If you rent a home for more than 14 days during the year, you must report the money you receive on Schedule E and file the form with your 1040 income tax return. This applies whether you rent part of your own home out or rent a separate property. You’ll report your gross rent income and your eligible expenses on Schedule E to arrive at your net income amount. Your net rental income is the amount you’ll be taxed on -- not the gross amount you receive monthly. However, if you have a loss from your activities, you may not deduct losses in excess of $25,000 unless you are a real estate professional.
Obtain IRS Schedule E from the irs.gov website. If you use tax preparation software, search for Schedule E in the topic search area or navigate to the section regarding rental income.
Calculate the rent amount you receive each month during the year that is paid by credit card or other third-party payment channel, such as PayPal or Google Checkout. Enter the sum on Schedule E, Part 1, line 3a.
Calculate the rent you receive during the year that is paid by cash or check. Enter the sum on Schedule E, Part 1, line 3b.
Add the amounts shown on line 3a and 3b and enter the total on line 4. This is your total gross rental income for the year.
Complete lines 5 through 19 of Schedule E to report your expenses for keeping up the rental property. You may not deduct your principal mortgage loan expense for the rental, but you can deduct mortgage interest and recover the cost of your property through depreciation. Your eligible expenses may be limited depending on whether you personally used the property during the year. In this case, it may be necessary for you to allocate the rental expenses between rental use and personal use. You may only deduct the expenses that are directly associated with the rental use of your property on Schedule E. The instructions for Schedule E contain information on allocating rental expenses against personal use if this scenario applies to you.
Enter your total expense from lines 5 through 19 on line 20.
Subtract line 20 from line 4. If the result is positive, enter the result on Schedule E, line 24. If the amount is negative, you have a loss. Enter losses on line 25, but do not enter a loss greater than $25,000 if you are not a real estate professional who actively and routinely participates in real estate activities for more than 750 hours during the year. Enter your combined net income or loss on Schedule E, line 26.
Enter the amount on Schedule E, line 26 on Form 1040, line 17. This is your rental income subject to income tax.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.