If you rent buildings, rooms, or apartments, and provide only heat and light, trash collection, etc., you normally report your rental income and
expenses in Part I of Schedule E (Form 1040). However, do not use that schedule to report a not-for-profit activity. See Not Rented For
Profit under Rental Expenses, earlier.
If you provide significant services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service,
you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business or Schedule C-EZ, Net Profit
From Business. Significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. For
information, see Publication 334,
Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). You also may have to pay
self-employment tax on your rental income. See Publication 533,
Schedule E (Form 1040)
Use Part I of Schedule E (Form 1040) to report your rental income and expenses. List your total income, expenses, and depreciation for each rental
property. Be sure to answer the question on line 2.
If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Complete
lines 1 and 2 for each property. However, fill in the "Totals" column on only one Schedule E. The figures in the "Totals" column on that
Schedule E should be the combined totals of all Schedules E.
Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment
conduits. If you need to use page 2 of Schedule E, use page 2 of the same Schedule E you used to enter the combined totals in Part I.
On page 1, line 20 of Schedule E, enter the depreciation you are claiming. You must complete and attach Form 4562 for rental activities only if you
- Depreciation on property placed in service during 2001,
- Depreciation on any property that is listed property (such as a car), regardless of when it was placed in service, or
- Any car expenses (actual or the standard mileage rate).
Otherwise, figure your depreciation on your own worksheet. You do not have to attach these computations to your return.
In January, Eileen Johnson bought a condominium apartment to live in. Instead of selling the house she had been living in, she decided to change it
to rental property. Eileen selected a tenant and started renting the house on February 1. Eileen charges $550 a month for rent and collects it
herself. Eileen received a $550 security deposit from her tenant. Because she plans to return it to her tenant at the end of the lease, she does not
include it in her income. Her house expenses for the year are as follows:
|Fire insurance (1-year policy)
|Miscellaneous repairs (after renting)
|Real estate taxes imposed and paid
Eileen must divide the real estate taxes, mortgage interest, and fire insurance between the personal use of the property and the rental use of the
property. She can deduct eleven-twelfths of these expenses as rental expenses. She can include the balance of the allowable taxes and mortgage
interest on Schedule A (Form 1040) if she itemizes. She cannot deduct the balance of the fire insurance because it is a personal expense.
Eileen bought this house in 1979 for $35,000. Her property tax was based on assessed values of $10,000 for the land and $25,000 for the house.
Before changing it to rental property, Eileen added several improvements to the house. She figures her adjusted basis as follows:
|Patio and deck
On February 1, when Eileen changed her house to rental property, the property had a fair market value of $92,000. Of this amount, $20,000 was for
the land and $72,000 was for the house.
Because Eileen's adjusted basis is less than the fair market value on the date of the change, Eileen uses $39,000 as her basis for depreciation.
Because the house is residential rental property, she must use the straight line method of depreciation using either the GDS recovery period or the
ADS recovery period. She chooses the GDS recovery period of 27.5 years.
She uses Table 4-D to find her depreciation percentage. Because she placed the property in service in February, she finds the
percentage to be 3.182%.
On April 1, Eileen bought a new dishwasher for the rental property at a cost of $425. The dishwasher is personal property used in a rental real
estate activity, which has a 5-year recovery period. She uses the percentage under "Half-year convention" in Table 4-A to figure
her depreciation deduction for the dishwasher.
On May 1, Eileen paid $2,000 to have a furnace installed in the house. The furnace is residential rental property. Because she placed the property
in service in May, she finds the percentage from Table 4-D to be 2.273%.
Eileen figures her net rental income or loss for the house as follows:
|Total rental income received
($550 × 11)
|Mortgage interest ($1,800 × 11/12)
|Fire insurance ($100 × 11/12)
|Real estate taxes ($800 × 11/12)
|House ($39,000 × 3.182%)
|Dishwasher ($425 × 20%)
|Furnace ($2,000 × 2.273%)
|Net rental income for house
Eileen uses Part I of Schedule E (Form 1040) to report her rental income and expenses. She enters her income, expenses, and depreciation for the
house in the column for Property A. She uses Form 4562 to figure and report her depreciation. Eileen's Schedule E (Form 1040) is shown next. Her Form
4562 is not shown. See Publication 946
for information on how to prepare Form 4562.
Johnson Schedule E (Form 1040)