Schedule E Explained: Rental Income, Expenses and Depreciation

Updated September 7, 2026, against the IRS Schedule E instructions, Publication 527 and Publication 946. This guide covers reporting a rental you own and operate; selling a rental is a separate topic. If you would rather have the return prepared, see rental property tax preparation.

The short answer: Schedule E is the form attached to your Form 1040 that reports rental income and expenses, one column per property. You list the rent you received, subtract the expenses of owning and operating the property, deduct depreciation on the building, and the net result flows to your return. Rental income is not subject to self-employment tax, but a net loss is usually “passive” and can only be deducted against other income up to a limit that depends on your income and how involved you are. The categories below follow the lines of the form, so you can organize your records the way the IRS reads them.

Who files Schedule E, and who does not

Schedule E, Part I, is for individuals who rent out real estate they own directly or through a single-member LLC: a house, a condo, an apartment building, a room in your home, land, or a commercial space. It is also used when you rent personal property along with real estate. It is not the right form when the rental is really a business with substantial services, such as a hotel, a bed-and-breakfast, or a short-term rental where you provide meals, cleaning during the stay or concierge services; those go on Schedule C and are subject to self-employment tax. A rental held in a partnership or a multi-member LLC is reported on the partnership’s Form 1065 and reaches you on a K-1, which is then entered in Part II of your Schedule E.

Rental income: what counts

Line 3 of Schedule E is total rents received during the year, on the cash basis for nearly all individual landlords. Rent is income when you receive it, not when it is due, and it includes more than the monthly check:

• Advance rent is income in the year you receive it, even if it covers a later year. First-and-last-month arrangements put the last month’s rent in income at the start of the lease.
• Security deposits are not income when received if you intend to return them. They become income in the year you keep any part of them (for damage or unpaid rent), and the corresponding repair is a deduction in that year.
• Expenses paid by the tenant on your behalf, such as a utility bill or a repair the tenant covered and deducted from rent, are income to you, and you deduct the expense separately.
• Services in place of rent are income at their fair market value: a tenant who paints the building in exchange for a month’s rent produces both rental income and a deductible repair.
• Lease cancellation payments from a tenant are rent.
• Insurance proceeds for lost rent are rent; proceeds for property damage are handled through the casualty rules.

For 2026, a tenant who is a business and pays you $2,000 or more in rent during the year should send you a Form 1099-MISC; the income is reportable whether or not the form arrives.

Deductible expenses, line by line

Schedule E lists expense categories on lines 5 through 19, with line 20 for the total. Keeping your records in these categories makes the return mechanical.

Mortgage interest, taxes and insurance

These three are usually the largest recurring deductions. Only the interest portion of the mortgage payment is deductible; principal is not an expense (you recover it through depreciation). Points paid to obtain a rental mortgage are deducted over the life of the loan, not in the year paid. Property tax is deductible in full on Schedule E without the state-and-local-tax cap that applies to your personal home. Prepaid insurance covering more than the current year is deducted as it is used.

Management, utilities and professional fees

Fees to a property manager are deductible when paid, including the leasing fee for placing a tenant. Utilities you pay as landlord are deductible; utilities the tenant pays directly are neither your income nor your expense. Tax-preparation fees are deductible to the extent they relate to the rental schedule, which is a reason to have the preparer itemize the invoice.

Travel and vehicle

Local trips to the property, to the hardware store for the rental, or to meet a tenant or contractor are deductible at the standard mileage rate (70 cents per mile for 2025; 72.5 cents for 2026) or at actual vehicle costs, with a contemporaneous mileage log either way. Travel to a rental in another city is deductible when the main purpose of the trip is managing or maintaining the property, with the usual limits on meals and the requirement that the trip be primarily for the rental rather than a vacation with a walk-through attached.

Repairs versus improvements

This is the distinction that decides whether a cost is deducted this year or spread over 27.5 years, and it is the one the IRS examines most. A repair keeps the property in its ordinary efficient operating condition: patching a roof leak, replacing a broken window pane, fixing a water heater, repainting a unit. An improvement betters the property, restores it after it has deteriorated, or adapts it to a new use: replacing the whole roof, a new HVAC system, a kitchen remodel, converting a garage to a unit. Improvements are capitalized and depreciated.

Three safe harbors let smaller items be expensed even when they might otherwise be improvements:

• De minimis safe harbor: items costing $2,500 or less per invoice or item (with an election attached to the return) can be expensed. A $1,900 refrigerator or a $2,400 water heater qualifies; a $6,000 HVAC unit does not.
• Small taxpayer safe harbor: for a building with an unadjusted basis of $1 million or less, if the year’s total repairs, maintenance and improvements on it do not exceed the lesser of $10,000 or 2% of the building’s basis, all of it can be expensed. A $400,000 duplex can expense up to $8,000 of such work in a year under this rule.
• Routine maintenance safe harbor: recurring work you expect to do more than once over ten years to keep the building in operating condition, such as periodic repainting or servicing systems, is a deductible expense.

Keep the invoices for anything that could be argued either way, and have the contractor describe the work accurately; “roof repair” and “roof replacement” lead to different treatment.

Depreciation: the basics

Depreciation is the deduction for the wearing out of the building itself, taken every year whether or not you claim it, which is why skipping it is a mistake: when you sell, the IRS treats depreciation as taken even if it was not. The mechanics for a residential rental:

• The basis is what you paid for the property plus closing costs that are capitalized (title, recording, transfer taxes, legal fees on purchase), plus improvements. If you converted your home to a rental, the basis is the lower of your adjusted basis or fair market value on the conversion date.
• Land is not depreciated. The purchase price is split between land and building, usually using the assessor’s ratio, an appraisal, or the purchase contract allocation. Only the building portion (and later improvements) is depreciated.
• Residential rental buildings are depreciated straight-line over 27.5 years (39 years for nonresidential property), starting in the month the property was placed in service, using a mid-month convention: a building placed in service in June gets 6.5 months of depreciation in its first year.
• Appliances, carpets, furniture and similar personal property in the rental are depreciated over 5 or 7 years and may qualify for bonus depreciation or the de minimis safe harbor; land improvements such as fences, driveways and landscaping are 15-year property.
• Form 4562 is filed the first year a property or improvement is placed in service; after that, the depreciation schedule carries forward and the amount goes straight to line 18.

A $500,000 purchase allocated $400,000 to the building produces about $14,545 of depreciation a year ($400,000 ÷ 27.5), which for many landlords turns a cash-positive property into a tax loss.

Personal use, vacation homes and partial rentals

If you used the property yourself during the year, the rules change. “Personal use” includes use by you, your family, or anyone paying less than fair rent. The tests:

• Rented fewer than 15 days in the year: the rental income is not reported at all and no rental expenses are deducted.
• Personal use exceeds the greater of 14 days or 10% of the days rented at fair value: the property is treated as a residence. Expenses are allocated between rental and personal days, and rental expenses are deductible only up to rental income, with the excess carried forward; a loss cannot be claimed.
• Personal use is within the limit: expenses are still allocated by days, but the rental portion can produce a deductible loss subject to the passive rules.

Renting a room or a unit in the home you live in works the same way: expenses are allocated by square footage or another reasonable method, and only the rental share goes on Schedule E. Days spent at the property mainly working on repairs and maintenance do not count as personal use.

When a rental loss is deductible: the passive activity rules

Rental activity is passive by law for most owners, and passive losses can only offset passive income, with the excess suspended and carried forward on Form 8582 until there is passive income or the property is sold. Two exceptions matter for individual landlords:

• The $25,000 allowance. If you “actively participate” (make management decisions such as approving tenants and repairs, which a landlord using a property manager can still do), you can deduct up to $25,000 of rental loss against other income. The allowance phases out as modified adjusted gross income rises from $100,000 to $150,000, and is gone above $150,000 (halved for married filing separately taxpayers who lived apart all year).
• Real estate professional status. If you spend more than 750 hours a year in real property trades or businesses and more than half of your total working time there, and you materially participate in the rental, the loss is not passive. This is a documented-hours test that the IRS enforces; a full-time job elsewhere almost always rules it out.

Suspended losses are not lost. They accumulate and are released in full in the year the property is sold to an unrelated party. Rental income may also qualify for the 20% qualified business income deduction if the activity rises to the level of a trade or business; the IRS provides a safe harbor for owners who keep separate books and spend 250 or more hours a year on rental services.

Records to keep

• Closing statement from the purchase, and the land/building allocation you used.
• Invoices for every improvement, with dates placed in service, and the running depreciation schedule.
• Rent ledger by tenant, and the security-deposit ledger showing amounts held and returned.
• Form 1098 for the mortgage, property tax bills, insurance declarations.
• Receipts or statements for every expense line above, sorted into those categories.
• Mileage log and travel records.
• A calendar of rental days and any personal-use days for a property you also use.
• Form 8582 and the prior return, for suspended losses and carryforwards.

Keep the purchase and improvement records for as long as you own the property plus the period of limitations for the year you sell it, since they determine the gain. A separate bank account for the rental makes all of this simpler; a monthly bookkeeping plan is worth it once you have more than two or three properties.

Common questions

Is rental income subject to self-employment tax?

Not for a Schedule E rental. It is subject to income tax and, for higher earners, the 3.8% net investment income tax. Rentals with substantial services reported on Schedule C are subject to self-employment tax.

Can I deduct my time or my own labor?

No. Your own labor is not a deductible expense, though the materials you buy are. Hours count for the participation tests, not as a deduction.

Do I have to depreciate?

Depreciation is “allowed or allowable,” meaning the basis is reduced whether or not you claimed it. Not claiming it forfeits the deduction without avoiding the later recapture, so claim it every year.

What if my rental shows a loss every year?

A loss from depreciation is normal and expected. Whether you can use it this year depends on the passive rules above; if not, it carries forward on Form 8582.

Do I need a separate Schedule E for each property?

Each property gets its own column; Schedule E holds three per page and additional pages are attached for more. Income and expenses are never combined across properties before reporting.

If the property is in another state, the personal-use days are close to the limit, or a loss has been building for years, the return is worth having prepared. Our rental property tax preparation service handles Schedule E alongside the rest of your personal tax return; Get Started and tell us how many properties are involved.

Sources

• IRS, Instructions for Schedule E (Form 1040) — irs.gov
• IRS, Publication 527, Residential Rental Property — irs.gov
• IRS, Publication 946, How To Depreciate Property — irs.gov
• IRS, Publication 925, Passive Activity and At-Risk Rules — irs.gov
• IRS, Tangible property regulations, frequently asked questions (safe harbors) — irs.gov
• IRS, Topic no. 415, Renting residential and vacation property — irs.gov
• IRS, Revenue Procedure 2019-38, rental real estate safe harbor for the QBI deduction — irs.gov
• IRS, 2026 standard mileage rates — irs.gov
• IRS, Instructions for Forms 1099-MISC and 1099-NEC (2026 rent threshold) — irs.gov