Schedule E: Supplemental Income and Loss
Schedule E calculates the supplemental income or loss to report on your main tax return. In this article, we will go over the basics of Schedule E so you can better prepare for tax season.
Schedule reports supplement income or losses not earned income. Supplemental income typically refers to passive income. The most common type of passive income is rental income. However, you are limited on the amount of loss you can take on passive activities. The amount of loss you can write off will depend on your Adjusted Gross Income. These limitations are as follows:
- If your AGI is $100,000 or less, you can take a loss of up to $25,000 a year.
- An AGI between $100,000 to $150,000 that $25,000 starts to phase out.
- When your AGI is over the $150,000 you can no longer claim a passive income loss. Unless you are a real estate professional.
Any losses you do not qualify to deduct to offset future passive income or gains on rental property sales.
One of the most important parts of completing a Schedule E is properly calculating basis. There are two types of basis: property and loan cost. Property basis is the purchase price of the property plus closing costs (i.e. title insurance, transfer taxes, inspections, and appraisals) travel costs, attorney fees, notary fees, and bank fees. Loan cost basis is the total cost of all fees for acquiring the property loan. This includes the origination fee, credit report, and bank fees.
It is vital that the property and loan cost basis are calculated correctly. This is the case because they are necessary for calculating depreciation and annual amortization.
Calculating the income to report on your schedule E is simple. On the Schedule, you need to report your gross rental income. Gross rental income includes rental income, refunds for utilities, and prorated rents from when you purchased the property.
There are many types of expenses that you can use to offset income. These expenses include:
- Advertising: This includes advertising in newspapers or websites, business cards, mailers, or rental signs.
- Travel: You can deduct any necessary/ordinary travel costs that you incur to maintain our rental.
- Cleaning/Maintenance: The costs of cleaning the property, painting, landscaping, or other minor maintenance are deductible.
- Commissions: This includes commissions paid to a realtor or property manager to get a tenant for your property.
- Insurance: Homeowners, hazard and flood insurance for your rental property are expenses.
- Legal/Professional Fees: This includes attorney fees, accounting fees, as well as business and financial planning fees.
- Management Fees: Management fees include the cost to hire an agent or property manager to care for your rental property.
- Interest: Interest includes mortgage interest paid as well as interest paid to third parties (i.e. private investors, private businesses, and crowdfunding platforms).
- Repairs: This refers to small repairs made to the property. Not capital improvements like replacing flooring or roofing.
- Supplies: This is the cost of incidental materials and supplies. This can be paper, small tools, or other materials that do not fit into any other category.
- Taxes: Taxes that you pay due to owning and operating a rental property are expenses. This can be property taxes, school district taxes, special easement taxes, or land taxes.
- Utilities: You can only deduct utility expenses you have personally paid for. This includes any utilities that your tenant reimburses you for.
- Other: This category is a catch-all for any expenses that do not fit into any other categories.
Completing Schedule E
To complete the schedule, you will need to add up all your expenses and subtract the gross rental income for each property. Schedule E can be a tricky document to complete. Due to this, it is best to utilize a qualified tax preparer to complete it for you.
Questions? Want to schedule an appointment? Contact us by clicking here.