Schedule E has several parts, each of which is independent of the others. These parts include:
Part I, for rental and royalty activities;
Part II, for partnership and S Corporation income;
Part III, for income from estates and trusts;
Part IV, for income from real estate mortgage investment conduits (REMICs).
Part V, for farm rental income, certain income from real estate professionals, and a summary.
All of these items relate to investment activities.
The total income from each of these parts is then totaled at the bottom of Schedule E and carried to Form 1040 line 17.
If the vacation home rules apply, the activity is NOT passive. Income from this activity doesn't offset other passive loss. To see whether the vacation home rules apply, look at line 2f on the corresponding Rentals and Royalties Worksheet.
Rental and royalty income and expenses carry from the Rentals & Royalties Worksheet. You have to recalculate the tax return to make the carries occur.
If an activity has net income, the full amount of income will always carry to line 22A. In this case, line 23A, which is labeled "deductible rental loss," will always remain blank.
If a rental activity to which the vacation home rules don't apply has a net loss, the passive activity rules will apply. The result (which appears on line 23A) could be anything from full deductibility to no deductibility.
Royalties can be either passive or non-passive. Most royalties, other than those derived in the ordinary course of a trade or business, are NOT passive. For example, oil and gas, mineral, and copyright royalties all are generally NOT passive.
Such royalties are often reported to you on Schedule K-1 or Form 1099-Misc and should be entered on the program's versions of those forms. These royalties will carry to the Rentals & Royalties Worksheet, and from there to Schedule E.
To report other non-passive royalty income, you can use our Rentals & Royalties Worksheet directly. At the top of the form, put an "X" in the "Royalty." box.
If the royalty is derived in the course of a business (as, for example, a self-employed writer's, inventor's or artist's royalties might be) then you would report them on Schedule C or C-EZ, not on the Rentals & Royalties Worksheet.
To report passive royalty income, use Schedule C.
Line 16A on Schedule E is the sum of three lines concerning taxes on the Rentals & Royalties Worksheet: lines 7, 13 , and 14.
The loss will be fully deductible if all of the following apply:
The activity is rental real estate with active participation
Your total losses from all such real estate are $25,000 or less
Your modified adjusted gross income (see Form 8582 line 7) is $100,000 or less ($50,000 if you are married filing separately).
-or-
You have enough positive passive income from other activities (e.g., on your K-1's) to cover your real estate losses.
You'll get NO deduction if the rental activity is NOT rental real estate with active participation, and if you don't have any positive passive net income from other activities.
You'll also get NO deduction if your modified AGI (Form 8582 line 7 ) is $150,000 or above ($75,000 or above if married filing separately).
You'll also get NO deduction if you are married and filing separately, but lived with your spouse at any time during the year.
You'll get a partial deduction in all other cases. For example, you'll get a partial deduction if any of the following situations apply:
The property is rental real estate with active participation, but your losses exceed $25,000.
The property is rental real estate with active participation, but your modified AGI is between $100,000 and $150,000.
You have high rental losses (whether or not active participation real estate), but you also have some activities with net passive income.
Amounts on Schedule E carry from the Rentals & Royalties Worksheet for your first three rental activities. For additional rental activities, the numbers carry to Schedule E by way of the "Sch E Pt I Att." Worksheet. This attachment is a worksheet for you to file, formatted as requested by the IRS. Totals from the additional rentals worksheet are reflected in the fourth (right-most) column on page 1 of Schedule E.
If you have more than three rental or royalty activities, the phrase, "See worksheet attached" (abbreviated to fit on the form) will appear to the left of line 26. Otherwise, that space will remain blank.
The chart of partnerships and S Corporations is filled in based on your K-1 Worksheets. The net amounts that carry are shown in either the "passive" or "non-passive" columns as appropriate.
In carrying the amounts, we follow the following rules:
If you haven't X'd "all at risk" on the associated K-1 worksheet, we put an "X" under "some not at risk."
We carry the number amounts from column (4) of the chart of data carries, which is located near the bottom of the K-1 Worksheet.
To column (g), passive loss, we carry from data carries row a(1), if that number is less than zero, plus the amount on row c(1).
To column (h), passive income, we carry the amount from row a(1), if that number is not less than zero.
To column (i), nonpassive loss, we carry the amount from row a(2), if that number is less than zero.
To column (j), nonpassive Section 179 amount, we carry the amount from row c(2).
To column (k), nonpassive income, we carry the amount from row a(2), if that number is not less than zero.
We always carry the guaranteed payments amount directly from Schedule K-1, line 4 to column (k), and add them to the amount there.
Guaranteed payments made by a partnership are always treated as non-passive income.
Note: If a passive activity was completely disposed of in 2010 in a fully taxable transaction, and there was an overall loss on the disposition, then the activity's numbers will show up as "nonpassive" at the bottom of the K-1 worksheet, and will be carried to the "nonpassive" columns on Schedule E. There is an overall loss if the activity's current year income (or loss) minus carryforward loss, plus gain on disposition or minus loss on disposition, gives a number that is less than zero.
If you have more than five partnerships or S corporations, we fill in the "Sch E Pt II Att" worksheet for you. This worksheet may be submitted, and it is in the format requested by the IRS. Totals from that worksheet carry to Schedule E at lines 29a through 32 . In this case, the words "See attached" appear next to line 32. (Otherwise, this text entry remains blank.)
We carry line items from the K-1 (Est/Tr) to Schedule E for the first two estates or trusts. If you have more than two estates or trusts, we automatically fill out one or more "Sch E Part III Att" worksheets and add the totals for each to the totals displayed on Schedule E Part III (and the words "See Attached" will be printed next to line 37). Carries are made from the Passive Activities Worksheet at the bottom of the K-1 (Est/Tr) Worksheet.
We provide a mini-worksheet for you to combine REMIC information that is reported to you directly with REMIC information that is reported to you through partnerships.
The total of the amounts shown in Schedule(s) Q, line 2c is the smallest amount of taxable income you may report on Form 1040. If your taxable income would be less, this amount is carried to Form 1040 line 43 . This amount is not, however, included on Schedule E line 39.
If you're a farmer or a fisherman, you'll need to complete line 42 MANUALLY.
Real estate professionals who materially participated (under the passive activity loss rules) in rental real estate activities need to reconcile some of their net income or loss on Schedule E.
We provide a mini-worksheet for line 43. The amount on line 43 carries from column 6 of the Passive Activity Computation chart on those Rentals & Royalties Worksheets on which you indicated that you were a real estate professional.
If there are any amounts that we haven't included on line 43, you should include those amounts on line 43b.