How to Report Rental Income: A Step-by-Step Schedule E Walkthrough

Filing rental income taxes shouldn't be mysterious. But every year, thousands of investors overpay — or worse, underreport and face penalties — because they don't understand Schedule E.

This guide walks through Schedule E (Form 1040), Supplemental Income and Loss, line by line. We'll use a real example, flag the mistakes the IRS catches most often, and show you exactly where each number goes.

Before You Start: What You Need

Gather these documents before touching Schedule E:

• [Closing Disclosure](/blog/homebuying-closing-process) (from purchase) — for cost basis and depreciation calculations
• Mortgage statements (Form 1098) — showing interest and property tax paid
• Bank statements for your rental account — all income received
• Receipts and invoices for every expense
• 1099-MISC or 1099-K — if received from property management companies or payment platforms
• Prior year tax return — for depreciation carry-forward and suspended passive losses
• Mileage log — for auto/travel deductions
• Property tax bills — actual amounts paid in the tax year

The Example Property

We'll file Schedule E for one rental property:

• Address: 742 Elm Street, Austin, TX
• Purchased: June 15, 2022, for $320,000
• Land value: $64,000 (20%, per county assessor)
• Depreciable basis: $256,000
• Rental start date: August 1, 2022
• 2026 rental income: $28,800 ($2,400/month)
• Owner: Taylor and Morgan Chen (MFJ)
• Filing status: Married Filing Jointly, $140,000 combined W-2 income

Schedule E, Part I: Line-by-Line

Line 1a — Physical Address

Enter the street address of the rental property. Each property gets its own column (A, B, or C). If you have more than three rentals, use additional Schedule E pages.

742 Elm Street, Austin, TX 78701

Line 1b — Type of Property

Check the appropriate box:

• A: Single Family Residence ✓
• B: Multi-Family Residence
• C: Vacation/Short-Term Rental
• D: Commercial
• E: Land
• F: Royalties
• G: Self-Rental
• H: Other

Line 2 — Personal Use Days / Fair Rental Days

This is where many investors make their first mistake.

• Fair rental days: The number of days the property was rented at fair market value or available for rent. For our property: 365 days (full year, leased all of 2026).
• Personal use days: Days you used the property for personal purposes. For a standard rental: 0 days.

Why this matters: If personal use exceeds the greater of 14 days or 10% of rental days (IRC §280A(d)), the property is classified as a personal residence, and deductions are limited to the extent of rental income (no losses allowed). This primarily affects vacation rentals.

Common mistake #1: Staying at your rental for "inspection" purposes. If you stay overnight and also use it recreationally, the IRS may count it as a personal use day. Brief visits for maintenance (a few hours, no overnight stay) are generally not personal use.

Line 3 — Rents Received

Report all rent received during the tax year, regardless of what period it covers.

$28,800 (12 months × $2,400)

Include:

• Regular monthly rent
• Late fees collected
• Pet deposits applied (non-refundable)
• Lease break fees
• Any expense paid by the tenant on your behalf (e.g., tenant pays the water bill that's in your name — that's income to you and a deductible expense)

Do NOT include: Security deposits you expect to return.

Common mistake #2: Failing to report rental income because you didn't receive a 1099. The IRS doesn't require tenants to issue 1099s for rent paid. But the income is still taxable. If you're audited, the IRS will match bank deposits to your return.

Line 4 — Royalties Received

Not applicable for rental property. Leave blank.

Lines 5-19 — Expenses

Here's where your tax savings live. Each expense must be ordinary and necessary (IRC §162) and directly related to the rental activity.

Line 5 — Advertising: $450

Zillow listing fee ($300), yard sign ($50), professional photos ($100).

Line 6 — Auto and Travel: $840

1,200 miles driven for property-related activities × $0.70/mile = $840.

Keep a mileage log with: date, destination, business purpose, odometer start/end. Without this, the deduction is indefensible in an audit.

Line 7 — Cleaning and Maintenance: $1,650

Annual HVAC service ($250), lawn care ($1,200/year), pest control ($200).

Line 8 — Commissions: $0

No property manager or leasing agent used. (If Taylor and Morgan used a PM at 10%, this would be $2,880.)

Line 9 — Insurance: $1,800

[Landlord insurance](/blog/landlord-insurance-guide) premium for the year. Includes liability, [dwelling coverage](/blog/homeowners-insurance-complete-guide), and loss-of-rent coverage.

Line 10 — Legal and Professional Fees: $500

CPA fee for rental portion of tax preparation ($350). Attorney consultation for lease review ($150).

Line 11 — Management Fees: $0

Self-managed. If you use software (e.g., Buildium at $50/month), you'd deduct $600 here.

Line 12 — Mortgage Interest: $14,200

From Form 1098 received from the lender. This is the interest portion only — principal payments are NOT deductible.

Common mistake #3: Deducting total mortgage payments instead of just interest. If your monthly payment is $1,800 and $1,183 is interest, only $14,200 goes on this line — not $21,600.

Line 13 — Other Interest: $0

Interest on credit cards or personal loans used for rental expenses would go here. Track carefully — the funds must be traceable to rental activity.

Line 14 — Repairs: $2,100

• Replaced garbage disposal: $350
• Fixed leaky faucet: $175
• Patched drywall after tenant moved out: $400
• Replaced broken blinds: $275
• Exterior paint touch-up: $900

Remember: repairs restore to original condition. Improvements (new roof, renovation) are capitalized and depreciated.

Common mistake #4: Deducting a full kitchen renovation as "repairs." The IRS classifies this as an improvement under the Betterment, Restoration, or Adaptation (BRA) test (Reg. §1.263(a)-3). Improvements must be capitalized and depreciated over 27.5 years.

Line 15 — Supplies: $280

Cleaning supplies, light bulbs, smoke detector batteries, air filters, lockbox.

Line 16 — Taxes: $5,400

Property taxes paid in 2026. From the county tax bill.

This is NOT subject to the $10,000 SALT cap — it's a business expense on Schedule E.

Line 17 — Utilities: $0

Tenant pays all utilities per the lease. If the landlord pays water/sewer, it goes here.

Line 18 — Depreciation Expense: $9,309

This requires Form 4562 (Depreciation and Amortization).

Calculation:

• Depreciable basis: $256,000
• Recovery period: 27.5 years
• Annual depreciation: $256,000 ÷ 27.5 = $9,309

This property was placed in service mid-year 2022, so the first-year depreciation used the mid-month convention. By 2026 (full year), it's the standard annual amount.

Common mistake #5: Failing to claim depreciation. Even if you "forget," the IRS requires you to reduce your basis by the allowable depreciation — meaning you'll be taxed on depreciation recapture at sale whether you claimed it or not (IRC §1250(b)(3)).

If you've missed depreciation in prior years, file Form 3115 (Application for Change in Accounting Method) to catch up. This is a one-time automatic adjustment — no amended returns needed.

Line 19 — Other Expenses: $720

• HOA dues: $0 (not applicable)
• Accounting software (QuickBooks): $360/year
• Landlord education (course): $200
• Bank account fees: $60
• Key copies and locksmith: $100

Total expenses (Lines 5-19): $37,249

Line 20 — Total Income or (Loss)

Line 3 (income) - Line 20 (total expenses): $28,800 - $37,249 = ($8,449)

Taylor and Morgan have a rental loss of $8,449 — despite collecting $28,800 in rent and having positive cash flow (because depreciation is a non-cash expense).

Lines 21-22 — Personal Use Ratio

If the property had personal use days, you'd prorate expenses. Since personal use = 0, this doesn't apply. Enter full amounts.

Line 23a-e — Loss Limitations

Line 23a — Total Loss: ($8,449)

Line 23b — Modified Adjusted Gross Income Check

Taylor and Morgan's MAGI: $140,000 (W-2) + ($8,449) rental loss = ~$131,551 before the rental loss is considered.

Since MAGI is between $100,000 and $150,000, the $25,000 allowance is partially phased out:

• Phase-out: ($131,551 - $100,000) × 50% = $15,776
• Allowed loss: $25,000 - $15,776 = $9,224

Since the actual loss ($8,449) is less than the allowed amount ($9,224), the full $8,449 loss is deductible.

Line 23e — Deductible Rental Loss: ($8,449)

This flows to Schedule E, Line 26, then to Form 1040, Schedule 1, Line 5.

Line 26 — Total Rental and Royalty Income or (Loss)

If Taylor and Morgan have multiple properties, all results combine here. For our single property: ($8,449).

Form 4562: Depreciation Detail

Schedule E requires you to complete Form 4562 if you're claiming depreciation on property placed in service during the current year or if you need to report depreciation on property placed in service in prior years.

Key entries:

• Part III, Section B: MACRS depreciation for assets placed in service before the current year
• Column (a): Description — "Residential rental building, 742 Elm St"
• Column (b): Date placed in service — 08/01/2022
• Column (c): Business use % — 100%
• Column (d): Cost or basis — $256,000
• Column (e): Recovery period — 27.5 years
• Column (f): Method — S/L (straight-line)
• Column (g): Depreciation deduction — $9,309

If you're claiming the de minimis safe harbor election, attach a statement to your return: "Under Reg. §1.263(a)-1(f)(ii), [taxpayer name] elects to apply the de minimis safe harbor to all eligible expenditures for the 2026 tax year."

Form 8582: Passive Activity Loss Limitations

If you have a rental loss, you typically need to complete Form 8582 to determine how much is deductible.

Key worksheets:

• Worksheet 1: All rental activities with net losses
• Worksheet 3: MAGI calculation and $25,000 allowance
• Allowed loss flows to Schedule E, Line 23e

When you DON'T need Form 8582:

• Your rental activities show net income (no loss to limit)
• You qualify as a Real Estate Professional and materially participate
• You're disposing of the entire interest in the activity (all suspended losses are released — IRC §469(g))

The 10 Most Common [Schedule E Mistakes](/blog/real-estate-tax-mistakes-to-avoid)

Mistake 1: Not Reporting All Income

Risk: Accuracy-related penalty of 20% (IRC §6662) on the understatement. The IRS matches 1099s and bank deposits to your return. Report everything.

Mistake 2: Deducting Personal Expenses

Risk: Disallowed deductions + 20% penalty. Your personal cell phone is not 100% rental-related. Prorate honestly.

Mistake 3: Mixing Repairs and Improvements

Risk: Overstated current-year deductions, understated depreciation. Use the BRA test: does it fix something (repair) or make it better/different/longer-lasting (improvement)?

Mistake 4: Skipping Depreciation

Risk: You lose the deduction but still owe recapture at sale. Always claim depreciation. If you've missed years, file Form 3115.

Mistake 5: Wrong Land vs. Building Allocation

Risk: Overstated depreciation → audit adjustment. Use the county tax assessor's allocation, an appraisal, or a reasonable comparable method. The IRS will challenge arbitrary allocations (like 5% land in Manhattan).

Mistake 6: Deducting Principal Payments

Risk: Overstated interest expense. Only the interest portion of your mortgage payment is deductible. Check Form 1098.

Mistake 7: Missing the De Minimis Safe Harbor Election

Risk: Forced to capitalize items under $2,500 over 27.5 years. This annual election costs nothing but saves significant hassle.

Mistake 8: Failing to Issue 1099s to Contractors

Risk: $280 penalty per form not filed (IRC §6721), and loss of the deduction. If you pay a contractor $600+ during the year, you must issue Form 1099-NEC by January 31. Get their W-9 before you pay them.

Mistake 9: Ignoring [Passive Activity Rules](/blog/real-estate-professional-status)

Risk: Deducting losses you're not entitled to → underpayment penalty. If MAGI > $150,000 and you're not a REPS, your rental losses are suspended. Track them on Form 8582 — they'll be valuable when you sell.

Mistake 10: Not Keeping Records

Risk: Every deduction is disallowed in an audit. The burden of proof is on you (IRC §6001). No receipt = no deduction. Use an app, a shoebox, a spreadsheet — just keep everything for 3-7 years.

Multi-Property Reporting

If you own more than three rental properties, you need additional Schedule E pages. Each page has columns A, B, and C.

Important: Each property must be reported separately. You cannot combine properties on a single line (unless they're grouped under a REPS election, and even then, the financial reporting is per-property).

Partnership and S-Corp Rentals

If you hold rental property in a partnership (LP, LLC taxed as partnership) or S-Corporation, the rental income/loss flows through on Schedule K-1 (Form 1065 for partnerships, Form 1120-S for S-Corps).

This income is reported on Schedule E, Part II (Lines 28-34), not Part I. The passive activity rules still apply, but the reporting location is different.

State Tax Considerations

If your rental property is in a different state than your residence, you generally must file a non-resident state return in the property's state. This includes:

• Reporting rental income/loss to the property state
• Paying state income tax on income sourced to that state
• Claiming a credit for taxes paid to other states on your resident return (to avoid double taxation)

Example: Taylor and Morgan live in California but own a rental in Texas. Texas has no state income tax, so no non-resident return is needed. If the rental were in Oregon, they'd file an Oregon non-resident return and claim a credit on their California return.

When to Use Schedule C Instead of Schedule E

Report on Schedule C (not Schedule E) if:

• You're a real estate dealer (buying/selling as inventory)
• You provide substantial services to tenants (daily cleaning, meals, concierge — hotel-like)
• You're running a short-term rental business that looks more like a hotel than a rental

Consequences of Schedule C: Income is subject to self-employment tax (15.3% on first $168,600 in 2026, 2.9% thereafter). This is a significant cost — on $28,800, SE tax would be $4,406.

Most standard residential rentals (30+ day leases, no substantial services) belong on Schedule E.

Filing Timeline and Extensions

Pro tip: Filing an extension does NOT extend the payment deadline. Estimate your tax and pay by April 15 to avoid the failure-to-pay penalty (0.5%/month, up to 25% — IRC §6651(a)(2)) and interest (current rate ~8% — IRC §6621).

Final Checklist Before Filing

• All rental income reported (including non-1099 income)
• Expenses supported by receipts/records
• Depreciation calculated and Form 4562 attached
• De minimis safe harbor election statement attached
• Form 8582 completed (if reporting a loss)
• 1099-NEC issued to all contractors paid $600+
• Mileage log maintained for auto expenses
• Prior-year suspended passive losses carried forward correctly
• Cost basis and land allocation documented
• State non-resident returns filed (if applicable)

Getting Schedule E right isn't complicated — it just requires organization. Set up a system at the beginning of the year, categorize as you go, and filing becomes a straightforward data-entry exercise rather than a frantic shoebox-sorting session in April.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.

Related Articles

• [[Rental Property Depreciation](/blog/depreciation-real-estate-guide) Guide: How to Maximize Your Tax Deductions in 2026](/blog/depreciation-rental-property-guide)
• Property Taxes Explained: How They Work and How to Reduce Them
• [Complete Guide to [Rental Property Tax Deductions](/blog/rental-property-accounting-guide) for Landlords (2026)](/blog/rental-property-tax-deductions)