What Is Schedule E on a Tax Return: Rental and Pass-Through Income

Schedule E is the IRS form you attach to Form 1040 to report supplemental income and losses from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs).¹ If money reaches you from any of those sources, it belongs on Schedule E rather than on the schedules used for wages or self-employment. The form has four parts, and the deduction rules — particularly for rental property — can move your final tax bill by a meaningful amount.

The Four Parts of Schedule E

Each part of the form handles a different type of income.²

Part I covers rental real estate and royalties. Rents from properties you own go here, along with royalty payments from oil and gas leases, patents, copyrights, and name, image, and likeness rights.
Part II covers partnerships and S corporations. You report your allocated share of income or loss from these pass-through entities, which don’t pay federal income tax at the entity level.
Part III covers estates and trusts. If you’re a beneficiary, your allocated income goes here.
Part IV covers REMICs, a form of mortgage-backed security pool. You report your share of a residual interest’s quarterly taxable income or loss.

Part I is where most individual filers spend the bulk of their time, especially landlords. Parts II through IV lean heavily on documents the entity sends you, usually a Schedule K-1.

When Rental Income Doesn’t Belong on Schedule E

Not every landlord uses Schedule E. If you provide substantial services to tenants — think daily housekeeping, meals, or other hotel-style amenities — the IRS treats the operation as a business, and the income goes on Schedule C instead.³ The difference matters: Schedule C income is subject to self-employment tax, while Schedule E rental income generally is not. A traditional landlord arrangement with no significant personal services stays on Schedule E.

Reporting Rental Income and Expenses

In Part I you list each rental property by address and enter that property’s income and expenses for the year. Rental income includes all rent received, and advance rent counts in the year you receive it regardless of the period it covers.⁴ If a tenant pays one of your expenses directly, that payment is also rental income to you.

Deductible expenses against rental income include:

Advertising costs to attract tenants
Insurance premiums on the property
Mortgage interest
Property taxes
Repairs and routine maintenance
Utilities you pay
Property management fees
Legal and professional fees tied to the rental
Local travel for inspections, maintenance, or rent collection

Repairs and improvements are treated differently. A repair keeps the property in its current condition and is deducted in full in the year you pay for it. An improvement adds value, adapts the property to a new use, or significantly extends its life, and it has to be capitalized and depreciated over time.⁵ Fixing a broken window is a repair. Adding a new deck is an improvement.

Foreign rental property is reported in Part I as well. The instructions ask for the city, province or state, country, and postal code.²

If you pay $600 or more during the year to an individual contractor for rental-related work — a plumber, painter, property manager — you’re generally required to issue Form 1099-NEC.⁶ Missing that filing can bring its own penalties.

Depreciation on Rental Property

One of the largest deductions available on Schedule E is depreciation, a non-cash deduction that accounts for the wear on your rental building over time. You don’t write a check for it, but it reduces taxable rental income every year. Three factors set the annual amount: your cost basis in the property (excluding land), the recovery period, and the depreciation method.⁵

Residential rental property uses a 27.5-year recovery period and the straight-line method.⁵
Nonresidential (commercial) rental property uses a 39-year recovery period and the straight-line method.⁷

Straight-line depreciation means you deduct roughly the same amount every year across the recovery period, with a mid-month convention adjusting the first and last years. The deduction goes on line 18 of Schedule E, Part I. Property placed in service during the current tax year requires Form 4562 attached to the return.⁵

Why a Rental Loss May Not Lower Your Tax Bill

Rental real estate is generally a passive activity. Losses from a passive activity can only offset other passive income, not wages, salary, or active business earnings.⁸ This catches many first-time landlords off guard when a paper loss on Schedule E doesn’t reduce their overall tax.

The $25,000 Allowance for Active Participants

If you actively participated in managing the property, you can deduct up to $25,000 of rental losses against non-passive income like wages. Active participation is a low bar: you need to own at least 10% of the property and make management decisions such as approving tenants, setting rent, or authorizing repairs.⁸

The $25,000 phases out at higher incomes. It drops by $1 for every $2 that modified adjusted gross income exceeds $100,000, and it hits zero at $150,000. For married taxpayers filing separately who lived apart all year, the range is $50,000 to $75,000 and the maximum allowance is $12,500.⁹

The Real Estate Professional Exception

If you qualify as a real estate professional, your rentals aren’t automatically passive. Two requirements must both be met during the year:¹⁰

More than half of your personal services during the year must go to real property trades or businesses in which you materially participate.
More than 750 hours of services during the year must be in those real property activities.

For a married couple filing jointly, one spouse must meet both tests independently.⁸ Even after qualifying, you still have to materially participate in each rental activity for its losses to be treated as non-passive, though you can elect to group all your rentals as a single activity for that purpose.

At-Risk Limits and Carryforwards

Before the passive activity rules kick in, a separate limit caps deductible losses at the amount you have “at risk” in the activity. Your at-risk amount generally includes your cash investment and borrowed amounts for which you’re personally liable. Non-recourse loans and amounts protected by loss guarantees generally don’t count.¹¹ Losses beyond the at-risk amount get reported on Form 6198.

A loss the passive activity or at-risk rules block this year is not lost. It carries forward, and in later years it can offset passive income, use the special allowance, or be deducted in full when you sell your entire interest in the activity in a taxable transaction to an unrelated party.¹²

Vacation Homes and Mixed-Use Rentals

Special rules apply when you rent out a home you also use personally.

Rent a dwelling that’s also your residence for fewer than 15 days in the year, and you report none of the income and deduct none of the rental expenses for those days.¹³ The income is simply tax-free.

Rent it for 15 days or more with personal use as well, and you have to split shared expenses. Divide rental days by the sum of rental days plus personal-use days, then apply that fraction to shared expenses like mortgage interest, insurance, property taxes, and utilities. A home rented 85 days and used personally 14 days allocates 85 of 99 days, or about 86%, to the rental side. Days spent substantially full-time on repairs and maintenance don’t count as personal-use days, and days the home sat vacant and available for rent don’t count as rental-use days.⁵

Partnership, S Corporation, Estate, Trust, and REMIC Income

Part II reports your share of partnership and S corporation income or loss. You don’t calculate the numbers; the entity issues a Schedule K-1 showing your allocated share of ordinary business income, rental income, interest, dividends, and other items.¹⁴ Partnerships issue Schedule K-1 (Form 1065); S corporations issue Schedule K-1 (Form 1120-S). Each entity gets its own line on line 28 of Schedule E, and each item is classified as passive or non-passive depending on whether you materially participated.¹⁵ Losses run through the same passive activity and at-risk limits.

Your share of the entity’s income is reported whether or not you received a cash distribution. The K-1 reflects allocation, which can differ from what actually landed in your bank account.¹⁴

Part III works the same way for beneficiaries of estates and trusts, using Schedule K-1 (Form 1041), with income reported when allocated even if not yet distributed. Part IV covers the less common case of a REMIC residual interest, where you report your share of the pool’s quarterly taxable income or loss.²

Related Taxes and Deductions

Two other items ride along with Schedule E income for many filers.

The qualified business income (QBI) deduction under Section 199A can deduct up to 20% of net rental income if the rental activity qualifies as a trade or business. The deduction is claimed on Form 1040, but Schedule E figures feed the calculation. The IRS provides a safe harbor treating a rental enterprise as a trade or business if you perform at least 250 hours of rental services per year — advertising, tenant screening, rent collection, repairs, management — in any three of the five most recent tax years. You have to keep records of hours worked, a description of each service, dates, and who performed the work.¹⁶ The full 20% is available without wage or capital limitations if total taxable income is at or below approximately $201,750 ($403,500 for married filing jointly) in 2026; above those thresholds, the deduction may be reduced or phased out depending on W-2 wages and depreciable property held by the business. Partnership and S corporation income reported in Part II can also qualify.

The 3.8% net investment income tax (NIIT) may apply on top. It hits the lesser of net investment income or the amount by which modified adjusted gross income exceeds:¹⁷

$250,000 for married filing jointly or a qualifying surviving spouse
$200,000 for single or head of household
$125,000 for married filing separately

Net investment income includes rental income, royalties, and passive partnership or S corporation income. Non-passive business income from a partnership or S corporation in which you materially participate is generally not subject to the NIIT.

Records and Filing

Every number on Schedule E should be supported by paperwork: receipts, bank statements, lease agreements, invoices, canceled checks, and credit card records organized by category. Income figures typically come from rent ledgers, bank deposit records, or a Form 1099-MISC issued by a property manager who collected rent for you.⁶

The IRS generally expects you to keep records for at least three years from the date you file. Understate income by more than 25% of the gross shown on the return and the retention period stretches to six years. Property records — purchase price, closing costs, depreciation calculations — should be kept until at least three years after you dispose of the property in a taxable transaction, because depreciation adjusts your cost basis and drives the taxable gain when you sell.¹⁸ If you’re relying on the QBI safe harbor, you also need time logs of hours, service descriptions, dates, and personnel, plus separate books for each rental enterprise.¹⁶

Schedule E is attached to Form 1040 when you file. Tax software transmits it with the rest of the return. Paper filers arrange the schedule in the sequence indicated on the form. Owning more than three rental properties means completing and attaching additional copies of Schedule E, but the combined totals go on only one.²

After processing, an IRS automated matching program compares your Schedule E figures against information returns filed by partnerships, S corporations, and other entities. A mismatch — a K-1 reporting income you didn’t include, for example — typically produces a CP2000 notice asking you to explain or pay.¹⁹ A substantial understatement can also draw a 20% accuracy-related penalty on the underpaid tax.²⁰ Matching your Schedule E to the K-1s and 1099s you received is the surest way to avoid both.

1
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
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Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
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Internal Revenue Service. Topic No. 414, Rental Income and Expenses
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Internal Revenue Service. Rental Income and Expenses – Real Estate Tax Tips
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Internal Revenue Service. Publication 527 (2025), Residential Rental Property
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Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
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Internal Revenue Service. Publication 946, How To Depreciate Property
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Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
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Internal Revenue Service. Instructions for Form 8582 (2025)
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Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
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Internal Revenue Service. Instructions for Form 6198, At-Risk Limitations
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Internal Revenue Service. 2025 Instructions for Form 8582
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Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property
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Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) (2025)
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Internal Revenue Service. Shareholders Instructions for Schedule K-1 (Form 1120-S) (2025)
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Internal Revenue Service. Section 199A Trade or Business Safe Harbor – Rental Real Estate Notice
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Internal Revenue Service. Topic No. 559, Net Investment Income Tax
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Internal Revenue Service. Topic No. 305, Recordkeeping
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Internal Revenue Service. Automated Underreporter (AUR) Privacy and Civil Liberties Impact Assessment
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eCFR. 26 CFR 1.6662-2 Accuracy-Related Penalty