How to Fill Out Schedule E (Form 1040): Income, Expenses, and Loss Limits

To fill out Schedule E of Form 1040, gather your income and expense records for each rental property, royalty stream, or pass-through interest, then complete the part of the schedule that fits each source: Part I for rental real estate and royalties, Part II for partnerships and S corporations, Part III for estates and trusts, and Part IV for REMIC residual interests. The finished schedule attaches to your Form 1040 as part of a single return.¹

Documents to Pull Before You Start

Which papers you need depends on which parts of the schedule apply. For a rental property, pull a full-year log of rents collected, receipts for repairs, insurance, property management fees, and utilities you paid, and your property tax statements. If you drove to the property for maintenance or rent collection, bring your mileage log; the 2026 standard mileage rate is 72.5 cents per mile.²

You will also want the following forms if they apply:

Form 1098 from your mortgage lender, sent if you paid at least $600 in mortgage interest during the year. The interest figure goes on line 12 of Part I.³
Form 1099-MISC for royalties. The gross royalty amount transfers into Part I.⁴
Schedule K-1 from each partnership (Form 1065) or S corporation (Form 1120-S) you hold an interest in. The K-1 tells you which boxes map to which lines in Part II.⁵
Form 4562, required in the first year you place a rental property in service for depreciation, and again in any later year you claim depreciation on a newly acquired asset or elect a special provision.
Form 1099-K if you collect rent through a payment app or online platform and gross payments exceed $20,000 with more than 200 transactions. You report the income whether or not you receive the form.⁶

Part I: Rental Real Estate and Royalties

Part I holds up to three properties per page. If you own more than three, attach additional copies of Schedule E, but fill in the combined totals on lines 23a through 26 on only one copy.⁷

For each property, enter the street address, the property type (single-family, multi-family, commercial, land, self-rental, or other), and the number of fair rental days and personal use days during the year. Those day counts matter. If you used a rental property for personal purposes beyond the greater of 14 days or 10 percent of the days it was rented at fair market value, Section 280A can cap your deductions at the amount of rental income the property generated.⁸

Reporting Income on Lines 3 and 4

Line 3 is rents received. Federal law counts all rent as gross income, so cash, checks, and the fair market value of anything you accepted in place of cash (a tenant’s labor, for instance) all belong there.⁹ Advance rent is taxable in the year you receive it, regardless of the period it covers.¹⁰

Security deposits work differently. A deposit you plan to return stays off Schedule E entirely; it is a liability, not income. The moment you keep part or all of a deposit for unpaid rent, damage, or a lease-break fee, the retained amount becomes rental income in that tax year and goes on line 3. Interest earned on a security deposit held in a separate account belongs on Schedule B, not here.

Line 4 is for royalties from intellectual property (books, music, patents) or natural resource extraction (oil, gas, timber).¹⁰ Transfer the gross royalty amount from your 1099-MISC.

Deductible Expenses on Lines 5 Through 20

You can deduct the ordinary and necessary costs of managing, maintaining, and operating a rental property.¹¹ The most common entries:

Mortgage interest on line 12, from Form 1098. If you refinanced for more than the prior balance, only the portion of interest tied to the rental property is deductible here.
State and local property taxes on the rental on line 16. Do not include any share of tax on your personal residence.
Repairs on line 14. A repair keeps the property in its present condition (fixing a leaky faucet, patching drywall, replacing a broken window pane) and is fully deductible in the year you pay for it.
Insurance premiums on line 9 for fire, theft, flood, and landlord liability coverage. If you prepay for multiple years, deduct only the portion covering the current tax year.
Depreciation on line 18 (covered below).
Other expenses on line 19, which picks up property management fees, legal fees tied to the rental, advertising, HOA dues, and tax preparation fees for preparing Part I.¹¹

The line between a repair and an improvement matters. An improvement adds value, adapts the property to a new use, or substantially prolongs its life, and it has to be capitalized and depreciated rather than deducted the year you pay. Replacing a few shingles is a repair; replacing the whole roof is an improvement. The IRS tangible property regulations offer a de minimis safe harbor: if you do not have audited financial statements, you can expense items costing $2,500 or less per invoice without capitalizing them.¹²

Depreciation on Line 18

Residential rental property is depreciated over 27.5 years using the straight-line method and a mid-month convention. Nonresidential real property gets a 39-year recovery period.¹³ You depreciate the building, not the land. Most filers use the assessed value ratio from their property tax statement to separate the two.

Capital improvements to residential rental property are also depreciated over 27.5 years.¹⁴ Enter the total annual depreciation for each property on line 18. File Form 4562 with your return in the first year you place a rental property or a new improvement in service.

Parts II Through IV: Pass-Through Entities, Estates, and Trusts

Parts II, III, and IV cover income that flows to you from a business or fiduciary arrangement rather than from property you personally own. The entity itself does not pay federal income tax; it passes income, deductions, and credits through to you on a Schedule K-1.

Part II: Partnerships and S Corporations

Partners report their distributive share of partnership income on their personal returns.¹⁵ S corporation shareholders do the same with their pro rata share.¹⁶ Take the figures from your K-1 and transfer them to Part II. Box 1 on the K-1 is ordinary business income or loss; box 2 is net rental real estate income or loss; each subsequent box has a matching destination on Schedule E or elsewhere on the return.¹⁷

List each entity separately, and for each one mark whether the activity is passive or non-passive. That designation carries over from the K-1 and controls which column of Part II you use.

Parts III and IV: Estates, Trusts, and REMICs

Part III reports income or loss from estates and trusts. Beneficiaries receive a Schedule K-1 from Form 1041; transcribe the figures the same way you handle a partnership K-1. Part IV handles income from residual interests in real estate mortgage investment conduits and is rarely used by individual filers outside of certain structured investment products.

Loss Limits That Can Cap Your Deduction

A loss on Schedule E does not always translate into an immediate deduction. Two rules run in sequence before the loss reaches your Form 1040.

At-Risk Rules

You can only deduct losses up to the amount you have at risk in the activity. Your at-risk amount generally equals the cash you invested, the adjusted basis of property you contributed, and amounts you borrowed for which you are personally liable (or pledged non-activity property as security). Non-recourse loans generally do not increase your at-risk amount, with a specific exception for qualified non-recourse financing on real estate.

If your activity shows a loss and you have amounts not at risk, file Form 6198 with your return. The form walks through the calculation of how much of your loss is currently deductible; any excess carries forward.¹⁸

Passive Activity Rules

Rental real estate is classified as a passive activity by default. Losses from a rental generally cannot offset wages, salary, or other non-passive income; disallowed losses carry forward and can be used when you have passive income or when you sell the property.

There is a $25,000 exception for active participants. If you owned at least 10 percent of the property and were involved in decisions about tenants, rent, and repairs, you can deduct up to $25,000 in rental losses against non-passive income. The allowance starts phasing out when your modified adjusted gross income exceeds $100,000, shrinking by 50 cents for every dollar above that threshold, and disappears entirely at $150,000.¹⁹ Limited partners generally do not qualify.

A separate exception exists for real estate professionals. If more than half your working hours during the year go into real property trades or businesses and you log at least 750 hours in those activities, your rental losses are treated as non-passive and can offset any income. Meeting the standard requires contemporaneous records showing what you did, when, and for how long.

When the passive activity rules limit your loss, complete Form 8582 and attach it to your return. The allowed loss from Form 8582 is what goes on the appropriate line of Schedule E.²⁰

Two Items That Can Shift the Bottom Line

Qualified Business Income Deduction

Income reported on Schedule E from a partnership, S corporation, or a rental activity that qualifies as a trade or business may be eligible for the Section 199A qualified business income deduction, worth up to 20 percent of qualified business income.

For rental real estate, the IRS provides a safe harbor: perform at least 250 hours of rental services per year (or, for properties in existence at least four years, in at least three of the past five years), keep separate books and records for each rental enterprise, and maintain contemporaneous time logs, and the rental qualifies as a trade or business for the deduction.²¹ Rentals that miss the safe harbor may still qualify under the general definition.

For 2026, phase-out limits kick in at roughly $201,750 of taxable income for single filers and roughly $403,500 for joint filers. Above those thresholds the deduction is subject to wage and property basis limitations that can reduce or eliminate it, particularly for specified service businesses such as law, medicine, and consulting.

Net Investment Income Tax

Rental income, royalties, and passive income from partnerships and S corporations can trigger an additional 3.8 percent net investment income tax. The surtax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately.²² These thresholds are not indexed for inflation. If you qualify as a real estate professional and your rental income is non-passive, it is generally excluded from net investment income. Otherwise, calculate the surtax on Form 8960 and add it to the return.

Attaching Schedule E to Your Return

Schedule E is not filed on its own. It attaches to your Form 1040 (or 1040-SR or 1040-NR) as part of your complete return.²³

Most tax software handles Schedule E as an integrated part of an e-filed return. Electronic filing produces an immediate confirmation of receipt, and refunds from e-filed returns are generally processed within about two weeks.

If you mail a paper return, the processing center depends on your state and whether you are enclosing a payment. Filers in Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Texas who are not enclosing payment mail to the IRS in Austin, TX 73301-0002. Filers in northeastern and midwestern states send returns to Kansas City, MO 64999-0002. Western-state filers use Ogden, UT 84201-0002. Addresses differ when a payment is enclosed; the IRS “Where to File” page lists them by state.²⁴ Paper returns take roughly six weeks to process.²⁵

Estimated Tax and Extensions

Rental and pass-through income are not subject to withholding, so if your Schedule E activity generates meaningful tax, you likely owe quarterly estimated payments. The 2026 due dates are April 15, June 15, September 15, and January 15, 2027.²⁶ Underpaying during the year can result in a separate penalty at filing time even if you eventually pay in full.

Need more time to file? Submit Form 4868 by April 15, 2026, for an automatic extension to October 15, 2026.²⁷ An extension gives you extra time to file, not extra time to pay. Any tax owed is still due April 15, and interest accrues on unpaid balances from that date. Form 4868 is useful when you are waiting on a K-1 from a partnership or S corporation that has extended its own return.

Penalties and How Long to Keep Records

Inaccurate reporting on Schedule E can trigger an accuracy-related penalty equal to 20 percent of the underpayment attributable to negligence or a substantial understatement of income.²⁸ Failure to file at all draws a penalty of 5 percent of the unpaid tax for each month the return is late, up to 25 percent.²⁹

Keep a copy of your filed Schedule E and all supporting records (receipts, 1098s, 1099s, K-1s, mileage logs, depreciation schedules, lease agreements) for at least three years from the date you filed. If you underreported gross income by more than 25 percent, the IRS has six years to assess additional tax, so hold onto records longer if there is any doubt.³⁰

1
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