The reporting of rental real estate income or loss can be a little more complicated, but is still fairly clear. Rental income can be reported using either the cash or accrual basis. The cash basis simply means that income is reported in the period in which you actually or constructively receive payment. The accrual basis means that income is reported in the period in which you have earned the income, even if you have not yet received payment.
The first step in completing Schedule E for rental real estate is to enter the location and description of the rental property. Next, you report the gross amount of rental income for each property. Then you list all of the deductions or expenses related to each property. From here you arrive at a net income or loss for each property.
Some of the most common deductions or expenses for rental real estate are real estate taxes, depreciation, management expenses, maintenance, mortgage interest, and insurance premiums. Depreciation is calculated on both the building and also any major appliances or furniture included in the rental of the property.
Any other expenses necessary for the upkeep and repair of the rental property would also be deductible. Some other expenses might include salaries and wages to janitors and maintenance employees, travel expenses to maintain the property, legal expenses, and costs related to cancelling a lease.
An important point to understand is the difference between a repair and a capital improvement. A repair would be expensed, and a capital improvement would be depreciated. The definition of a repair indicates that it merely keeps the property in adequate condition. However, an improvement either extends the life of the property, modifies the property for a new use, or adds to the value of the property.
Special rules apply if the taxpayer uses the rental property for personal use at any time during the year. Depending on the amount of time used for personal purposes, varying amounts of deductible expenses will be allowed.
Royalty income is also reported on Schedule E. Payments received for the use of copyrights and patents or for the use of mineral properties need to be reported, along with any related expenses.
If you need help with figuring out your income taxes, including which schedules you might need to file and which expenses are allowed as deductions, you are in the right place. Try out the CPA search feature on this website to find a qualified professional in your area to assist you with all your tax and accounting needs.