If you rent out buildings, rooms, or apartments, and provide only
heat and light, trash collection, etc., you normally report your
rental income and expenses in Part I of Schedule E (Form 1040).
However, do not use that schedule to report a not-for-profit activity.
See Not Rented For Profit under Rental Expenses,
earlier.
If you provide significant services that are primarily for your
tenant's convenience, such as regular cleaning, changing linen, or
maid service, you report your rental income and expenses on Schedule C
(Form 1040), Profit or Loss From Business or Schedule
C-EZ, Net Profit From Business. Significant services
do not include the furnishing of heat and light, cleaning of public
areas, trash collection, etc. For information, see Publication 334,
Tax Guide for Small Business (For Individuals Who Use Schedule C
or C-EZ). You also may have to pay self-employment tax on
your rental income. See Publication 533,
Self-Employment
Tax.
Schedule E (Form 1040)
Use Part I of Schedule E (Form 1040) to report your rental income
and expenses. List your total income, expenses, and depreciation for
each rental property. Be sure to answer the question on line 2.
If you have more than three rental or royalty properties, complete
and attach as many Schedules E as are needed to list the properties.
Complete lines 1 and 2 for each property. However, fill in the
"Totals" column on only one Schedule E. The figures in the
"Totals" column on that Schedule E should be the combined totals
of all Schedules E.
Page 2 of Schedule E is used to report income or loss from
partnerships, S corporations, estates, trusts, and real estate
mortgage investment conduits. If you need to use page 2 of Schedule E,
use page 2 of the same Schedule E you used to enter the combined
totals in Part I.
On page 1, line 20 of Schedule E, enter the depreciation you are
claiming. You must complete and attach Form 4562 for rental activities
only if you are claiming:
- Depreciation on property placed in service during
2000,
- Depreciation on any property that is listed property (such
as a car), regardless of when it was placed in service, or
- Any car expenses (actual or the standard mileage
rate).
Otherwise, figure your depreciation on your own worksheet. You
do not have to attach these computations to your return.
Illustrated Example
In January, Eileen Johnson bought a condominium apartment to live
in. Instead of selling the house she had been living in, she decided
to change it to rental property. Eileen selected a tenant and started
renting the house on February 1. Eileen charges $550 a month for rent
and collects it herself. Eileen received a $550 security deposit from
her tenant. Because she plans to return it to her tenant at the end of
the lease, she does not include it in her income. Her house expenses
for the year are as follows:
| Mortgage interest |
$1,800 |
| Fire insurance (1-year policy) |
100 |
| Miscellaneous repairs (after renting) |
297 |
| Real estate taxes imposed and paid |
800 |
Eileen must divide the real estate taxes, mortgage interest, and
fire insurance between the personal use of the property and the rental
use of the property. She can deduct eleven-twelfths of these expenses
as rental expenses. She can include the balance of the allowable taxes
and mortgage interest on Schedule A (Form 1040) if she itemizes. She
cannot deduct the balance of the fire insurance because it is a
personal expense.
Eileen bought this house in 1979 for $35,000. Her property tax was
based on assessed values of $10,000 for the land and $25,000 for the
house. Before changing it to rental property, Eileen added several
improvements to the house. She figures her adjusted basis as follows:
| Improvement |
Cost |
| House |
$25,000 |
| Remodeled kitchen |
4,200 |
| Recreation room |
5,800 |
| New roof |
1,600 |
| Patio and deck |
2,400 |
| Adjusted basis |
$39,000 |
On February 1, when Eileen changed her house to rental property,
the property had a fair market value of $92,000. Of this amount,
$20,000 was for the land and $72,000 was for the house.
Because Eileen's adjusted basis is less than the fair market value
on the date of the change, Eileen uses $39,000 as her basis for
depreciation.
Because the house is residential rental property, she must use the
straight line method of depreciation using either the GDS recovery
period or the ADS recovery period. She chooses the GDS recovery period
of 27.5 years.
She uses Table 4-D to find her depreciation
percentage. Because she placed the property in service in February,
she finds the percentage to be 3.182%.
On April 1, Eileen bought a new dishwasher for the rental property
at a cost of $425. The dishwasher is personal property used in a
rental real estate activity, which has a 5-year recovery period. She
uses the percentage under "Half-year convention" in Table
4-A to figure her depreciation deduction for the
dishwasher.
On May 1, Eileen paid $2,000 to have a furnace installed in the
house. The furnace is residential rental property. Because she placed
the property in service in May, she finds the percentage from
Table 4-D to be 2.273%.
Eileen figures her net rental income or loss for the house as
follows:
| Total rental income received
($550 x 11) |
| $6,050 |
| Minus: Expenses |
| Mortgage interest ($1,800 x 11/12) |
$1,650 |
| Fire insurance ($100 x 11/12) |
92 |
| Miscellaneous repairs |
297 |
| Real estate taxes ($800 x 11/12) |
733 |
| Total expenses |
| 2,772 |
| Balance |
| $3,278 |
| Minus: Depreciation |
| House ($39,000 x 3.182%) |
$1,241 |
| Dishwasher ($425 x 20%) |
85 |
| Furnace ($2,000 x 2.273%) |
45 |
| Total depreciation |
| 1,371 |
| Net rental gain for house |
| $1,907 |
Eileen uses Part I of Schedule E (Form 1040) to report her rental
income and expenses. She enters her income, expenses, and depreciation
for the house in the column for Property A. She uses Form 4562 to
figure and report her depreciation. Eileen's Schedule E (Form 1040)
and Form 4562 are shown next.
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