Form 1040 Schedule E - Supplemental Income And Loss
Federal Form 1040 Schedule E, also known as Supplemental Income and Loss, is used to report income from rental properties, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs (Real Estate Mortgage Investment Conduits).
In more detail, Schedule E is used to report:
- Rental income and expenses from rental properties
- Royalty income
- Income from partnerships, S corporations, estates, and trusts
- Income from residual interests in REMICs
When reporting rental income, only the rental income that relates to properties shown on the Schedule of Real Estate Owned on the borrower's loan application should be included. All regular and ongoing expenses for the properties, such as maintenance, advertising, management fees, utilities, homeowners' association dues, and supply costs, should be subtracted from the borrower's cash flow.
Additionally, adjustments may need to be made for depreciation and any one-time extraordinary expenses, such as the costs of repairing damage that resulted from a natural disaster. The full amount of the mortgage payment for a rental property will be factored into the net rental income calculation, but it may also be counted as part of the liabilities that are considered in the calculation of the borrower's total debt-to-income ratio.
Why is Schedule E Important?
Schedule E is important for several reasons:
- Passive income and loss: Schedule E is used to report passive income and loss, which can affect the taxpayer's overall tax liability.
- Self-employment tax: Schedule E is used to report income from partnerships, which may be subject to self-employment tax.
- Accurate reporting: Schedule E ensures that income and expenses are reported accurately, which is essential for maintaining accurate tax records.
Tips for Completing Schedule E
- Keep accurate records: Maintain accurate and detailed records of income and expenses from rental real estate, royalties, and partnerships.
- Determine passive income and loss: Ensure that you accurately determine passive income and loss from rental real estate and partnerships.
- Report all income and expenses: Report all income and expenses from rental real estate, royalties, and partnerships, even if they are not subject to tax.