Real Life Planning Podcast Ep54: Understanding Schedule E- Part 2
Real Estate CoachingIn Episode 54 of the Real Life Planning Podcast, Vekevia Tillman-Jones, CFP®, MBA, walks rental real estate investors through the second part of our deep dive into IRS Schedule E—focusing on understanding expense categories and depreciation. Whether you’re preparing your real estate numbers to share with your tax preparer or want to understand how your rental properties are really performing, this episode will help you get organized and make smarter decisions.
“Tracking your expenses in the same categories as Schedule E throughout the year makes tax time easier and helps you see how your rentals are truly performing.” – Vekevia Tillman-Jones
This week on Real Life Planning Podcast:
| 💡 | Why is Schedule E essential for rental property owners? [00:00:20] |
| 💡 | What counts as personal use vs. fair rental days—and why does it matter? [00:05:55] |
| 💡 | Which expenses can you deduct—and how should you track them? [00:09:39] |
| 💡 | How does depreciation work? [00:17:12] |
| 💡 | Who qualifies for loss deductions—and what happens if you don’t? [00:21:03] |
Takeaway Quotes:
“You may not be able to deduct all of your rental losses in one year, but tracking them accurately lets you carry them forward for future benefit.” – Vekevia Tillman-Jones
“Understanding depreciation is key—especially for new rental property owners.” – Vekevia Tillman-Jones
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About the Real Life Planning Podcast
Hosts Cynthia Meyer and Vekevia Tillman-Jones explore practical steps for real estate investors to build financial freedom and make working for someone else optional.
Transcript for Episode 54
[00:00:00] Vekevia Tillman-Jones: As a rental real estate investor, just how important it is to keep track of all of your income and all of your expenses for each property throughout the year. It's especially helpful if you do that through the year so that come tax filing time, is so much easier to transfer everything over into Schedule E that you are going to report to the IRS.
[00:00:20] Now, most rental real estate property is reported on Schedule E. There are some exceptions to that, but for the purposes of this video today, we're going to focus on what gets reported on Schedule E, which is for supplemental income and loss from rental real estate. There are some other areas like any income that you might get from royalties that would also go on Schedule E, or an S corporation, or even a partnership.
[00:00:43] But for purposes of today, we're focusing on just rental real estate that would go and set part one of Schedule E. Now, a lot of people might wonder exactly what is all involved with Schedule E. So yes, you're going to put your income. You get to put the details for each property and Schedule E has many benefits for real estate investors.
[00:01:02] Now certainly, this video is not intended to be tax advice in any way. This is more of informational purposes to help real estate investors understand the various categories and what gets reported on Schedule E.
[00:01:15] So on Schedule E, you're going to put your income, but it's also important that you have an opportunity to list all of your expenses and Schedule E allows you to have a standard approach to doing that from one rental estate property to multiple real estate properties. So you have this standard way of tracking everything, which makes it much easier when you go to compare properties to see how are they performing or maybe even when you get ready to sell, you've been tracking things and you know how you do each year, and you know how the depreciation has accumulated over time.
[00:01:46] So you're going to use Schedule E to make things standard if you come audit time or just sticking with compliance, having a standard form that you use across all properties is going to make that so much easier. You are going to know exactly which expenses you deducted in any particular year.
[00:02:01] If you ever have to go back and reference, that would be really important. And there are also certain rules that could come up. Like you could be eligible for a QBI, which is a qualified business deduction- business income deduction and schedule E will be able to help with that in determining what that deduction might be.
[00:02:18] Also if let's say at the end of the year you have a loss in your rental real estate. There are rules around being able to deduct any losses and passive activity loss rules would come into play. So there's so many benefits to Schedule E. So, what we're going to do now is go ahead and take a look at Schedule E together and walk through the various sections when you fill out part one in particular.
[00:02:40] So now when you want to go pull up your- the most recent version of the Schedule E form, I recommend going to the IRS website, and you can simply- so it's just irs.gov. I'm already on that site, but it's irs.gov. And then you can type in Schedule E. You'll see that it pulled up for me because I've already searched for this before.
[00:03:03] But you type in Schedule E and then you just scroll down and you pull up the latest version that's available. And right now it's still the 2024 form. So I'm just going to make this bigger so that it's easier to see. And then you start to fill this out, basically you put your name as it's shown on your 1040; on your return. You put your social security number. And then when you go down just a little bit further, remember we're focusing on part one. If you made any payments in the year that would require you to fill out a Form 1099, you're going to basically check yes. So think about if you, this would be for any non-employees.
[00:03:40] So- for instance, maybe you hired an independent contractor like a handyman or a plumber or electrician. Or maybe you hired an attorney to help draft or review a lease agreement, for instance, or handle an eviction or dispute for you that might fall up under what you might provide a 1099 for.
[00:03:59] And then they go by a certain threshold. I think it said if you paid at least $600 to them, then you would need to include that there. And if you did, then it's asking if you did make payments that were required 1099. Did you file the form yet? And then you put yes or no.
[00:04:13] And then the address of each property. So you can do three properties on this particular form, that's going to be important. So right under A, B, and C, you put the physical address, so the street, city, state, and zip code. And if you have more than one property, you will use more than one schedule E basically to list three properties at a time.
[00:04:33] Then you go down to the type of property. So, you're essentially, for each property that you listed in up here for physical address and a whatever, property's there, then you put the type of property here for that property in particular, you're going to choose from the types of properties right here in this section.
[00:04:49] And so, if it's a single family residence, then you put number one, and if it's a multi-family residence, you put number two. A lot of times apartment complexes might still fall under multifamily residence where you put part two or the type of property is two, so that'll be important and your CPA or tax professional will be able to help with that, as well.
[00:05:08] And vacation or short-term rental, you put three. Commercial properties, you put four and so forth, so you can fall along with this. Land royalties, any self-rentals and where self rental might come into play. Let's say maybe you have a- maybe you're a dentist and you have a practice, and then you're also have set up maybe a LLC that your practice is actually renting out or leasing the property; so from yourself basically. So self-rental might come into play. Now for fair rental days versus personal use days. This is important because remember this Schedule E is going to be used for any- or you could list any expenses that you want to be able to deduct for the year against any income, right?
[00:05:55] So that's going to reduce your taxable income or potentially, right, for any real rental real estate. So now, if you used it for personal use obviously the days that you use that property for personal use, you aren't going to be able to deduct expenses for that timeframe. So another personal use might be if you actually, which might be surprising too many people, if you rented the property out, so let's say a family member, and technically you could get $2,400 for rent, but you only charge them a thousand or $500.
[00:06:28] The IRS might assume that's actually personal use now, in terms of being audited about that or how they will find that out? I'm not sure. Definitely speak with the CPA about that; a tax professional, you wanna make sure you're playing by the rules. Especially, you could get audited on this, you just don't want any issues. But if you rent it out for less than fair market value, or if you have access to a unit or someone else has access to a particular unit ,personal use might come into play.
[00:06:54] Let's say you're staying in a property, it's for rent, but you need to get it situated. There are some improvements. Maybe you're doing some handyman work yourself, et cetera. Then that technically does not count as personal use days. That's just you being in a property trying to get it ready to be rented.
[00:07:08] Now for fair rental days, the fair rental days are basically the actual days that it's rented out, which, so that might be surprising people. So not necessarily that it was available, but actually rented out. And that's going to be important because when it comes to deciding how much of the expenses you can deduct for the particular property, they are going to use a percentage of like, okay, well how many days did you, how many days did you use it for personal use out of the days that it actually was rented out? So that's a big deal in terms of just determining whether or not you'll be able to deduct all or portion of the expenses. And then I think if you have it rented out less than 14 days or less than 15 days, you wouldn't even report the income, which might sound exciting, like, well, I don't have to report the income, but you also don't get to deduct any applicable expenses, right. Of course your CCPA or tax professional will be able to help with that just to narrow in and see and make sure that you report as it's applicable to your particular situation. Now for QJV listed on the form, this stands for Qualified Joint Venture, which is essentially you and your spouse can elect to be treated as an unincorporated business. So you're not set up as an LLC or anything. And now there are some exceptions to this rule. There are some exceptions to this, but technically, you and your spouse, basically you're renting out this- you have this rental business and you get to select qualified joint venture because you guys are the only members and this allows you not to have to complete a partnership return which is an informational tax return. You just get to select QJB. You're the only members. You materially participate in this business. You guys file a joint return. So you just wanna make sure and see with your CPA or tax professional, see if you qualify for that.
[00:08:58] So then we go down to the income and expenses. So for each property, you're just going to list the applicable income. So see it's designated here, A, B, and C; pretty self-explanatory. You're using A, B, and C here at physical address. Then for each particular property, you put the type of property and then you go right down to the next section for income, and you put it for property A, property B, property C.
[00:09:22] So you put the rents that you received from the property, and then any royalties that you may have received. Remember this sheet technically for Schedule E, you also would put royalty income on here. But we're sticking to the rental real estate piece for this video.
[00:09:39] All right, so then you go down to expenses and you have a number of different expenses. One thing that would be a helpful tip on this is if you are tracking your expenses throughout the year, it's really a good idea to set up your tracking- whatever method you're using to track it. Maybe you have software, maybe you have a property management company, or maybe you're using QuickBooks. Whatever you're using, it will be a good idea to use the same categories that you usually would- that you would use on Schedule E anyway. So it makes it so easy to report over your doing things the same way that the IRS would love to see it, right. And they're required to see it on Schedule E.
[00:10:17] So, the first, advertising, the first expense that's listed here, think online listings, like maybe you use Zillow or LoopNet. Sometimes they might charge if you have their, use, their more premium service. So some of it might be fee but free, excuse me. But if you want to use their more premium service and get access to, perhaps a larger group of people, or to have your advertising show up in a certain way, they might charge a fee for that. So any advertising expenses, or maybe you are on Instagram or a real estate website, like maybe like realtor.com or maybe you pay for photography or videography, like high quality photos. And a lot of people are doing video tours of their rental property now. Or even signage that you might put out in the front of the property for rent; signs or anything like that you might pay for. Those are some of the advertising expenses you might come across.
[00:11:08] Then for auto and travel expenses, think travel to and from your property. And you wanna keep track of the mileage. Now, there are different ways that you can go about this. I think there's like a set expense or mileage fee that you could take or you might take actual, and your CPA or tax professional can help with that. But keeping track of any mileage to and from, any fuel calls or any parking or tolls. Or maybe your property is in a whole nother state, right? And so in that case, any flights that you might take or meals while you're traveling that you know you have to eat or any hotel, lodging expenses, those kinds of things would fit into auto and travel.
[00:11:47] Now, cleaning and maintenance, no surprise, like any expenses that you might incur before the property is rented and you need to get the carpet cleaned or the kitchen cleaned, the stove deep cleaned. Maybe you do a service on the property or excuse me, when the renter moves out and you get it cleaned, that will fall into that, as well. Any pest control, those kinds of things could fall into under cleaning and maintenance. Then as far as commissions go, for commissions think maybe there's a leasing agent that you're paying and to actually get the property leased. Or maybe there is a- maybe you're trying to pay a property manager and sometimes that fee that they charge might go in there if it's just for that one time fee that could be included in that section, as well. Or a tenant placement fee.
[00:12:39] And then insurance. So, of course you have to have your property insurance. That's going to be important. Any property insurance that you pay for that will go in this section and you could deduct that. Flood insurance, an umbrella policy maybe that you have and it might only be a portion of that umbrella policy that gets to be included here. Your CPA or tax professional could help with that.
[00:13:00] And then legal and other professional fees. So legal and other professional fees. Maybe you had your lease reviewed or someone to help through the eviction process. That'll be important. Or fees for tax advice or preparation of any tax forms that will be included there. Now you wouldn't deduct legal fees that are you paid to- you might have to defend the property title or something like that. You wouldn't deduct those. So it's important to just know which ones will fall under that category and if you're unsure, your CPA and tax professional will be able to help you with that.
[00:13:35] Now even management fees will come into play. If you have a property manager, sometimes they will charge 10% generally, is what I see, but you, they could charge anywhere from eight to 12% of whatever your monthly rental income is to manage that property for you. So that's something that you would include on here, as well and you get to deduct that expense. So it's not fun paying it all the time, but at least they're taking care of the property for you, handling those late night calls. Maybe because the sink isn't working or I don't know, there's a plumbing issue or whatever have you. And so, it might not be fun to have to pay them, but at least you get to deduct that expense.
[00:14:10] And then mortgage interest. So any mortgage interest you pay, maybe you have a mortgage on the property and the interest that you pay to the banks. This could also include any, maybe you're using a credit card to pay for the various different expenses and any interest that you would be charged on the credit card that's applicable to the rental real estate business, that would be included, as well.
[00:14:32] Now as far this other interest, maybe you have a loan that's not to a bank, maybe outside of a bank, and you have to pay interest. And actually credit card interest might even fall under section 13 or line 13, as well. So it'll be important to decipher that with your CPA or tax professional.
[00:14:50] And then repairs. Any repairs that you get done to the property. Maybe, like I mentioned before, broken plumbing. Maybe you had to fix a door or replace- fix appliances, those kinds of things would be included. So repairs are going to be like ordinary and necessary expenses that are necessary basically, or required so that you can keep operating your rental real estate business or keep those properties rented out. You might need to fix something. This would not include, right? It would not include improvements to the property. If you had to replace appliances as opposed to fix them, that would not be included. Or you had to replace an entire HVAC system that is not a repair, that is an improvement. That would be basically depreciated over time and your CPA and tax professional will be able to help you in terms of how to go about doing that.
[00:15:43] And then supplies. Supplies are another thing. And for supplies, think you know anything for your office supplies like notepads, pens, those kinds of things. But cleaning supplies like a broom, a mop. Maintenance- maybe light bulbs, batteries, a hammer, screwdriver, or landscaping supplies; fertilizer lawn care products, a shovel. A toilet seat. Those kinds of things are small tools. A smoke detector or fire extinguisher. A lot of times those are going to fall under supplies.
[00:16:15] And then when it comes to taxes, think property taxes that you pay which can be significant, especially in certain states, and you get to deduct those as an expense. And also if your state in particular has, or maybe just come across any fees that are associated with permissions to actually be able to rent out your property, or if there are any licensing fees that are involved that could also fall under taxes and you wanna include that. Utilities is interesting in that you might cover the utilities yourself or your renters might cover it.
[00:16:50] So if you cover the utilities, you want to include it or you cover it for your renters at all, you wanna include it. But if your renters will reimburse you, then for the years where they're not reimbursing you and you're recovering it, you wanna put that in here and then if they reimburse you, you have to take that in as income, as well as not include whatever they reimbursed you for as an expense that year.
[00:17:12] And then for depreciation is essentially the IRS allows you to depreciate the building. So not the land doesn't get depreciated, but the actual rental property itself is saying there's wear and tear on this property. Each year, the IRS is actually going to assume that you take a certain amount of depreciation. Now, whether or not you take it, they still will count that you've taken it. So it's often better to just take it anyway and then you take it as an expense. So essentially, if you have residential property that's depreciated over 27 and a half years. So they're going to take the cost basis of just the rental property itself, right? Excluding the land and divided by 27 and a half years. And that's going to be for residential. So like up here, the single family residents and even multi-family residents will typically fall under residential.
[00:18:04] Now, if there's an exception to the multi-family residence where you have an apartment building or so, then your CPA will let you know. But typically that's going to be under residential and that's depreciated over 27 and a half years. Short term rentals, you might be surprised, but if you have like a Airbnb or VRBO property, those are oftentimes considered commercial properties just because of the length of the time that they're rented out and their transient properties. People are in and out, they say less than 30 days. That often will fall under commercial property. And so a commercial property, unlike residential, which is depreciated over 27 and a half years, they take the cost basis of and divide it over 39 years. They assume that it's the same amount each year. So for every year that you own the property, you take a portion of the depreciation as an expense, which is further reducing your taxable income. This is actually very huge, especially in the early years when you first purchased a property. Depreciation gets counted in the first year of purchase. Now you don't get to depreciate your home, your primary residence that you just use for yourself. This is speaking to property that's in business. So rental real estate in particular will fall under that.
[00:19:20] And then do you have any other expenses that are not listed here? You can include them in Other. Again, your CPA or tax professional can help you just see if technically it could fall somewhere else or what should go in this section.
[00:19:32] So then from there, you tally it all up on line 20. You're going to tally all of the expenses up on line 20, and then you're going to take your income minus your expenses and put that on this line for 21.
[00:19:43] And then on 22, now there are certain rules that come into play. And not everybody can deduct the full amount of any loss that they might incur. So that's going to be important. So once you get to the end of the form, essentially, you need to know, do you have any limitation as far as how many of these expenses or how much of your total expense you can deduct that'll come into play. . So you'll need to indicate that on the form.
[00:20:10] You also will be able to use this form once you see, hey, did I actually have a loss at the end of the year? If you had a loss at the end of the year, not everybody can deduct the full amount of that loss in any one particular year. For many renter real estate investors, you are going to only be able to deduct a certain amount. Typically and it depends on your income, right? Your CPA or tax professional will be able to help. Technically, depending on your income, you can deduct up to $25,000 of your real estate rental income loss against any passive income that you might have. So, and, but that phases out. You don't get to do that automatically, that phases out once your income hits a certain threshold and then it phases it out, phases out completely, I think when you get up to about $150,000 as a married filing jointly.
[00:21:03] And you could check IRS website for those numbers, as well. And so this is a very important form because you may be able to get partial deduction or a full deduction. And then when it's partial, if you only get to do a certain amount, you'll be able to pass it on to the next years and carry it forward. And that goes all the way up until maybe you might sell the property. And then when you sell it, typically you might be able to take the full remaining amounts that you could not deduct before in any given year. Now, there are some exceptions to this. If you meet a real estate professional designation per the IRS, you might even be able to use some of these losses and deduct them against active income, which is a very big thing that's often used for high income earners and can really be beneficial to offset W2 income.
[00:21:49] But in any given situation, what's going to be most important with this is that you report accurately on your Schedule E, so that you can know exactly what your expenses are for the year, what the income is, keep track of everything. It's going to help you keep things very organized and it makes it easy for you if you were ever audited. Nobody likes the idea of being audited, but you're ever audited. It will keep track of these things for you. It also helps to see if you are eligible for a qualified business income deduction or it helps you determine what portion of your rental real estate income you can actually- what portion of any loss, excuse me, from rental real estate you can actually use to offset passive real estate income or any other passive income. And it helps you determine if you actually do qualify to use any portion of any loss to actually offset W2 income. So it's huge.
[00:22:43] Now again, this is not meant to be any type of tax advice. This is meant to be educational. But you can see there are many benefits to understanding Schedule E and even tracking your expenses in the same categories as Schedule E already uses to do it throughout the year, so that come tax on the time is so much easier for you.
[00:23:03] I know as financial planners, whenever we help rental real estate investors, we look at Schedule E all the time, and we use this to form the basis of some of the calculations that we use to help real estate investors better understand how their properties are performing and what adjustments they might make.
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