If you receive income from rental properties, royalties, partnerships or S corporations, estates or trusts or other supplemental sources, you have to file a Schedule E worksheet to show income and expenses. You must file a separate Schedule E for every entity. Completing the Schedule E worksheet determines the gain or loss to report on your Form 1040.
You must "materially participate" in a rental property, limited liability company, S corporation or other supplemental income activity to claim any expenses. You don't have to change light bulbs in a rental unit, but you must be "involved in its operations on a regular, continuous and substantial basis," according to the Internal Revenue Service.
Limit on Usage
Your deduction for expenses on rental property is limited by your personal use of it. Use it personally more than 14 days a year and it's not a full-time rental. If you rent a vacation house for six months, but occupy it the other six months, your deduction for such things as real estate taxes, mortgage interest and maintenance is limited to the amount of your use. If it's half the year, you can claim only half the expenses.
Repairs and Improvements
Repairs necessary to maintain the property or expenses required to keep a business operating are deductible expenses, but improvements are not. You can claim repairs on a roof, but not an addition to a house. You can claim part of your expense for telephone or Internet service used for business, but not the cost of a new desk or computer.
Losses are limited by "at-risk" and "passive activity" rules. "At risk" limits your claim for a loss to the percentage of your income that was at risk with the property or business. If you run a sideline business at home, you're limited to the investment you have at risk with it. Most real estate holdings are passive activities, and you can't use those losses to offset income from other activities in most cases.
Partnership or Corporation
If your Schedule E income is from a partnership, S corporation, estate or trust, your expenses and deductions are limited to the extent of your participation. If you're a 50 percent owner of an S corporation, for instance, you can claim only 50 percent of expenses. Estate and trust expenses are allocated by the share; you're limited to your share of the total.
There is a special allowance in some cases, limited by income. You can claim a $25,000 deduction for a passive activity loss, such as on a real estate investment, if your taxable income is under $100,000. You're limited to the actual amount of loss. Go over $100,000 in taxable income and the allowance drops, ending when income reaches $150,000. It's half those limits for single taxpayers.
- "If I Received a 1099-MISC, Which Tax Forms Do I Need to Fill Out?"
- Tax Deduction for Temporary Housing Out-Of-State
- Do You Need to Claim Income Earned From Renting Out a Room in Your Home in the United States?
- Tax Laws on Computer Expenses & Deductions
- Isn't It a Tax Write-Off if I Am Renting My House for Less Than My Mortgage Payment?
- How to Determine Business Activity Code for Schedule C