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Schedule E: Rental Income and Royalties Guide

Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.

Schedule E is the IRS form for reporting supplemental income and loss from rental real estate, royalties, partnerships, S corporations, estates, and trusts. If you own rental property, receive book or patent royalties, or are a partner or S corporation shareholder, your income flows through this form before reaching your Form 1040. Rental property taxation is one of the more complex areas of the tax code because of depreciation, passive activity rules, and the special $25,000 allowance.

This guide covers every part of Schedule E, with particular focus on Part I (rental real estate and royalties), which is what most individual taxpayers need.

Where to Get Schedule E

Download Schedule E and its instructions at irs.gov/forms-pubs/about-schedule-e-form-1040. Tax preparation software generates Schedule E automatically when you enter rental or pass-through entity income.

Who Needs to File Schedule E?

You file Schedule E if you received income from:

Rental real estate — Houses, apartments, condos, commercial property you rent to tenants
Royalties — Payments for use of intellectual property (books, music, patents, mineral rights)
Partnerships — Your share of income/loss from a partnership (Schedule K-1, Form 1065)
S corporations — Your share of income/loss from an S corp (Schedule K-1, Form 1120-S)
Estates and trusts — Income distributed to you as a beneficiary (Schedule K-1, Form 1041)
REMICs — Real Estate Mortgage Investment Conduits (rare for individual taxpayers)

Important distinction: If you provide substantial services to tenants (daily cleaning, meal service, guided tours), your activity may be classified as a business rather than rental activity, which would use Schedule C instead of Schedule E. Short-term rentals (average stay 7 days or less) with substantial services are a common example.

Part I: Income or Loss from Rental Real Estate and Royalties (Lines 1-26)

This is the section most individual taxpayers use. You can report up to three properties on a single Schedule E; if you have more, use additional copies.

Property Information (Lines 1-2)

For each property, provide:

Line 1a-c: Physical address of the property
Line 1d: Type of property (single family, multi-family, vacation/short-term, commercial, land, royalties, self-rental, other)
Line 2: Days rented at fair market value and days of personal use

The personal-use days matter because:

If you rent the property fewer than 15 days per year, you do not report rental income at all (and cannot deduct rental expenses)
If personal use exceeds the greater of 14 days or 10% of rental days, the property is considered a personal residence and deductions are limited to rental income (no rental loss deduction)

Income (Lines 3-4)

Line 3: Rents received (total rent collected for the year)
Line 4: Royalties received

Expenses (Lines 5-21)

Line	Expense Category	Notes
5	Advertising	Listing fees, tenant-finding costs
6	Auto and travel	Mileage to property for management, repairs
7	Cleaning and maintenance	Routine cleaning between tenants, lawn care, pest control
8	Commissions	Property management fees (typically 8-12% of rent)
9	Insurance	Landlord insurance, umbrella policy (rental portion)
10	Legal and professional	Attorney fees, CPA fees for rental activity
11	Management fees	If separate from commissions on Line 8
12	Mortgage interest	Interest paid on the rental property mortgage
13	Other interest	HELOC or other loan interest related to the property
14	Repairs	Fixing broken items, painting, patching — must be repairs, not improvements
15	Supplies	Hardware, cleaning supplies, small tools
16	Taxes	Property taxes on the rental (not deducted on Schedule A if claimed here)
17	Utilities	If landlord pays utilities (water, electric, gas, trash)
18	Depreciation	The big deduction — see below
19	Other	HOA fees, pest control, landscaping, snow removal

Depreciation (Line 18)

Depreciation is typically the largest non-cash deduction for rental property owners.

Residential rental property: Depreciated over 27.5 years using straight-line method. Only the building value is depreciated — land is not depreciable.

Commercial property: Depreciated over 39 years using straight-line method.

Example: You purchase a rental house for $300,000. The land is appraised at $60,000 and the building at $240,000. Annual depreciation: $240,000 / 27.5 = ~$8,727 per year.

You must report depreciation on Form 4562 and carry the amount to Schedule E, Line 18. Even if you do not claim depreciation, the IRS considers it “allowed or allowable” — meaning they will reduce your basis by the depreciation you should have taken when you eventually sell the property.

Net Income or Loss (Lines 21-26)

Line 21: Total expenses for each property
Line 22: Income (Line 3 + Line 4) minus expenses (Line 21) for each property
Line 23a: Total rental real estate and royalty income or loss
Line 25: Total rental real estate and royalty income or loss after applying passive activity loss limitations
Line 26: Total income or loss flowing to Schedule 1, Line 5

Passive Activity Rules

Rental activities are generally considered passive activities, which means losses can only offset passive income — not wages, salary, or portfolio income. This is the biggest limitation for rental property owners.

The $25,000 Special Allowance

There is a crucial exception. If you actively participate in your rental activity, you can deduct up to $25,000 of rental losses against non-passive income (like your W-2 wages).

Requirements for active participation:

You own at least 10% of the property
You make management decisions (approving tenants, setting rent, approving repairs)
You do not need to do the day-to-day work yourself — using a property manager is fine

AGI phaseout: The $25,000 allowance begins to phase out when your modified AGI exceeds ~$100,000 and is completely eliminated at ~$150,000 MAGI. The phaseout is $1 for every $2 of MAGI over $100,000.

MAGI	Allowable Rental Loss Deduction
Under ~$100,000	Up to $25,000
~$125,000	Up to $12,500
~$150,000+	$0 (losses suspended)

Real Estate Professional Exception

If you qualify as a real estate professional, your rental activities are not automatically classified as passive. To qualify:

More than 50% of your personal services during the year are in real property trades or businesses
You perform more than 750 hours of services in real property trades or businesses
You materially participate in each rental activity

This is a high bar but removes the passive activity limitation entirely, allowing unlimited rental loss deductions against any income. It is common for one spouse in a married couple to qualify if they work full-time in real estate.

Suspended Losses

Passive losses that you cannot deduct in the current year are not lost — they are suspended and carry forward to future years. Suspended losses can offset:

Future passive income from any source
All remaining suspended losses are fully deductible when you dispose of the property in a fully taxable transaction

Parts II-V: Pass-Through Entities

Part II: Partnerships and S Corporations (Lines 27-34)

Report your share of income or loss from:

Partnerships — From Schedule K-1 (Form 1065)
S Corporations — From Schedule K-1 (Form 1120-S)

Enter the entity name, EIN, and whether you materially participated. Passive activity rules apply here too — if you do not materially participate, losses are passive.

Part III: Estates and Trusts (Lines 35-40)

Report income distributed from estates or trusts, per Schedule K-1 (Form 1041).

Part IV: Real Estate Mortgage Investment Conduits

Rarely used by individual taxpayers.

Part V: Summary (Line 41)

Combines all parts. The total flows to Schedule 1 and then to your Form 1040.

Common Mistakes to Avoid

Confusing repairs and improvements — Repairs (fixing what is broken) are deductible immediately. Improvements (adding value, adapting to new use, extending useful life) must be capitalized and depreciated. Replacing a broken faucet is a repair; remodeling a kitchen is an improvement.
Not depreciating the property — As noted above, the IRS will assume you took depreciation whether you did or not. Failing to claim it means losing the deduction but still facing depreciation recapture when you sell.
Deducting passive losses against wages — Unless you qualify for the $25,000 special allowance or are a real estate professional, passive rental losses cannot offset W-2 income.
Ignoring the personal use test — If you or family members use the rental property for personal purposes, keep careful records. Exceeding the personal use limits can reclassify the property and limit your deductions.
Double-counting property taxes — If you deduct rental property taxes on Schedule E, do not also claim them on Schedule A under SALT. Each dollar of property tax can only be deducted once.

E-Filing Schedule E

Tax software handles Schedule E by walking you through property-by-property income and expenses. It will:

Calculate depreciation and generate Form 4562
Import K-1 data (some software supports direct import)
Apply passive activity limitations automatically
Track suspended losses from prior years
Determine eligibility for the $25,000 special allowance

Frequently Asked Questions

Can I deduct a loss on a rental property I own?

It depends on your income and level of participation. If you actively participate and your MAGI is under ~$100,000, you can deduct up to $25,000 in rental losses. Above ~$150,000 MAGI, the loss is suspended unless you are a real estate professional.

Do I report Airbnb income on Schedule E or Schedule C?

If the average rental period is more than 7 days and you do not provide substantial services (like daily maid service, meals, or guided activities), use Schedule E. If you provide substantial services or average rental periods are 7 days or less with substantial services, use Schedule C, and self-employment tax applies.

What happens to suspended passive losses when I sell the property?

When you sell the property in a fully taxable transaction, all accumulated suspended losses are released and become fully deductible against any type of income in the year of sale.

How does the QBI deduction apply to rental income?

Rental income may qualify for the 20% qualified business income deduction under Section 199A if the rental activity rises to the level of a trade or business. The IRS safe harbor (Revenue Procedure 2019-38) provides that 250+ hours of rental services per year qualifies. This deduction was made permanent under the One Big Beautiful Bill.

Can I deduct travel to my rental property?

Yes. Travel expenses to manage, maintain, or collect rent on your rental property are deductible. Use the standard mileage rate (~$0.70/mile for 2026) or actual vehicle expenses.

Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional or visit irs.gov for official guidance on your specific tax situation.