Most investors use the 1040 Schedule E form to report on their rental-real-estate activities. Whether you own a skyscraper downtown or you have a rental house that you own yourself, the Schedule E is where you report on its income and expenses to calculate your tax liability. Although the form may look a bit daunting, it's actually pretty straightforward.
Complete Part 1 with the address of your property, the type code (1 is for a rental house, for example) and the number of days you used it for yourself as opposed to when it was available for rental purposes. If you only have one property, put everything on line "A," but if you own several, use as many lines as you need. If you have more than three properties, add another sheet with the data for them.
Enter your total rental and other income in Column A of line 3 for your first rental property, moving rightward for additional properties. If you collect royalties from your property, enter them on line 4.
Enter your property expenses on lines 5 through 17. Line your expenses up with the IRS' predefined categories and don't worry about line items that don't fit in for now. Two line items deserve extra care. Your line-6 auto and travel expenses are limited to legitimate expenses that are directly related to your property. Repairs, which get reported on line 14, should include day-to-day repairs and not major work that could be classified as an improvement.
Enter your depreciation on line 18 as calculated on Form 4562. Depreciation is a process that allows you to write off a portion of the value of the buildings in your real estate investment portfolio. Residential and multi-family properties get depreciated over 27.5 years while commercial properties have a 39-year life. For example, if you spent $300,000 on a rental house whose value is assessed at $200,000 to the building and $100,000 to the land, you'd be able to write off $7,273 per year for 27 years, and write off $3,629 in the 28th year. The $7,273 comes from dividing the $200,000 by 27.5 years, and the $3,629 is the remainder for the "0.5" year.
Enter the total of your "other expenses" on Line 19. If the small space the IRS gives you isn't enough room, attach a piece of paper with a list. While you don't want to be overly creative, the IRS will let you write off any expense that is "ordinary and necessary," so don't let the categories on lines 5 through 17 limit you.
Add up all of your expenses on line 20, subtract them from your rents and royalties, and enter your profit or loss on line 21.
Show your loss after any passive activity loss limitations on line 22, then enter summary totals for all of your properties on line 23.
Add up the income from all of your properties on line 24, the losses on line 25, and combine lines 24 and 25 to show your overall profit or loss from real estate investments on line 26.
Items you will need
- Building records
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