IRS Form 1040 Schedule E: Supplemental Income and Loss

• IRS Form 1040 Schedule E is used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs.
• You must file Schedule E if you have supplemental income from any of the sources listed above. It’s the primary rental income form for landlords.
• You’ll need records of all income received and detailed documentation of all expenses paid related to that income, such as mortgage interest, property taxes, and maintenance costs.
• Schedule E allows you to deduct a wide range of rental expenses, which can significantly lower your total taxable income. Knowing what you can deduct is essential.

If you earn money from rental properties, royalties, or through partnerships, you’ll need to report it to the IRS. This article breaks down everything you need to know about the Schedule E tax form for the 2025 tax year.

What is IRS Form 1040 Schedule E?

Schedule E, formally known as “Supplemental Income and Loss”, is an IRS tax form attached to your main Form 1040, 1040-SR, or 1040-NR when filing your individual income tax return. Most commonly, people use this supplemental income schedule to report rental income from investment properties.

You must file Schedule E to report income and deductible expenses from:

• Rental real estate (houses, apartments, vacation homes, mixed-use units);
• Royalty income reporting (oil, gas, mineral, copyright, patent);
• Pass-through K-1 income from a partnership or S corporation;
• Estates and trusts (beneficiary K-1s);
• REMIC residual interests.

What has changed for Schedule E in the 2025 tax year?

While the structure of Schedule E remains largely consistent, taxpayers filing for the 2025 tax year should be aware of statutory and inflationary adjustments.

• Inflation adjustments: Key thresholds, such as the standard deduction amount and the Modified Adjusted Gross Income (MAGI) phase-out limits for the $ 25,000 passive loss allowance, are adjusted annually for inflation. For the 2025 tax year, expect slight increases across all income thresholds. This is critical for higher-income landlords who may be close to the $ 100,000 or $ 150,000 MAGI cutoffs for the loss deduction.
• Bonus depreciation: The temporary 100% bonus depreciation has been steadily phasing out. For the 2025 tax year, the bonus depreciation rate for qualified assets (which often includes new interior non-structural property additions) is scheduled to be 40%.
• Qualified Business Income (QBI) Deduction (Section 199A): Rental property owners may qualify for the 20% QBI deduction on their net rental income if their activity qualifies as a “trade or business.” It’s subject to specific rules and is becoming a greater focus for the IRS. This deduction is claimed on Form 8995, not Schedule E; however, the supplemental income figure from Schedule E serves as the starting point.

A guide to Schedule E: Understanding form’s sections

IRS Form 1040 Schedule E is divided into five distinct parts, each designed to capture a specific type of supplemental income or loss. Understanding the scope of each section is crucial for accurately filing your tax form.

Part I: Income or Loss From Rental Real Estate and Royalties

This section is for reporting income or losses from rental properties and royalties, such as earnings from oil, gas, minerals, copyrights, or patents. Generally, rental income falls under this category, unless the activity involves substantial services (such as a hotel), which would be reported on Schedule C.

Each property should be listed in its own column, with details like address, property type, and whether it’s a qualified joint venture. Income includes rents received (cash or non-cash) and royalties, with expenses like advertising, maintenance, insurance, taxes, and depreciation deducted.

Easily report on your incomes or losses from Real Estate and Royalties using pdfFiller’s intuitive editor.

Part II: Income or Loss From Partnerships and S Corporations

This part is for taxpayers who receive Schedule K-1s from partnerships or S corporations, including publicly traded partnerships (PTPs). Each entity should be listed on its own line, along with its EIN.

In this section, you report:

• any loss not allowed in a prior year due to the at-risk or basis limitations, a prior year unallowed loss from a passive activity (if that loss was not reported on Form 8582), or unreimbursed partnership expenses;
• passive income (may require attaching Form 8582) and passive losses that come from Schedule K-1;
• nonpassive income and nonpassive losses both from Schedule K-1, and the Section 179 expense deduction from Form 4562;
• the total partnership and S corporation income or loss.

Part III: Income or Loss From Estates and Trusts

You use this part of Schedule E to report those amounts if you are a beneficiary of an estate or trust that generates income. Like Part II, the necessary figures are provided on a Schedule K-1 (Form 1041, U.S. Income Tax Return for Estates and Trusts). List the name and identifying number of the estate or trust and enter the income amounts shown on the corresponding Schedule K-1.

Part IV: Income or Loss From Real Estate Mortgage Investment Conduits (REMICs)—Residual Holder

This section is tailored to a niche group of specialized real estate investors who report taxable income or losses from owning residual interests in Real Estate Mortgage Investment Conduits (REMICs). A REMIC is a specialized investment vehicle that holds mortgage loans and distributes the generated income to investors. Use Schedule Q (Quarterly Notice of Residual Interest Taxable Income or Net Loss Allocation) to report these figures.

Part V: Summary

Part V is the final, brief section that acts as an aggregation tool, collecting the net results from the four preceding sections to calculate your overall supplemental income or loss that flows to your Form 1040.

Rental property income and expense reporting: Line-by-line instructions

Part I of Schedule E provides comprehensive line-by-line reporting for rental real estate and royalty income.

Step 1: List your properties
You must list the physical address of each rental property and specify its type (e.g., single-family residence, multi-family, etc.).

Step 2: Report your total rental income
On Line 3, enter the total gross rent you received during the tax year. Line 4 includes royalties received.

Step 3: Detail your expenses (Lines 5-18)
This is the most critical section for reducing your taxable income. Common rental expenses deductions include:

• Line 5: Advertising (e.g., costs to find tenants)
• Line 6: Auto and travel expenses for management purposes.
• Line 7: Cleaning and maintenance
• Line 8: Commissions (fees paid to real estate agents for finding tenants)
• Line 9: Insurance expenses
• Line 10: Legal and other professional fees (for example, for leases or eviction proceedings, and accountant fees)
• Line 11: Property management fees
• Line 12: Mortgage interest (the interest portion of your mortgage payments, reported on Form 1098)
• Line 13: Other interest
• Line 14: Repairs (costs for fixing things, like a broken appliance or a leaky pipe)
• Line 15: Supplies (costs of supplies needed for the rental business)
• Line 16: Taxes (state and local property taxes)
• Line 17: Utilities (payments for things like water or electricity for your tenants)
• Line 18: Depreciation (a non-cash deduction that allows you to recover the cost of your property over its useful life)
• Line 19: Other (a catch-all for any other valid expenses not listed above).

Use pdfFiller’s intuitive editor with field navigation to accurately enter your rental income and expenses on the Schedule E form.

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How do passive activity loss rules and limitations work?

By default, rental real estate is a passive activity. You can deduct passive losses only against passive income, with two key exceptions:

1. $25,000 special allowance for rental real estate with active participation (you make bona fide management decisions and own at least 10% by value). The allowance phases out as MAGI rises from $100,000 to $150,000 (MFS living apart: thresholds are halved). Excess losses carry forward to future years.
2. Real estate professionals’ status: If you (a) spend more than 50% of your personal service time in real property trades or businesses and (b) perform more than 750 hours of services in those businesses and materially participate in the rental activity, then those rental activities are not passive. You can deduct qualifying losses against non-passive income.

Use Form 8582 to compute how much rental loss you can deduct this year and what carries forward.

What is the difference between Schedule E and Schedule C?

A common point of confusion is whether to report income on Schedule E vs. Schedule C. The key difference lies in the level of service you provide and whether the income is subject to self-employment tax.

• Schedule E serves for reporting passive income from rental properties and royalties. This income is generally not subject to self-employment tax (Social Security and Medicare tax). This applies when you are renting out space and providing only basic services like utilities and maintenance.
• Schedule C, Profit or Loss from Business, is for reporting income from an active trade or business you operate as a sole proprietor. This income is subject to self-employment tax.

If you offer “substantial services” to tenants (like regular cleaning, changing linens, or providing meals), the IRS considers your rental activity a business. In this case, you’d use Schedule C, not Schedule E.

Common landlord tax mistakes to avoid on Schedule E

First-time and experienced landlords alike make predictable errors when completing Schedule E. Here are the most common ones:

• Confusing repairs vs. capital improvements: This is a common mistake. Capital improvements, like a new water heater or deck, are depreciated over several years. Repairs, like fixing a step or patching a leak, can be deducted immediately.
• Failing to claim depreciation: Many landlords forget this crucial deduction, meaning they pay tax on income that isn’t actually profit. Depreciation starts when the property is ready and available for rent, even if it’s vacant.
• Not prorating expenses for personal use: If you use your rental property for personal reasons for more than 14 days or 10% of the total days it’s rented, you must divide your expenses between personal and rental use.
• Inadequate record keeping: The IRS requires detailed records for every deduction. Keep receipts, invoices, bank statements, and mileage logs for at least three years from the filing date to verify all deductible expenses you claim.

Final thoughts

Filing IRS Form 1040 Schedule E is essential if you have supplemental income from rentals, royalties, or certain businesses. While it needs attention to detail, understanding its sections and eligible deductions will ease tax season stress. Maintaining proper record-keeping throughout the year is your best bet for a smooth filing experience.

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Glossary

• Depreciation expense: A non-cash deduction that allows you to recover the cost of an asset over its useful life.
• Passive Activity Loss (PAL): A loss from a business activity in which you do not materially participate, such as rental real estate.
• Supplemental income: Income earned from sources other than a primary job or active business (like income from rental properties, royalties, and investments in partnerships or S corporations, all of which are reported on Schedule E).
• Schedule K-1: A tax document issued by a partnership, S corporation, estate, or trust to its partners, shareholders, or beneficiaries. It reports your share of the entity’s income, deductions, and credits, which you then report on your own tax return, often on Schedule E, Part II.