When you are a landlord, you are required to report your income to the IRS at tax time. If you are taxed as a sole proprietor, you will either complete Schedule C or Schedule E. The services you offer to your tenants will dictate which schedule you need to complete.
What is Schedule C?
Schedule C, according to the IRS, is a form for reporting your business profit or loss if you are taxed as a sole proprietor. They explain that you would use Schedule C along with your 1040 if your primary purpose in the business is to gain income and if you are involved in the work of the business regularly.
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Schedule C allows you to report your business's profits, whether you are selling homemade quilts at a craft fair or renting a guest house on your property. You can deduct business expenses, like the cost of internet or phone, office supplies, travel cost and the cost of your home office, provided all of these expenses relate directly to your business dealings.
Essentially, you first list your profits, then deduct your expenses and the schedule guides you through the calculations to determine your net profit. This is then transferred to your 1040. Follow all current instructions or consult a tax professional for up-to-date information come tax time, however.
What is Schedule E?
The IRS explains that Schedule E is specifically for reporting rental income or losses pursuant to real estate. You can also use it for reporting the same in relation to royalties, partnerships, S corporations, estates, trusts and residual interests in real estate mortgage investment conduits (REMICs). If you are unsure whether you should be using Schedule C or Schedule E, you can consult your tax professional.
Schedule E requests information like the physical address of each property you rent out, the fair rental days versus personal use days for each, the type of property for each and the rents and royalties received. You will also be given the opportunity to deduct all of your expenses from your income.
If you fall into any of the categories listed above, like needing to report partnerships, estates or residual interests, you can also list that information on Schedule E. The information from Schedule E will then be transferred to your 1040. Again, check with your accountant to determine how to complete this process.
Schedule C vs. Schedule E
If you are not taxed as a sole proprietor, you would not report your rental income on either Schedule C or E. The information would instead be reported on your business's tax return.
When you provide what are classified as basic services to your tenants and you are a sole proprietor, you should use Schedule E. The IRS considers basic services to be things like a place to live, trash collection or general maintenance. Recall that Schedule E does allow you the option to report the expenses you are responsible for related to these services (like how much it costs you to get trash collected on behalf of your tenants or what their heating bills cost).
If, however, you offer more services to tenants, like housekeeping, dry cleaning, meals or maid services, you will need to report your rental income on Schedule C. This is the main difference between Schedule C and E. This is less applicable to most landlords and is more relevant to those running a hotel, boarding house, bed and breakfast or sometimes a rental like an Airbnb or VRBO. Again, if you have questions or it is not exceptionally clear to you which schedule you should complete come tax time, your best bet is to consult a tax professional.