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Rents and miscellaneous income (Schedule E)

Click for accompanying notes, and online audio samples from our tape on income tax planning.

Schedule E - rents

Next comes Schedule E. Schedule E is a kind of catch-all form that shows miscellaneous income.

If you own rental housing, fill out the front side of Schedule E. Up at the top you'll show your income from rent. Then you have plenty of space to show your expenses for things like maintenance, insurance, mortgage interest, taxes, and depreciation.

Your net rental profit or loss flows into your 1040. Notice that with rental activities, after you subtract the depreciation, you often have a loss that flows through to your 1040.

This kind of loss is good in that it lowers your taxable income, but there's one potential problem with it. If your rental losses are too high, or your income is too high, you can't deduct the losses from your income.

If your rent-related losses exceed $25,000, or your adjusted gross income exceeds $100,000, you won't be able to deduct all of the losses against your other income.

Real estate and passive losses

This gets into the area of passive losses, and is one of the ways tax shelters were closed with the 1986 Tax Reform Act. Under the Act, most rental activities and limited partnerships were classified as passive activities.

This is a complex area of taxation, and if you own a lot of rental property or are in a limited partnership, you'll almost certainly need professional help.

Partnership, S Corp. and trust income on Schedule E

Also, on the back of Schedule E, you report other income or losses that you might get from a partnership, limited liability company, or S corporation.

Partnerships, LLCs, and S corporations are called flow-through entities. You contribute either capital or expertise to the enterprise, and in return you receive a proportionate share of the enterprise's profits or losses.

These profits or losses flow directly to your Schedule E, and aren't subject to taxation at the corporate level like C corporations. S corporations are smaller firms that, after recent reforms, must have 75 or fewer shareholders. Large corporations like IBM are classified as C corporations.

Finally, if you're lucky enough to receive money from a trust, that money must be reported on the back of Schedule E.

Body text copyright 1997 by David Luhman