Schedule E - Rental Real Estate
Schedule E is the official IRS tax form that is used to report supplemental income from a wide range of sources, including real estate investments. You will use Schedule E (Form 1040) to report your income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs).
A Schedule E tax form must be attached to Form 1040 by individual taxpayers who earn supplemental income from, among other things, rental real estate, partnerships, and S corporations. Full-time real estate investors and house hackers renting spare rooms alike use Schedule E to report their supplemental income from rental property and real estate investments on their tax return.
However, when asking “what is Schedule E?” it’s also important to note that the tax form is used by individual taxpayers in particular. Partnerships and S corporations are required to file Form 8825 instead
Who needs to file a Schedule E - Rental Real Estate form?
To you, all income may look largely the same. But the IRS has its own unique ways of categorizing these monies, which must be reported to it by individual taxpayers.
Although you may work hard and put in many nights and weekends to bring it in, rental real estate income is considered passive income by the IRS. Because of this, real estate investors do not pay a self-employment tax.
Business activities that are considered to be passive are those in which owners do not actively participate in the activity of on a regular, substantial, and continuing basis. Those that require active participation are viewed differently by the IRS in that losses from passive activities are capped at the amount of gains while losses from active activities are not limited.
Put simply: For practical purposes, passive activities are taxed differently from those which require active participation. Regardless of whether or not (and to what extent) you actively participate in the operation of rental investments, the IRS categorizes rental real estate activities as passive for tax purposes. What’s more, because the income is considered to be passive, passive investors can only claim losses up to their gains while active participants can claim all losses in full.
As discussed earlier, it’s critical for real estate investors to understand and fulfill their tax obligations. Likewise, it’s also essential for them to be aware of the implications and impact of any taxable activities on their annual tax payments. To learn more about the business of real estate, and how to maximize profits and minimize losses from real estate investment, be sure to browse our Learning Center.
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