If you find yourself asking, "Do I need to file an IRS Schedule E?" the answer is this: maybe. Many of us will never need to fill one out, but others will, particularly landlords or those who invest in partnerships.
IRS Schedule E is used by taxpayers preparing their returns to report income or losses from rental properties, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits, or REMICs. Let's review some of those situations in a bit more detail.
If you own a residential or commercial building -- and even if you just rent out a room in your own home -- you'll collect rental income from one or more tenants. This income should be reported on Schedule E.
There's an important distinction to note here between active and passive income. Active income results from work you perform in some capacity, such as if you hold a salaried job or are employed as a contractor. Passive income comes to you without your exerting much effort, such as via interest from bank accounts or bonds, dividend income from stocks, and (you guessed it) rental income.
There's a point at which your rental income might no longer qualify for Schedule E, and that's if it is no longer considered passive -- if you're considered a "real estate professional" in the eyes of the IRS. If that's the case, it's because the rental income is coming from an activity (renting property) that is your main livelihood, not just an investment on the side.
Per the IRS, to qualify as a real estate professional, you must meet both of the following criteria in the tax year at issue:
- "More than half of the personal services you performed in trades or businesses during the year were performed in real property trades or businesses in which you materially participated," and
- "You performed more than 750 hours of services during the year in real property trades or businesses in which you materially participated."
(Married couples that file jointly must have at least one spouse meeting both conditions.)
So if you spend most of your working time overseeing and maintaining rental properties, you're probably a self-employed real estate professional, in which case your rental income is active. In that case, you'll use Schedule C to report that income.
Partnerships: Surprise -- you might be in one!
Another example of when you would need to file an IRS Schedule E form is if you're invested in a partnership or S corporation. Don't assume you're not, because many investors can be caught unaware. You might, for example, assume that all of the investments in your stock portfolio are regular common stocks, but some could be shares (or "units") of partnerships or S corporations – such as master limited partnerships, or MLPs. Two examples of MLPs are ONEOK Partners and Alliance Resource Partners, and there are scores more. (They're often tied to the energy sector.)
Such investments will typically send you a Schedule K-1 form around tax time (if they don't, you'll want to obtain one from them via their website or a phone call. The Schedule K-1 will report your share of the business's income, losses, and deductions, and you'll need that info when filling out your tax return, including Schedule E. Note that you're taxed on this income, if there is any, whether you receive it or not. Your ownership means you have a taxable stake in the business.
What to do
It's not the end of the world if you need to include IRS Schedule E with your tax return, but it will complicate your tax return preparation. Tax-prep software or a savvy accountant can make your life easier in that department.