What is Schedule E?
Schedule E is one of the tax forms to file with 1040 which is the individual tax return form. If you are a real estate investor and consider the rent income as your passive income, Schedule E is the correct tax form to file for your individual tax return.
Original IRS guidances are here :
Schedule E is to report income or loss from
- Rental real estate,
- S corporations,
- and residual interests in REMICs.
What would you do if you have set up LLC for your property?
It is always great to set up a LLC to manage your real estate properties. Once you set up a LLC and prepare all the documents with your vendors and tenants in the name of the LLC, you will be legally protected for most of the cases unless you commit a fraud. How about the tax point of view then? If you co-own the properties with some partners, you will have to prepare Schedule K-1 to recognize the profit or loss as much as your interest in your company.
In most cases, a single-member domestic LLC is not treated as a separate entity for federal income tax purposes. If you are the sole member of a domestic LLC, you may file Schedule E (or Schedule C, C-EZ, or F, if applicable). However, you can elect to treat a domestic LLC as a corporation. If you like to go deep about the election, please see Form 8832 for details on the election and the tax treatment of a foreign LLC.
What do you have to do?
The most important key in order to properly file Schedule E for your real estate properties is the proper bookkeeping of income and expenses for those properties.
Income is simply rent you receive from Tenants. If some of your tenants miss the deal line for the monthly rent, you can charge late fee on the rent. You also recognize the late fee as income which is “Rents received” in Schedule E.
Expenses are the expenses that incurred purely for your real estate business purpose. All of your expenses have to be categorized into one of these 15 expense categories :
- Auto and travel
- Cleaning and maintenance
- Legal and other professional fees
- Management fees
- Mortgage interest paid to banks, etc.
- Other interest
- Depreciation expense or depletion
Accuracy is the most important factor here. Of course you can manually bookkeep your income and expenses in spreadsheet like Excel but remember that you have to prepare the set of income and expenses separately for each property. If you have two properties, you have to enter your income and expenses separately for each property in Schedule E.
Do you need a tax accountant for Schedule E?
The answer is…. sorry… yes and no….
It is “Yes” because there is a chance you could make mistakes so it is always good to have some professionals to review. Or if you have multiple properties,
It is “No”, if you actually read the instruction of Schedule E yourself and you are absolutely confident. You can simply use services like Turbotax or H&R block online tax filing softwares and file your tax return.
I used a tax accountant to file the first year of tax return and started using online softwares to file tax return going forward.
Bookkeeping can be tedious , yes. However, it is not so difficult to do. Understanding the basics of Schedule E above will be sufficient for you to manage your properties well. Just remember
- Keep your any documents including small receipts
- Categorize each of your expenses into 1 of 15 expenses
- Send the data to your accountant or use Turbotax or H&R block online to file your schedule E.
Happy managing your properties!