IRS Schedule E “Supplemental Income and Loss” Explained

Schedule E (Form 1040), Supplemental Income and Loss, reports income and losses from rental real estate, royalties, partnerships, S corporations, estates and trusts. For many investors, it’s the most important schedule on the return after the 1040 itself.

Part I: Rental Real Estate and Royalties

For each rental property, report rents received and deductible expenses, such as:

• Mortgage interest (not limited by the $750,000 home mortgage cap) and property taxes
• Insurance, repairs, utilities, cleaning and maintenance
• Management fees, advertising, legal and professional fees
• Travel to manage the property, including vehicle expenses
• Depreciation of the building (27.5 years for residential, 39 years for commercial) and improvements, figured on Form 4562

Royalties from oil, gas and mineral interests, and from copyrights or patents, also go in Part I. Self-employed writers and inventors usually report royalties on Schedule C instead.

Personal Use and Short-Term Rentals

• If you rent a home for fewer than 15 days a year, the rent is tax-free and you don’t report it.
• If you use a rental property personally for more than the greater of 14 days or 10% of rented days, expenses are limited to rental income.
• Short-term rentals with an average stay of seven days or less generally aren’t treated as rental activities under the passive loss rules. If you provide substantial services, report them on Schedule C.

Parts II-IV: Pass-Through Income

Part II reports income and losses from partnership and S corporation Schedule K-1s. Part III covers estates and trusts, and Part IV covers REMICs. You must separate passive and nonpassive amounts, and you may need to attach basis and at-risk computations.

Passive Loss Rules

Rental activities are generally passive, so losses can only offset passive income. Exceptions:

• $25,000 special allowance: if you actively participate, you may deduct up to $25,000 of rental losses against other income. It phases out between $100,000 and $150,000 of modified AGI.
• Real estate professional: if you spend more than 750 hours and more than half your working time in real property businesses and materially participate, rental losses can be nonpassive.
• Suspended losses carry forward and are freed up when you sell the property in a taxable transaction.

When You Sell

Depreciation you took, or could have taken, is recaptured and taxed at up to 25% when you sell. The rest of the gain is a capital gain reported via Form 4797 and Schedule D. A Section 1031 exchange can defer the gain.

Real estate investors also may owe the 3.8% net investment income tax on rental income. See Schedule 2.

Get Help From Diehl CPA

Tax rules change often, and the right answer depends on your full financial picture. Diehl CPA, led by Mark Diehl, CPA, CFE, prepares returns and builds tax plans for investors, retirees and closely held businesses. Learn about our tax return preparation and investment tax planning services, or contact us to talk through your situation.

This article is general information, not tax or legal advice for your specific situation. Updated October 2026.