Schedule E is used by individual taxpayers to report income or losses from rental real estate as well as from partnerships, S-corporations and other pass-through entities where gains and losses "pass through" to partners or stockholders. These pass-through earnings must be reported on an individual's 1040 tax return.
Income or loss from rental real estate and royalties is reported on Part I of Schedule E. Expenses and operating costs are deducted from the rental receipts and other income to determine net gain or loss. This amount is carried forward to the taxpayer's 1040 tax return.
Part II of Schedule E is for reporting income and losses from partnerships and S Corporations. After deducting expenses from income, the company's net earnings pass through to its shareholders or partners. The profit or loss is reported by the company on Schedule K-1, which is mailed annually to each partner or shareholder.
Income and losses from estates and trusts are reported on Form 1041 K-1 and the taxpayer receiving this form carries the amounts forward to Part III of Schedule E. As with Part II, passive income is separated from non-passive income. Passive income is income generated without the taxpayer's active or material participation in the activity producing the income.
Income and losses from Real Estate Mortgage Investment Conduits or REMICs are reported on Part IV of Schedule E. Individual taxpayers who have invested in "bundles" of mortgages report their income here.
The final section of Schedule E is a summary of earnings and losses reported on this form. This section includes calculating farm rental income and allows real estate professionals to determine the amount that will "pass through" to the taxpayer's 1040 tax return.