is used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates and trusts.
There are a lot of issues with Schedule E
, but one big issue is whether losses from rental properties, partnerships or S corporations are passive losses. Passive losses usually have restrictions on them and may be suspended and carried forward to future years. An activity is generally considered passive if you have little or no involvement in the business activity. Losses from passive activities can only be deducted if you have income from passive activities.
Schedule E Tax Tips
- If you rent your home or vacation home for 14 days or less, you don't need to report your rental income on your tax return.
- You can deduct expenses for your rental home on your return even if you don't have tenants as long as you are actively seeking tenants. One way to document that you are actively seeking tenants is to clip out and save an ad in the newspaper showing that your rental home is available
- You can deduct up to $25,000 of rental losses on your tax return if your adjusted gross income is less than $150,000. If you are renting to a family member, you can deduct your rental loss if the family member is paying a fair rental price and uses the home as their principal residence.
- You are not limited to $25,000 in rental losses on your tax return if you are a real estate professional. If you spend more than one half of any job or business related time doing your real estate business and spend more than 750 hours on your real estate business, then you are a real estate professional. EXAMPLE: You own 10 rental houses for which you personally spend 1,350 hours during the year doing work related to those homes. You are also a school teacher and spend 1,300 hours during the year in the class room. Since more than half of your professional time is spent on your real estate business and you meet the 750 hours test, you are a real estate professional.
- If your rental property is damaged by vandalism, the repair costs to restore the property to its previous condition are deductible as repair and maintenance costs instead of being capitalized and depreciated.
- Always take depreciation on your rental home. Some people don't want to bother taking depreciation on their home if they are planning to rent their home for a year or two before returning and making the home their principal residence again. However, the IRS considers depreciation to be taken on your rental home for the period it was rented whether or not you take the depreciation on your tax return. So when you eventually sell the home, gain needs to be recognized to the extent of any depreciation taken (or what should have been taken).
- Remember to deduct suspended prior-year passive losses in the year that you sell or dispose of a rental home.
- If you are a passive investor in a partnership or S corporation, remember to deduct suspended prior-year passive losses in the year that you sell or dispose your partnership or S corporation investment. EXAMPLE: Bob Smith is a passive investor in Goldstar LLC. Bob's 2014 K-1 from Goldstar shows a $10,000 loss and the 2015 K-1 shows a $5,000 loss. Bob did not have any passive income in 2014 or 2015 to offset the passive losses so the losses are suspended and carried forward to 2016. Bob sells his investment in Goldstar LLC in 2016. The $10,000 and $5,000 losses from 2014 and 2015 will be deducted in 2016 since his investment is disposed of.