regarding replacing deck boards on a connected deck as a repair expense because it is the same Unit of Property as the house. Does this conclusion still stand two years later, or would this replacement of top deck boards now need to be amortized? I will not qualify for the small taxpayer safe harbor this year.

  35. Brent D on May 26, 2017 at 6:13 am

    Hi, a multi member llc purchase properties for rental and sometimes vacant land for speculation; are the costs incurred on vacant land deductible (like insurance, lawn cutting, property taxes) or do they become part of the basis of the land

  36. Earl on May 27, 2017 at 10:42 am

    I would like to know if hoa fees are deductabile on land I own in gated community.

  37. SUMEET on May 30, 2017 at 11:30 pm

    Excellent article. If I hired two handy man on payroll W2 to take care of my six properties, how do I allocate my payroll expenses (including payroll plus payroll taxes)among six properties on Schedule E. Also is their a better way to pay for handyman services other than W2 to take care of my rentals?
    Please advise.

  38. Chris on June 27, 2017 at 1:46 am

    Hi Brandon!

    My father & I purchased a duplex for rental 20 years ago deeded JTWROS which we renovated for 5 years and then began renting and depreciating. He passed in December and the property became solely mine. Do I get to continue the depreciation schedule we used and now combine his portion of depreciation with mine on my schedule E? Or?

    • Brandon Hall on June 27, 2017 at 9:38 pm

      Hi Chris – interesting problem. It sounds like you already had a stake in the property – were you previously reporting it on your tax returns? If so, you continue to report your stake as you always have. But your father’s stake, which you now own, should also be included at the stepped up basis.

      Example: when you purchased it, assume a 40/60 split (you 40, your father 60) on a $100k home. Assume that last December, the property was valued at $200k. You would continue depreciating your original basis of $40k (40% of $100k) but you would also add your father’s 60% stake at the $200k valuation, or $120k. So the total basis you are now reporting and depreciating is $160k.

      I’m sorry to hear about your loss. I hope all is well.

      • Chris on June 28, 2017 at 5:33 am

        Thank you so much for the lightning fast response and sentiment…he lived a long good life.

        I have always had a stake in the property and have reported my smaller percentage in tax returns. I’m slightly perplexed as this situation seems to financially be too good to be true. By adding my father’s stake at current valuation would I then be making a depreciation deduction on my schedule E larger than the annual total of our combined deductions in previous years because of the stepped up basis from current value? And do I begin a new 27.5 yr schedule with his stake in the process that will continue long after my stake’s depreciation allotment depletes? Where does the depreciation that my father had claimed up till now come in to play? And do I understand correctly that when I one day sell the property that my capital gain will be significant minimized because the cost basis has been adjusted to december’s value?

        Again, thank you so much for your time…

  39. Lucas Holcomb on July 3, 2017 at 4:01 pm

    I own some rental properties in my personal name, which I actively participate in the management of, but I am not a real estate professional.
    Every year I fill out a 1040 and Schedule E. I just got an EIN for banking purposes. Will the EIN not go anywhere on my taxes or will I now be required to fill out new forms such as schedule C so that I have a spot for the EIN?

    Question 2, I got the EIN for banking purposes as it relates to the real estate property that I own, but I also babysit mentally disabled individuals and have to fill out a schedule C for that (it is around 2k profit per year), should the EIN go on the schedule C even though it wasn’t obtained for the business of babysitting?

    • Brandon Hall on July 7, 2017 at 1:09 pm

      Both of these are great questions – however I’d be unable to answer them for you unless you are a client.

  40. Zak Keech on July 14, 2017 at 2:24 pm

    Brandon,

    I am a practicing CPA and absolutely dread Rental Property returns/record keeping. The only question I constantly face is whether or not to report each property on a separate Sch E. It’s not terrible when there are less than 10 properties, but it’s hard enough to get “landlord” types to give you the overall data, let alone keep up with it on a property-by-property basis (I typically try to use classes in QuickBooks).

    One advantage to reporting separately is claiming suspended losses a property is sold (difficult/not possible if all income/expense is aggregated on a single schedule E).

  41. Eilar on July 19, 2017 at 8:34 pm

    Hi there Brandon,
    Thanks for your helpful forum here.

    We sold a rental property in Jan 2016, but there had been no renters in it since July 2015, so no income in 2016. My tax preparer says we still have to fill out a Sch E for our 2016 return, which surprised us.

    He explained:
    … you have rented out the sold property and taken depreciation on it. So when you sell the property we will have to report the disposal in the depreciation schedule and the last Sch E has to be filed.

    Does this sound correct? After some thorough researching online, I haven’t seen any mention of needing to do a Sch E in regards to Sale of Rental Property.
    Your thoughts?
    Thanks for your time and attention.

    • Brandon Hall on July 19, 2017 at 11:55 pm

      If it’s in service as an investment property, you will continually depreciate it. To log the depreciation, you must fill out Sch E. When you sell property, you will have a partial year of depreciation. Sch E is where you report that.

  42. Verlyn Smith on August 10, 2017 at 6:41 pm

    So in the past we had a CPA do our taxes and he has items listed in a separate column for items that aren’t listed with the other two properties. Why would he have done that and not on a Schedule C. We just have 2 rentals.

    • Brandon Hall on August 12, 2017 at 12:29 pm

      Not sure I understand the question.

  43. Frank Quinn on August 10, 2017 at 7:26 pm

    Hello Brandon,

    Thank you for the great article! My wife and I own a second home free and clear.

    Her parents live in the home year round as their primary residence. It appears that as long as I declare a fair market rent (which is around $1100/ month) as gross rental income, I can then gift back to her parents the total rent and include the gift in “Other Expenses” on Schedule E. Is that correct?

    If that is correct, would I need to indicate the gift amount in another section of the 1040 as well?

    Thank you

    • Brandon Hall on August 12, 2017 at 12:30 pm

      You cannot gift funds when receiving value for the gift. And if you do gift funds, you cannot write them off as an expense.

      • Frank Quinn on August 16, 2017 at 11:43 am

        Thanks a lot for the reply. I am not receiving anything of value for them living in the home and I am paying the property taxes and insurance on the home.

        It was my understanding that a fair market rent had to be declared as income if I was to use the property as an investment property. Currently I do not include the property on my Schedule E.

        Can I show the fair market rent as gross income and then include the gift, not as a property expense, but as a gift for the amount of rent not collected?

        I am not sure if there would be a benefit to that.

        Thank you,

        Frank

        • Brandon Hall on August 19, 2017 at 11:38 pm

          Sorry I read the gift as occurring the other way around. You are likely fine in gifting back. However, you cannot write the gift off (otherwise you are receiving value – tax savings).

  44. Frank on August 26, 2017 at 1:05 am

    Outstanding!!! Thanks.

  45. Lisa Vachon on September 5, 2017 at 5:04 pm

    Brandon,

    I, too want to thank you for the article. I have one question; I have a client who owns a multi-family. They live in one unit and rent out the rest. Normally I allocate the mortgage interest and real estate taxes between Schedule E and Schedule A. But their income is now over $150,000. Therefore, they have to carry over any loss. Rather than allocate the mortgage interest and taxes, can I put them on the Schedule A at 100% and carryover a smaller loss?

    Thank you,

    Lisa V.

    • Brandon Hall on September 8, 2017 at 6:59 pm

      I wouldn’t change allocation methods on a property you have reported on in the past. I’d stick to prior allocation methods.

  46. Yacon Root on September 7, 2017 at 10:13 am

    Great Blog. Really enjoyed reading.

  47. James on September 11, 2017 at 10:12 pm

    Hi Brandon,

    Thank you for writing the very informative article.

    I have a question regarding whether to file our taxes using a Schedule C or a Schedule E. The situation is like this. Our CPA, who we’ve used for the past 2 years has been using a Schedule C to report our income and losses from our real estate.

    We have passive investments in apartments, but to keep matters simple, we’ll just focus on the assets we own. My partner and I (who are not yet married), have two duplexes in Texas. We have only one LLC that we created to manage the two properties. The two properties have conventional bank loans, so they are under my name (since they can not be placed under an LLC). I manage the two duplexes by spending a few hours a month leasing and doing maintenance work.

    We recently found out from one of our lenders (and from 2 other CPAs) that most people use a Schedule E to report RE income and expenses. The lender mentioned that we would be able to leverage a Schedule E and get more loan dollars than with a Schedule C, so the lender was encouraging us to ask our CPA to switch to a Schedule E.

    Do you recommend switching over to a Schedule E?

    What are the pros and cons of a Schedule C vs Schedule E when reporting rental income?

    Thanks in advance,
    James

    • Brandon Hall on September 12, 2017 at 1:07 pm

      Hi James – rental real estate is required to be reported on Schedule E unless the real estate is classified as a short-term rental.

      • James on September 13, 2017 at 7:14 am

        Thanks Brandon.

        Do you see any reason why our CPA would use a Schedule C?

  48. Chang on September 13, 2017 at 3:09 am

    Hello Brandon
    Great article. Here is my question. I am a real-estate agent and that is what I do for my living. Last year I bought a “short sale” property for $241K and renovated (bath rooms/kitchen/floors/ceilings) by spending around 45K. No rental income from this property as it took about 9 months to get it back into the market. Will I be able to deduct 45K in my schedule-C along with my other income related to real-estate sales or because it is a capital improvement, do I have to depreciate in some other forms?
    Thank you

  49. Brad on October 4, 2017 at 7:22 am

    Hi Brandon,
    I’ve read conflicting information about landlord’s ability to claim home office expenses. That is someone filing a SchE, but not SchC. Stephen Fishman’s book says to follow the rules in IRS 587, but report the expense on SchE Line 19 (Other) as “Business Use of Home.” Other places, like some TurboTax resources, say landlord isnt a business, so a landlord cannot claim HO expenses. Thoughts?
    Thank you,
    Brad

    • Brandon Hall on October 16, 2017 at 2:00 am

      Hi Brad – Stephen is right, Sch E Line 19 is where Home Office will go for rentals. You can be actively participating in your rental activities – that’s all that is needed to qualify for a home office.

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  51. Eli on November 5, 2017 at 8:38 pm

    Your home is valueble for me. Thanks!…

  52. Chris on November 27, 2017 at 6:07 pm

    Hi Brandon,
    In regards to the Safe Harbor election, I was curious about keeping under the 2%/10,000 limit for “total amount paid for repairs, maintenance, improvements, AND similar activities”. Shall I assume that everything in the Schedule E category of Supplies should be included in the tallying of that total? Auto/travel is used to make repairs or maintain the property also, do I include those expenses in figuring the total?

    Thanks for your help..

  53. Luis Esteban on December 22, 2017 at 11:59 pm

    Hi. Brandon,
    I am very grateful for all the great advice you give here.
    I had a loss of 18k in 2014 on my rental property (my only other income is non taxable Social Security.) I did not file form 8582 that year. The return just shows -18k on the 1040 .do I have send an amended return with the loss to use it following years.
    In 2016 I made a $2,116 profit.
    Thank You in advance for your advice.

    • Brandon Hall on December 23, 2017 at 12:11 am

      If SS was your only other income, then you probably correctly claimed your passive losses.

  54. Sabrina on December 24, 2017 at 1:59 am

    Hi Brandon, thanks for the article!

    I have a question about recording rental income. I know that advance/last month’s rent should be recorded at the time it is received.

    What if the last month’s rent is being held by a third party property management company? Should I include as income in the year the lease is signed, or wait until the rent is passed through to me in the last month of occupancy?

    • Brandon Hall on December 24, 2017 at 9:41 pm

      Good question – yes you should. The PM is your “agent” meaning that anything revenue they collect an expenses they incur, you should be recording on your end.

  55. Ryan Nathan on December 25, 2017 at 12:18 am

    Hi Brandon. Very helpful information, thanks!

    How about traveling related to scoping new properties? Should that go to the “Other” line? And how should I allocate it when it really is not related to any current properties?

    Thanks!

    Ryan

  56. Mike on December 28, 2017 at 8:52 pm

    Does Schedule E and the ability to deduct Property Taxes related to a rental change under the new Tax plan?

    • Brandon Hall on December 29, 2017 at 12:56 am

      Nope, only Sch A. Your deductions related to rentals will not be affected.

  57. Sharon on January 29, 2018 at 7:42 pm

    I’m so glad to have found this blog and website. I’ll be referring to it often I’m sure as I’m about to purchase my first rental. I do have a question regarding deducting the interest rate on line 12 of Schedule E.

    The scenario is this: I’ve just sold my residence and have enough equity to purchase a duplex I’ve found for cash. I like that idea, because the interest rate for rental properties is relatively high (compared to residential mortgage rates that is).

    When I find a home I’d like to live in, I’ll most likely need to finance the majority of it, since I will have spent most of my equity on the duplex. So my question is this. Can I write off the interest on my residential mortgage as an Interest Expense on line 12 of Schedule E since I wouldn’t have the loan if it wasn’t for having spent my money on the duplex?

    • Brandon Hall on January 31, 2018 at 5:55 pm

      As long as you use debt proceeds (from a HELOC or mortgage) to buy or improve a rental property, you can deduct the interest allocable to those debt proceeds on Schedule E.

  58. Sammi on January 30, 2018 at 5:14 pm

    Hello,
    We have a vacation home doing an Airbnb. Average period of the stay is less than 7 days but we do not provide any service. We contract someone to clean the house and make the bedding.
    In this case, should we file Schedule E or Schedule C? And do we issue 1099 to this contractor? We are paying more than $600 per year.
    We are currently holding work visa in the states and we are told that we could only received passive income along with W-2 from our employer. Is it true? If so, we do not want to file schedule C. If we are required to file Schedule C by the case above, is there anything we could change to make it qualified with Schedule E?
    Thank you

    • Brandon Hall on January 31, 2018 at 5:56 pm

      I don’t know about the 1099, I’d need to see further facts.

      As long as you aren’t providing substantial services, you should file on Sch E.

  59. aallem on February 3, 2018 at 6:41 am

    Wonderful article.You have broadly widened my scope in this matter. Question. My mother, 80, has never filed Schedule E for her rental income in years, and is about to sell her investment property. What kind of trouble would she face?

    • Brandon Hall on February 3, 2018 at 5:27 pm

      A lot if she’s received income and not reported it. Highly recommend speaking with a qualified tax professional (CPA or attorney) to resolve the matter.

  60. peter palombit on February 3, 2018 at 4:19 pm

    Looking forward to your expertise for our short term rental in California

  61. Sharice Nakatsu on February 12, 2018 at 3:41 am

    Found this on MSN and I’m happy I did. Well written article.

  62. karen s. on February 21, 2018 at 11:02 am

    Hi Brandon,
    Excellent article! My sister owns a rental property which has 3 apartments. She lives in one and has been renting out the other 2 apts until 6 mos ago . Renovations were needed and she did not rent the apts from Sept thru Dec 2017. Should all expenses incurred during that interval (including depreciation, real estate taxes, utilities and cleaning/mtce for common areas) be omitted from Schedule E ?
    Thanks in advance!

    • Brandon Hall on February 25, 2018 at 9:41 pm

      She will need to divide expenses between personal and business use.

  63. Chris Schwegel on March 9, 2018 at 11:10 pm

    Hello Brandon,

    I’m so glad to have found your very helpful blog and would be very appreciative if you could help me with my question.

    Given the following scenario, how do I report my accumulated suspended passive losses from the rental of my condo in the year I convert it from a rental into my personal residence?

    I accumulated about $20,000 in suspended passive losses through 2016 from renting out my condo apartment. During that period my income prevented my being able to take advantage of the $25,000 loss allowance. In 2017, I retired and no longer generate income, and I also moved back int my condo and made it my personal residence. In 2017 the passive loss from renting the condo was about $2,000.

    The tax software that I am using shows a loss from rental activities on the 1040 of $22,000, combining the suspended and current year 2017 passive losses. Don’t these passive losses have to remain in suspense until the property is sold? Or, is the software defaulting to give me the $25,000 loss allowance because my income is nil?

    Thanks!
    Chris

    • Brandon Hall on March 18, 2018 at 8:23 pm

      Hi Chris – passive losses should remain suspended until sold. You may have triggered the software to report a sale.

  64. Pat Snippley on March 10, 2018 at 2:43 am

    Hi Brandon – thanks for this great guide! Here’s a question, apologies if you’ve already addressed it elsewhere…I can’t seem to find an answer in the IRS Schedule E instructions or other obvious place..:

    Assumptions—
    * MFJ
    * 2x rentals
    * in 2016 filed 2x distinct Schedules.E, one for each
    * total losses of ~$28k, income below the PAL limiting threshold, so allowed loss of $25k, plus ~$3k unallowed losses, to carry-forward, “allocated” between the two, roughly 1/3rds and 2/3rds.
    * real estate professional status in 2017.

    Question(s):
    * if making the Sec. 469(c)(7)(A) election for 2017 and ongoing, can we persist in keeping 2x distinct Schedules.E? Or must we now consolidate into one?
    * if it’s permissable to keep reporting the rentals in distinct Schedules, how to compliantly navigate the checkbox ‘declarations’ on material participation? Ie. can we say on each Schedule.E that we materially participated, even if we Didier actually achieve the materiality criterion on one of them taken in isolation, ie. we ONLY achieved it by virtue of aggregating? Will the IRS ‘resolve’ these checkboxes with our election and it won’t matter? Technically, in isolation it seems like a false declaration on one of the Schedules though…Hopefully you will understand the potential issue I’m trying to get at…

    All else equal we would prefer to keep distinct, for ease of accounting.

    Thanks!

    • Brandon Hall on March 18, 2018 at 8:24 pm

      We continue to report the Sch Es separately.

  65. Ismael on March 10, 2018 at 8:52 pm

    How do you calculate fair rental days for form 1040 when not all units of triplex were rented 365 days? Thank you your website is very informative.

    • Brandon Hall on March 18, 2018 at 8:25 pm

      We count all days that the property was rented regardless of how many units were rented. Think of it as “how many days did the property generate income.”

  66. Emily on March 10, 2018 at 11:56 pm

    Hi there,
    I’m have an owner occupied 2 bedroom condo and I rent out the second bedroom. I can’t figure out if I’m allowed to deduct half of the HOA fees?
    Thanks!

    • Brandon Hall on March 18, 2018 at 8:25 pm

      You can always deduct the business use of your ordinary and necessary expenses.

  67. Carol on March 14, 2018 at 6:40 pm

    Hi Brandon – We sold 3 rental properties in 2017 that we held onto for close to 10 years. A few years ago, our income increased over $150,000 so our passive losses (which included depreciation expense) for the rentals were no longer allowed. My question relates to the depreciation recapture on these properties. Am I required to recapture the depreciation for the years that the passive losses weren’t allowed due to our income being too high? The IRS publication 523 states that you need to recapture the depreciation you were entitled to or that was ‘allowed or allowable’. Would that be for the entire 10 years that the rentals were in service or only the years that our passive losses were allowed? Thanks so much!

    • Brandon Hall on March 18, 2018 at 8:28 pm

      You need to recapture depreciation you have taken since you first placed the property into service. The passive losses that you should have been suspending will likely offset most or all of the gain attributed to Sec 1250 recapture.

  68. Shannon on March 26, 2018 at 6:41 pm

    Can you please clarify mileage deduction for residential rental properties? Everything I’m reading is that you have to have a home office (with specific restrictions) to qualify for the mileage deduction. Example: I drive from my house to my rental property to make repairs, clean the property, etc. If I don’t claim the “home office” deduction, the IRS treats that mileage like commuting mileage and is not deductible. Can you clarify this?

  69. Sarah on April 9, 2018 at 10:46 pm

    Hello Brandon,

    Thank you so much for this incredibly informative article. Further up the page you discussed with someone that the purchase of toasters, towels, etc. could be expensed up to $2,500 rather than capitalized but what if we purchased those things and want to capitalize them? Long story short we purchased a ski condo in September, spent 3 months getting it ready for short-term rental (per the requirements of the rental company certain items must be included with the rental), and then rented it for 4 days in December. It’s my understanding that since we didn’t reach 15 days of rentals we don’t include the income but we also can’t take the expenses. OK for the $200 we spent on repairs and utilities but we spent over $2,000 on getting furniture, artwork, kitchen appliances, etc. Do we just have to eat that amount or CAN we amortize it over 15 years if we so choose?

    • Brandon Hall on May 7, 2018 at 1:08 am

      The 14 day rule applies when you rent a personal dwelling. Likely, you have a reportable rental property.

  70. Moe on July 10, 2018 at 3:07 am

    Hi Brandon, your article is great and simple to understand. I have had my rental property for 13 years (out of which 7 years were in rental state); we’re now thinking to sell it.

    Here is a scenario:
    Purchase price is $635K
    Sale price is $620K
    Overall Loss form 8582 is $127K
    What we owe on the property is $475K
    Will the IRS tax our net profit after all closing fees & Cost?
    Income bracket over $150K (not including rental)
    What if we buy another property and sell the rental, can we avoid getting taxed by simply moving our equity from the sold rental and into the purchased one?

  71. joyce on July 19, 2018 at 3:42 am

    Hi Brandon,

    Really fantastic article and very helpful Property Basis and Depreciation Calculator! Thanks for sharing your wisdom! In 2017 we purchased a rental property and on the settlement statement we had a $3500 Seller Credit (toward closing costs/prepaids per the purchase contract) and another credit of $1998 for county taxes that the seller paid for the days that he owned the home. We were then responsible for paying the entire 2017 county tax bill in 2018. I believe the $3500 Seller Credit reduces the basis of the property, but I am unsure about how the credit from the seller for the county taxes should be handled. Thanks so much!

  72. Jonathan Carlisle on July 20, 2018 at 11:18 am

    So I had several questions that Brandon graciously answered and I’m posting my inquiry here for anyone who has a similar quandary. Also, the property is in Missouri.
    ME:
    On my Parcel Information Report (i.e. Tax Card) I have 2 sets of values (appraised land/building [9100/28700] and assessed land / building [1730/5450]). When calculating the ratio (land divided by building) both sets have nearly the same ratio (.31707317 and .31743119), however, I’m not sure which land value to subtract from my purchase price ($45000). If I go with the assessed values, the land value is increased, which I imagine would be a less desirable ratio. Anyroad, sorry to bother you – I have found ZILCH info when googling “Property Basis calculation”, “Property Basis calculation Missouri”, etc. Many thanks in advance for your consideration.

    Also… does property basis have to be calculated yearly?

    What do I do with costs I incur to make improvements (windows, doors, plumbing, HVAC). Do those get added to the “Improvements” figure? This is a four-plex.

    BRANDON:
    Hi Jonathan
    Good question – normally we use the assessed value but if you have both on the same property tax card, I’d use the one that yields a smaller land value. Keep it as support and I doubt an auditor would ever question it.

    You only calculate land value once. It doesn’t change after the initial calculation.

    When you make improvements, you either break the improvement out and depreciate separately or add it to the building basis. Hope this helps!

    ME:
    Brandon, your insight is much appreciated. Many thanks!!

  73. joyce on July 23, 2018 at 6:36 pm

    Hi Brandon,

    Thank you for the incredibly well written and informative article! I have a quick question about a closing cost for a rental property and how that impacts the property cost basis. When we purchased a rental property in 2017, we received a credit from the seller for the property tax amount related to the days that he owned the property. Then in early 2018, we paid the entire tax bill from the county. Is the credit that we received for the taxes at closing a reduction in the property basis? Many thanks!

  74. Jonathan Carlisle on July 27, 2018 at 12:59 pm

    JONATHAN:
    Hello again Brandon. I’ve been sleuthing around and don’t seem to be able to find much info specific to deducting work clothes as an expense within the context of Schedule E. I’ve seen articles that advise using Schedule A and Schedule C, but nothing specific to Schedule E. Reason I ask is, I’m going through a major gutting / overhaul of a lot of things and I bought a couple pairs of Redwing work boots (one to wear while the other pair dries out). Hitherto, I’ve also just been wearing my Old Navy jeans and they’re getting pretty torn and I thought it might be good to get some Carhartts or other heavier duty clothing.

    Also, in your article I don’t see anything pertaining to electronics. I ended up buying a backup drive and larger hard drive for my laptop to accommodate all the receipts / statements, etc. that the project has generated.

    BRANDON:
    Hi Jonathan – if an employee, work cloths are not deductible unless they are required by the company, at which point they’d be deductible only on Sch A.

    If you are the employer, work clothes you buy for your employees would be deductible in certain cases.

    Buying clothes for rehab projects is not deductible.

    Electronics are deductible if the business use is more than personal use.

    JONATHAN:
    Thank you much sir!

  75. Owen on August 13, 2018 at 1:08 pm

    Great article! I was in the process of writing such a guide when I found yours and felt I couldn’t improve on it – so I just linked to you instead! I think it’s precisely the kind of thing my blog readers would appreciate. Many thanks.

    Any thoughts on the interplay between the IRS tax codes and foreign tax regimes? I’m coming from a dual national perspective (UK/USA).

  76. Murray on September 14, 2018 at 6:43 pm

    Brandon — My wife and I own a unit in a condo Hotel and meet all the requirements for filing on a Schedule C except for the maximum of personal days. Do you see any reason why personal day could not be converted into rental day by renting to ourselves at market rates?

    • recpanew on October 25, 2018 at 10:25 pm

      Hi Murray – self-rental rules can be crazy to navigate. Recommend you touch base with a tax pro!

  77. Alicia on October 3, 2018 at 5:33 am

    Hi Brandon,

    Thank you so much for posting such an informative article! I also listened to your Episode # 1 podcast about keeping documentation of your rental expenses. In regards to this, I am a bit confused about the 1099 form. In this article you mentioned that landlords are exempt from issuing the 1099 form to contractors to whom you have paid >$600/year, however, in your podcast you mentioned the opposite. Could you please explain a bit further on this? The reason I am asking is because I have dealt with many contractors that do not provide a receipt for their work, but I pay them with either a check o via bank transfer; in this case, does the check/transfer serves as proof of the expense? or should I issue a 1099 form to them? Thank you!

    • recpanew on October 25, 2018 at 10:20 pm

      Hi Alica – historically landlords have not been required to issue 1099s as long as they are not materially participating in the rental activity. However with the new 199A regs from the 2018 tax code changes, we recommend that you issue 1099s to contractors regardless. I recommend documenting that you at least tried to issue a 1099 in the event that you were unable to gather the needed information to do so.

  78. Lisa Nelson on October 9, 2018 at 3:18 pm

    Can you shed some light on the annual election portion for major repairs? My husband is self-employed and it appears that the election will affect all areas on our return…is that correct? Also we changed property management companies mid year and I’m confused about whether I should report that the properties were renter 365 days on both 1099’s ( we have four properties and I made separate entries for each one under each 1099’s).

    • recpanew on October 25, 2018 at 10:14 pm

      Do you have the specific election?

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