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Schedule E

Schedule E

Supplemental Income and Loss

Use Schedule E (Form 1040) to report income or loss from a rental real estate, royalties, partnerships, S corporations, Estates, Trusts And Residual Interests in REMIC’s (Real Estate Mortgage Investment Conduits).

Schedule E should not be used in following situations:

  • The taxpayer has Farm rental income and he received rental income based on crops or livestock produced by the tenant. For this income Form 4835 should be used
  • THE taxpayer is in the business of renting personal Property such as equipment or vehicles. For this income use schedule C.
  • The client is in the business as a self –employed, writer, inventor, and artist etc. then use schedule C or C-EZ to report income.

At Risk Rules:
The taxpayer must complete Form 6198 to figure the allowable loss If the taxpayer has:

  • A loss from an activity carried on as a trade or business or for the production of income, and
  • Amounts in activity for which you are not at risk.

The at risk rules generally limit the amount of loss (including loss on the disposition of assets)a person can claim to the amount that can be lost in the activity. For more details about At risk Rules, refer the instructions for Form 6198 and Publication 925.
 
If there is any other “supplemental Income” –such as Farm Rental, Partnership K-1 , S corporation K-1, and estate or trust K-1 information or is the client is real  Estate Professional, the package summaries the income or loss from rents and Royalties on schedule E pg-2 , before transferring those amounts to Form 1040.so the taxpayer should complete any of these forms if applicable before completing schedule E.

For definition of Real Estate Professional refer instructions of schedule E.

Passive Activity Loss Rules:

  • The passive activity loss rules may limit the amount of loss which the taxpayer can deduct. These rules apply to losses in Part- I, Part- II, And Part- III and line 40 of schedule E.
  • The taxpayer can deduct losses from passive activities only to the extent of income from Passive activities.
  • Losses from passive activities may be subject to the at risk rules. Losses deductible under the At the risk rules are then subject to the Passive activity loss rule.

What is A Passive Activity?
A passive activity is any business activity in which a person did not materially participate and any rental activity to which exceptions applies.
Examples of activities which are not considered as Passive activities are:

  • The rental of your home that the taxpayer also used for personal purposes is not a passive activity.
  • A working interest in an oil or gas well that you held directly or through an entity that sis not limit your liability is not a passive activity even if you did not materially participate.
  • Royalty income not derived in the ordinary course of a trade or business reported on schedule E generally is not considered income from a passive activity.

For details regarding material Participation refer Form 8582 instructions and for definition of Rental activity and its exceptions refer publication 925. 

Active Participation:
The taxpayer can meet the active participation requirement without regular, continuous and substantial involvement in real estate activities. But the taxpayer must participate in making management decisions like approving new tenants, deciding on rental terms, approving capital and repair expenditures and arranging for others to provide services  in a significant and bonafide sense.

But the taxpayer is not considered as actively participated if any time during the year his interest was less than 10% by value of all interests in the activity.

Part I – Income Or Loss From Rental Real Estate And Royalties:

Use part-I to report:

  • Income and expenses from rental real estate (Including personal property leased with real Estate) and
  • Royalty income and expenses.
  • If you own a part interest in a rental real estate property, report only your part of the income and expenses on Schedule E.

More than Three Rental Properties:
Use Schedule E, page 1, for the first three rental and/or royalty properties. If there are more than three, use Schedule E Duplicate for the next three. If there are more than six properties, make additional copies of Schedule E Duplicate. The package carries the totals from all copies of Schedule E Duplicate to Schedule E, line 26.

Line 1 – Type and Location of Properties:

  • For “TYPE” of each Property A, B or C Describe the kind of the property rented. For example: Townhouse. But if schedule K-1P/s is added in the list and royalty income is reported on schedule K-1P/S then for property C it is calculated entry and the user need not enter manually.
  • For “LOCATION” of each property enter the street, address, city or town and state. Do not give the zip code of the location of property.

Line 2 –Personal Use Of property
Check the appropriate checkbox “YES “or “No” for the type of property listed on line 1.

  • If you check the “YES” checkbox and the taxpayer rented the property for at least 15 days the expenses must be divided between rental use and personal use. Even the rental activity is not considered a passive activity for tax purposes if checkbox YES is checked.

For definition of personal use refer the instructions of schedule E.

  • If you check the “NO” checkbox all taxpayers expenses for the rental part of the property are deductible, subject to the at-risk rules and passive activity loss rules.
  • If the taxpayer rented the property for fewer than 15 days, the taxpayer does not report the rental income and does not deduct any rental expenses. The property is not to be listed on schedule E. If the taxpayer itemizes deductions on Schedule A , He or she can deduct allowable interest , taxes and casualty losses there.

For more details, refer publication 527 and instructions of schedule E.

Line 3: Rent Received
If you received rental income from real estate (including personal property leased with real estate) and you were not in the real estate business, enter on this line manually the amount received. Use a separate column (A, B or C) for each rental property to report rent received.

Form 1099-M: If the rental income was reported to the taxpayer in box-1 of Form 1099-Miscellenous, then add form 1099-M and enter manually on line 1 amount of rent received. The package will flow the amount from 1099-M on line 3 depending upon the property TYPE entered on Form 1099-M.This form is not E-filable.


Total column: This column represents total of line 3 column A, B & C and if schedule E Duplicate is added then value of all properties entered on line 3 of schedule E duplicate is entered on this column by the package itself.

Line 4 – Royalties Received

  • Enter on this line manually the amount received as royalty.
  • Enter on line 4 the gross amount of royalty income.
  • If the taxpayer is in business as a self-employed writer, artist etc. report royalty income and expenses on schedule C or C-EZ.
  • Use a separate column (A, B or C) for each rental property to report royalty received.

Form 1099-M: If the royalty income was reported to the taxpayer in box-2 of Form 1099-Miscellenous, then add form 1099-M and enter manually on line 2 amount of royalty received. The package will flow the amount from 1099-M on line 4 depending upon the property TYPE entered on Form 1099-M.This form is not E-filable.

Schedule K-1P/S: If schedule K-1P/S is added and royalty income line 7 is entered then the package will flow the line 7 amount on line 4 column C.

Total column: This column represents total of line 4 column A, B & C and if schedule E Duplicate is added then value of all properties entered on line 4 of schedule E duplicate is entered on this column by the package itself.

Below line 4:
Row-1: Location of property – State
Enter the postal code for the state in which the property is located if different from the persons state of residence for making flow the value to state return taking each property separately.

Row-2: Income from Royalty checkbox
Check the checkbox for royalties if the income reported on line 4 is from oil, gas or mineral properties, copy rights and patents.

Row-3: Enter T, S or J
Enter T for taxpayer, S for spouse, or J for jointly to determine the ownership of the property.

Row-4: Check to list interest /taxes on Schedule A
Check the checkbox of schedule A if you are reporting and claiming the taxes or interest paid for earning the royalty income on schedule A.

Row-5: Percent of time, year, property rented.
In case the property was rented  partly  for a particular year, expenses are allowed for part of portion that was rented and so here enter the ratio of time , year and percentage of property rented in numeric form. It is automatically adjusted in percentage.

Line 5 – Advertising
Enter here the expenses paid of advertisement for each property taken separately.

Line 6 –Auto and Travel

  • Enter on this line the ordinary and necessary auto and travel expenses related to rental activities, including 50% of meal expenses incurred while traveling away from home.
  • The Taxpayer generally can either deduct actual expenses or take the standard mileage rate.
  • The taxpayer must use actual expenses if he used more than 4 vehicles simultaneously in his rental activities (as in fleet operations).
  • If the taxpayer deduct actual auto expenses : then he should only include the rental activity portion of the cost of gasoline, oil, repairs, insurance, tyres etc.but exclude the auto rental or lease payments and depreciations. Include them on line 18 and line 20 respectively.
  • Refer publication 527 and publication 463 for details.

Line 7 – Cleaning and Maintenance
Enter on this line expenses incurred by taxpayer for cleaning and maintenance of each property.

Line 8 – Commissions
Enter on this line expenses incurred by taxpayer as commissions for each property.

Line 9 – Insurance
Enter the amount paid for insurance on each property. This may include hazard insurance, personal liability insurance, private mortgage insurance, and other special policies.
If a premium covers more than one year, deduct only the part that pertains to the tax year for this return.
The taxpayer cannot deduct credit life insurance, which pays off the mortgage if he dies.

Line 10 – Legal and professional services
Enter on this line fees for tax advice related to business only and for preparation of the tax forms related to the rental real estate or royalty properties.
Do not deduct legal fees paid or incurred to defend or protect title to property, to recover property, or to develop or improve property. Instead, the taxpayer must capitalize those fees and add them to the property’s basis.

Line 11 – Management Fees
Enter on this line expenses incurred by taxpayer as management fees for each property.

Line 12 –Mortgage Interest Paid to Banks etc.

  • Enter the amount of interest the paid in 2006 to banks or other financial institutions for each property.
  • In general, to determine the interest expense allocable to rental activities, the taxpayer must have records to show how the proceeds of each debt were used. Specific tracing rules apply for allocating debt proceeds and repayment. See IRS Pub. 535, Business Expenses, for details.
  • Do not deduct prepaid interest when the taxpayer paid it. The taxpayer can deduct it only in the year to which it is properly allocable. Points, including loan origination fees, charged only for the use of money must be deducted over the life of the loan.
  • Total column:
  • This column represents total of line 4 column A, B & C and if schedule E Duplicate is added then value of all properties entered on line 4 of schedule E duplicate is entered on this column by the package itself.
  • If below line 4 row-4 checkbox to report on schedule A is checked and row-5 percent– time, Year and property is entered for a particular property then in the total column the property for which the checkbox is checked and percentage entered then expense of such property is allowed only up to the percentage specified else all whole amount is deductible.

Line 13 – Other Interest

  • If the recipient of interest paid by the taxpayer was not a financial institution or the taxpayer did not receive a Form 1098 from the recipient, report the deductible interest on line 12 for each property.
  • If you and at least one other person (other than your spouse if you filed a joint return) were liable for and paid interest on the mortgage, and the other person received Form 1098, report your share of the deductible interest on line 13.

Line 14 – Repairs

  • Enter on this line the cost of repairs made to keep the property in good working condition. Repairs generally do not add significant value to the property or extend its life. Examples of repairs are fixing a broken lock or painting a room.
  • Improvements that increase the value of the property or extend its life, such as replacing a roof or renovating a kitchen, must be capitalized and depreciated (that is, they cannot be deducted in full in the year they are paid or incurred).

Line 15 -Supplies
Enter on this line the cost of supplies for maintenance, cleaning, and other needs for the year they are purchased.

Line 16 – Taxes
Enter on this line the taxes assessed on the property by local government, county, school district, or other taxing authority. The taxes are deductible in the year paid.
Assessments for improvements to the property are not deductible. You must add them to the cost of the land.
If below line 4 row-4 checkbox to report on schedule A is checked and row-5 percent– time, Year and property is entered for a particular property then  the Type of the property for which the checkbox is checked and percentage entered then expense of such property is allowed only up to the percentage specified else all whole amount is deductible. This gets reflected on the line 19.

Line 17 – Utilities
Enter on this line the cost of ordinary and necessary telephone calls related to the rental activities or royalty income (for example, calls to the renter). However, the base rate (including taxes and other charges) for local telephone service for the first telephone line into the taxpayer’s residence is a personal expense and is not deductible.

Line 18 – Other Expenses
Enter on this line the description of the type of the expense and the amount of expenses not deducted elsewhere.

Line 19 – Total Expenses
On this line total of line 5 to line 18 is done by the package.
Total column:
This column represents total of line 19 column A, B & C and if schedule E Duplicate is added then value of all properties entered on line 19 of schedule E duplicate is entered on this column by the package itself.

Note: If for line 12 and line 16 below line 4 row-4 checkbox to report on schedule A is checked and row-5 percent– time, Year and property is entered for a particular property then the Type of the property for which the checkbox is checked and percentage entered then expense of such property is allowed only up to the percentage specified else all whole amount is deductible. The allowable expense from line 12 and line 16 are added for calculation on this line.

Line 20 – Depreciation
Depreciation is the annual deduction the taxpayer must take to recover the costs or other basis of business or investment property having a useful life substantially beyond the tax year. Land is not depreciable.
Refer the instructions of Form 4562 to figure the amount of depreciation to enter on line 20.
Refer publication 527 for more information on depreciation of residential Rental property.
If the property is oil, gas, timber or mineral interests the taxpayer may be able to deduct the depletion expense. Refer publication 535.

Line 21: Total
On this line total of line 19 to line 20 is done by the package for each property.

Line 22 – Income or Loss from Rental Real Estate and Royalty properties

  • The package subtracts line 21 (total expense) from the sum of line 3 (rent income) and Line 4(royalty income) and enters the result here for each property.
  • If line 22 amounts is a loss, the deductible loss may be limited due to at risk rules or passive activity rules. Refer instructions of schedule E for at the risk rules and Passive activity loss rules.
  • If line 22 is a loss and such loss is due to activities for which you are not at risk then use Form 6198 to determine the deductible loss and file form 6198.

Line 23 –Deductible Rental real estate loss

  • Do not complete line 23 if the amount on line 22 is from Royalty properties.
  • If you have a rental real estate loss from a passive activity the amount of loss that may be deductible may be limited by the passive activity loss rules. The taxpayer may need to complete Form 8582 to figure the amount of loss, if any to enter on line 23.
  • If your rental real estate loss is not from a passive activity or you meet the exceptions for certain real estate activities, you need not complete Form 8582. Enter the loss from line 22 or line 23.

Line 24 – Income
Enter all the positive amounts from line 22 of this form plus all positive amounts from all copies of schedule E duplicate if schedule E Duplicate is added.

Line 25 - Losses
Enter all the Royalty losses from line 22 of this form, deductible rental real estate losses from line 23 of this form and royalty losses and deductible rental real estate losses from all copies of schedule E duplicate if schedule E duplicate is added.

Line 26 – Total Rental Real Estate and Royalty Income or (loss).
On line 26 outer sum of line 24 and line 25 is done by the package.
Enter on line 26 inner the non passive rental activity amount for EIC purposes.

Part II – Income or loss from Partnerships and S Corporations
If the taxpayer is member of a partnership or joint venture or a shareholder in an S corporation, use Part II to report the share of the partnership or S corporation income or loss.
The taxpayer should receive a Schedule K-1 from the partnership or S Corporation.
The package supports two K-1 worksheets:

  • K-1P/S for partners and shareholders in S corporation.
  • K-1ET for beneficiaries of estates and trusts.

You must add the K-1 worksheets from the form list and fill K-1 worksheets before completing schedule E pg-2.

Losses Not Allowed in Prior Years Due to the at-Risk or Basis limitations

  • Enter your prior year unallowed losses that are not deductible on a separate line in column(h) of line 28.Donot combine these losses with or net them against, any current year amounts from the partnership or S corporation.

Prior Year unallowed losses from a Passive activity not reported on Form 8582

  • Enter on a separate line in column (f) of line 28 your prior year unallowed losses not reported on Form 8582. Do not combine these losses with or net them against, any current year amounts from the partnership or S corporation.

Line 27 –Reporting of any loss not allowed in Prior Years
The taxpayer should manually check the checkbox yes on line 27 if He is reporting any of the Following items on Schedule E.

  • Unreimbursed Partnership expenses.
  • Loss of prior year which was not allowed in earlier years from a passive activity and for that loss form 8582 was not filed by the taxpayer.
  • Any loss which was not allowed in prior year due to the At –Risk Limitation.

If none of the above applies then check the NO checkbox.

Line 28 –Partnership Income or loss:

  • The package automatically completes line 28 column (a) to (e) if schedule K-1P/S is attached to schedule E.
  • On line 28 A, B, C, and D represents the instance of the forms (4 partnerships and S corporations) that are added (that is a particular form added once, twice, thrice etc.)On each of these lines information flows from the instance of the form that is added. Say, if schedule K-1P/s is added twice then Information from schedule K-1P/s-1 will flow on line A and from schedule K-1P/S – 2 will flow on line B.
  • If more than four schedules K-1P/S carrying information to this line, then the package will carry the total of the fourth and all other schedule K-1P/s to line D.
  • Moreover if schedule K-1P/S -1 is added and removed by the taxpayer but there exist schedule K-1P/S -2 then also Information  from schedule K-1P/S -2 will flow on line A and line B will be blank.

Line 29, Line 30, Line 31 – Column Totals:
On these lines totals of respective columns is done by the package.

Line 32 – Total Partnership & S corporations Profit or Loss
  On this line sum of line 30 and line 31 is done by the package.

Part III – Income or loss from Estates and Trusts
If the taxpayer is a beneficiary of an estate or trust, use Part III to report the share of the estate or trust income or loss. The taxpayer should receive a Schedule K-1 from the Estate or Trusts. The package supports two K-1 worksheets:

  • K-1P/S for partners and shareholders in S corporation.
  • K-1ET for beneficiaries of estates and trusts.

You must add the K-1 worksheets from the form list and fill K-1 worksheets before completing schedule E pg-2.

Estimated Tax payments from 1040 K-1’s:
The package by itself carries the amount of estimated tax credited to the taxpayer from line 14a of K-1E/T worksheet to this line 37 of schedule E pg-2 as well as gets added on Form 1040 pg-2, line 65 as income tax withheld.

Line 33 – Estates and Trusts Income or Loss

  • The package automatically completes line 33 column (a) to (e) if schedule K-1E/T is attached to schedule E.
  • On line 33 A and B represents the instance of the forms (2 Estates and Trusts) that are added (that is a particular form added once, twice, thrice etc.)On each of these lines information flows from the instance of the form that is added. Say, if schedule K-1E/T is added twice then Information from schedule K-1E/T-1 will Flow on line A and from schedule K-1E/T – 2 will flow on line B.
  • If more than two schedules K-1E/T carrying information to this line, then the package will carry the total of the second and all other schedule K-1E/T to line B.
  • Moreover if schedule K-1E/T-1 is added and removed by the taxpayer but there exist schedule K-1E/T -2 then also Information from schedule K-1E/T -2 will flow on line A and line B will be blank.

Line 34, Line 35, Line 36 – Column Totals:
On these lines totals of respective columns is done by the package.

Line 37 – Total Estates and Trusts Profit or Loss
  On this line sum of line 35 and line 36 is done by the package.

Part IV – Income or Loss from Real Estate Mortgage Investment Conduits (REMICs)

Line 38: REMIC Income or Loss
If the taxpayer is a holder of a residual interest in a REMIC, use Part –IV to report your total share of the REMIC’s Taxable Income or Loss for each Quarter included in your tax year. The taxpayer should also receive schedule Q (Form 1066) and instructions from the REMIC for each quarter.

  • On line 38(a) enter manually name of REMIC.
  • On line 38(b) enter the federal employer identification number of the REMIC.
  • On line 38©Enter the total of the amounts shown on schedule Q , line 2c.This is the smallest amount the taxpayer is allowed to report as taxable income on Form 1040 and as AMT (alternative Minimum Tax) taxable income on form 6251, line 28.
  • If the amount on line 38 © is larger than the client’s taxable income would otherwise be, enter the amount from column© on Form 1040 pg-2 line 43(taxable income) line.
  • If the amount in column©is larger than your AMTI (alternative Minimum Taxable Income) would otherwise be, enter the amount from column © on Form 6251 pg-1 Line 28.
  • On line 38(d) enter manually the amount of taxable income or net loss from Schedule Q, line 1b.
  • On line 38(e) enter the total amounts shown on schedule Q line 3b.If you are itemizing deductions on schedule A, Include this amount on form 1040 schedule A Line 22.

Line 39: Total REMIC Profit or Loss
 On this line sum of line 38(d) and line 36(e) is done by the package.

Part V – Summary
Line 40 – Net Farm Rental Income or Loss
The package transfers the amount of net farm rental income or loss from Form 4835 on this line. Here loss is entered as a positive amount by the package.

Line 41 – Total Income OR loss
On this line the package enters by itself sum of schedule E pg-1 Line 26 and schedule E pg-2 line 32, line 37, line 39, and line 40 above.

Line 42 – Reconciliation of Farming and Fishing Income

  • On this line value is transferred from Schedule K-1P/S line 14B (gross farming and fishing Income) and From Form 4835 line 7 (gross farm rental income).
  • The taxpayer will not be charged a penalty for underpayment of estimated tax if:
  • (1)The taxpayer gross farming or fishing income for 2005 or 2006 is at least 2/3 of his gross income.
    (2)The taxpayer should file 2006 tax return and pay the tax due by march 1 , 2007.

Line 43 – Net Rental Real Estate Income or Loss
On this line value flows from schedule E pg-1 And K-1P/S and K-1E/T worksheets from appropriate lines only if in that respective forms condition of real Estate Professional is indicated by taxpayer. For more details on real estate Professionals refer instructions for schedule E.

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