Do you own a property which gives you rental income or losses on a regular basis? Are you eager on earning through royalties or pass through entities? Do you plan to buy a multiple unit property so you can live in one while renting out the others? For successfully getting any of the above done, you must know about IRS form 1040 Schedule E. It is a very important form and something you need to be aware of. So, what is this for, 1040 Schedule E exactly?
The IRS form 1040 Schedule E is used to report income and losses from rental property. It is also used to report income from pass through activities such as trusts and estates. If you are earning via pass through activities and are not receiving any rental income, you should fill out the form 1040 Schedule E. Those who have a pass through entity receive a Schedule K-1 from the entity and using the instructions on it to fill out Schedule E is quite easy.
However, if you have to report rental income for your property, things can get a little complicated. You will have to know and write about your accounts over the year to get a clear picture. It is recommended that you use a tax accounting software for the task and keep track of your income. Here is a list of everything that you need to keep track of.
- The price at which you bought your property before renting it out. Your property could be a condo, a house, or even an apartment building.
- Both annual and accumulated depreciation of your property.
- The rental income you are earning from your property.
- The security deposits you have received.
It is also important to keep track of all your deductible expenses as they have their own separate place on Schedule E. A deductible expense is an expense which you made to facilitate your income. These are made to make your property better and more suited for renting and increase its value. These expenses also produce more interest, revenue, dividends, royalties, and annuities for you. If you do not record them on your form, you will not be reporting exact expenses and will have to pay taxes on an income you never really made. Every dollar which you report on Schedule E reduces approximately 35 cents off your tax bill. This is a big reduction which is why you should diligently report all your deductible expenses. These expenses include:
- Money spent on advertising
- Money spent on maintenance of the property such as getting it cleaned, repaired etc.
- Property management fees
- The commission you paid real estate professionals for their services. These also include listing agencies.
- Real estate taxes
- Reimbursed security deposits
- Money spent on utilities such as electricity and water, waste collection fees, landscaping of the plot, and more.
It is important to remember that it is not possible to deduct more in investment interest than you earn in investment income. At the same time, it is possible to carry your disallowed investment forward to the next year.
Earning money through rental property is considered a passive activity, that is, the owner is not making any real effort to earn that money. In other words, you hold ownership interest but are not actually participating in any type of work for facilitating earning. It does not matter if you, as a property owner, are spending a lot of time on your property and making it better, the government is still going to file this income under passive activity.
Those who earn through passive activity suffer from a total loss of around twenty five thousand dollars from all their rental properties. This is the minimum amount which you will definitely lose. Any extra amount that you lose will be carried to the next year which can, thankfully, help you reduce your tax liability in that year.
Therefore, if you borrow money to purchase a property so you can rent it out, you will not be able to file it as investment interest. However, this expenditure can be used as an expense item on your Schedule E form.
Partnerships in S corporations
If you are earning through an S corporation entity, you will have to report your share of business income in Schedule E form. This is pretty self explanatory if you receive Schedule K-1 which asks you to report your share of income, losses, as well as deductions. In short, everything needs to be filled according to the details you fill out in the Schedule K-1 form related to the property.
Contacting a tax professional
It is possible that even after diligently filling out Schedule E form 1040, you face a lot of trouble. Situations can get complicated which is why it becomes necessary to bring in a professional into the scene. There are certain things which are best left to a professional who knows about taxes. Hence, when you find yourself in one of those, make sure you consult one. Professional help will enable you to stay with the law as well as minimize your tax liability.
Tax professionals are also very savvy at understanding your complete financial situation and also knowing whether or not is a good idea to sell your structured settlement or to hold onto it in your long term financial plans.
It is necessary to keep a track of all your expenses throughout the year so you can save money on taxes and find it easy to report it all at the end of the year. If you earn with your property as an entity, the best thing to do is fill out your Schedule E form in accordance with the information you fill out in Schedule K-1. Any confusion in your tax form should be handled with the help of a professional. These professionals will help you comply with the law and also minimize your tax liability.