Rental Real Estate

If you rented out residential or commercial real estate during the year, you will normally report your income and expenses from this activity on Part I of Schedule E, Supplemental Income and Loss.

Schedule E has space for up to three different real estate or royalty properties. Line 1 asks you to identify the type of property (such as "apartment building," "store," etc.) and the street address. You should also show your percentage of ownership in the property, if you (and your spouse, if filing jointly) own less than 100 percent. If you own, say, half of the property with another owner, you would report half of the income and half of the expenses on your tax return, regardless of which of you actually received the check for the income or paid the expenses out of pocket.

Warning Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax— Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you. Also, consider that the IRS has issued new depreciation regulations that generally apply to tax years beginning on or after January 1, 2014. But, for 2012 and 2013, it also provided taxpayers with the ability to elect certain regulations. The best choice for each taxpayer depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you and your business.

For each property, you are asked to answer "yes" or "no" to the question of whether you or your family used it for more than the greater of 14 days or 10 percent of the total days rented. See the discussion on vacation homes that explains how to make the count.

Income and expenses for each property are reported separately in columns A, B, and C, and the totals from all properties combined are entered in the "totals" column. If you have more than three properties, use as many copies of Schedule E as you need. Just be sure to fill out the "totals" column on only one of the copies, which will become the "master."

Schedule E is not used to report farm rental income if the rent is paid in the form of a percentage of the crops or livestock produced on the farm. In that case, you must use Form 4835, Farm Rental Income and Expenses, instead. But if the farm rent is paid in terms of a flat fee, use Schedule E.

Also, if you provide a large number of services to tenants in a residential property, you may have to treat your activity as being more akin to running a hotel (reported on Schedule C) than investing in real estate. The IRS says that providing maid service to tenants can transform your activity into a business, not a Schedule E rental. However, providing occasional cleaning or concierge services would probably not be sufficient to change the nature of your activity.

For more details on how to handle rental real estate on your tax return, check out the following:

• rental real estate income
• rental property expenses
• gains and losses from rental activities
• sale of rental real estate

Planning Tools You can download Schedule E and Schedule C to aid in your financial planning.