If you own rental properties, Schedule E (Supplemental Income and Loss) is one of the most important tax forms you'll file each year. Getting it right means maximizing your deductions, staying compliant with passive loss rules, and giving your CPA exactly what they need. This guide covers everything you need to know.
What Is Schedule E?
Schedule E is an IRS form attached to your personal tax return (Form 1040) that reports income and expenses from rental real estate, partnerships, S corporations, and trusts. For landlords, Part I of Schedule E covers rental properties — you report each property on a separate line, showing gross rents received, deductible expenses, and net income or loss.
If you own properties through LLCs taxed as partnerships, those flow through on Schedule K-1 instead — but the underlying data you need is the same.
Income to Report
All rental income is reportable, including:
- Monthly rent payments
- Late fees collected
- Pet fees and other recurring charges
- Lease termination payments from tenants
- Security deposits kept due to damage or non-payment (in the year they are kept)
- Services provided in lieu of rent (report fair market value)
Security deposits you hold and expect to return are NOT income. They become income only if you keep them — when a tenant forfeits their deposit, that's the tax year you report it.
Deductible Expenses
Schedule E allows you to deduct ordinary and necessary expenses for managing, maintaining, and preserving your rental property. Common deductible categories:
| Expense Category | Examples |
|---|---|
| Advertising | Zillow listings, signage, photography |
| Auto & Travel | Mileage to/from property (keep a log) |
| Cleaning & Maintenance | Turnover cleaning, lawn care, snow removal |
| Commissions | Leasing agent fees |
| Insurance | Landlord/dwelling policy premiums |
| Legal & Professional | Attorney fees, CPA, bookkeeping software |
| Management Fees | Property management company fees |
| Mortgage Interest | From Form 1098 issued by your lender |
| Property Taxes | Annual real estate taxes |
| Repairs | Fixing what's broken — not improvements |
| Supplies | Cleaning supplies, light bulbs, tools |
| Utilities | If you pay any utilities for the property |
| Depreciation | Building value spread over 27.5 years |
Repairs vs. Improvements: Know the Difference
This distinction trips up many landlords. A repair restores something to its original condition (patching a roof, fixing a broken window) and is fully deductible in the year paid. An improvement adds value, prolongs useful life, or adapts the property to a new use (new roof, added bathroom, HVAC replacement) — improvements must be capitalized and depreciated over time, not expensed immediately.
The IRS has safe harbor rules that allow certain improvements under $2,500 per invoice to be expensed rather than capitalized. Talk to your CPA about the De Minimis Safe Harbor election.
Depreciation: Your Biggest Non-Cash Deduction
Depreciation is often a landlord's single largest tax deduction — and it requires zero cash outlay. Residential rental property is depreciated over 27.5 years using the straight-line method. To calculate annual depreciation:
- Determine your cost basis (purchase price + closing costs + improvements)
- Subtract the land value (land is not depreciable — use the tax assessor's ratio as a guide)
- Divide by 27.5
A property with a $300,000 building basis generates roughly $10,909 in depreciation per year — a real tax deduction that reduces your taxable rental income, even in a cash-flow-positive year.
Passive Activity Loss Rules
Most landlords are considered "passive investors" under IRS rules. Passive losses (when expenses exceed income) generally can only offset passive income — not wages or business income. However, there are two important exceptions:
The $25,000 rental loss allowance: If your adjusted gross income (AGI) is under $100,000 and you actively participate in your rentals (make management decisions, approve tenants), you can deduct up to $25,000 in rental losses against ordinary income. This phases out between $100,000 and $150,000 AGI.
Real Estate Professional status: If you spend more than 750 hours per year in real estate activities and more than 50% of your working time is in real estate, losses become fully deductible against any income. This is a significant planning opportunity for active investors with a real estate professional spouse.
What Your Books Need to Produce at Tax Time
Your CPA needs one Schedule E per property (or per LLC). For each property, they need:
- Total rents received (all sources)
- Expense totals by category matching IRS Schedule E line items
- Mortgage interest amount (from Form 1098)
- Property tax amount paid
- Prior-year depreciation schedule and this year's addition
- Any capital improvements made during the year
BaseLedgerPro generates a Schedule E-ready P&L report per property, categorized to match IRS line items. Export it as a PDF and hand it to your CPA — no spreadsheet reconciliation required.
Keep records for at least 7 years after you sell a property. The depreciation you take now reduces your cost basis, which affects your capital gain calculation when you eventually sell.
Get Schedule E-ready books all year long.
BaseLedgerPro generates per-property P&L reports categorized to IRS Schedule E line items — so tax season is never a scramble.
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