Every line explained, depreciation and passive-loss rules made clear, with worked examples for owners of 1–10 rental doors. Written for the 2026 tax year.
Schedule E ("Supplemental Income and Loss") is where you report income and expenses from rental real estate, royalties, partnerships, S-corps, estates, and trusts. For most small landlords, only Part I — rental real estate matters.
You file Schedule E if you own residential or commercial rental property and collect rent as a passive investor — which is the vast majority of landlords. The big advantage over Schedule C: rental income on Schedule E is not subject to the 15.3% self-employment tax.
You might instead file Schedule C (and owe SE tax) if:
One Schedule E page has three columns (A, B, C) for up to three properties. Own more than three? Add additional Schedule E pages. For each property you report:
| Line | What goes here |
|---|---|
| 1a / 1b | Physical address and type of property (1=single family, 2=multi-family, 3=vacation/short-term, 4=commercial, etc.). |
| 2 | Fair rental days and personal-use days. Critical for mixed-use/vacation properties — personal use over 14 days (or 10% of rental days) limits your deductions. |
| 3 | Rents received. All rent collected during the year, including last month's rent and forfeited deposits kept as income. Security deposits you intend to return are NOT income. |
| 4 | Royalties (most landlords leave blank). |
Security deposits: a deposit you plan to return is not income when received. But if you keep part of it to cover damage or unpaid rent, the kept portion becomes income in the year you keep it (and the repair it covers is a deductible expense).
Lines 5 through 19 are your deductions. Every dollar here directly reduces taxable rental income.
| Line | Expense | Notes |
|---|---|---|
| 5 | Advertising | Listing fees, Zillow/Apartments.com ads, signage, photography for listings. |
| 6 | Auto and travel | Mileage between properties, to the bank, hardware store, contractor meetings. 70¢/mi for 2026 — see our mileage calculator. |
| 7 | Cleaning and maintenance | Turnover cleaning, landscaping, snow removal, pest control, gutter cleaning. |
| 8 | Commissions | Leasing commissions paid to agents to place a tenant. |
| 9 | Insurance | Landlord/dwelling policy, liability, umbrella allocable to rentals, flood insurance. |
| 10 | Legal and professional fees | Attorney for evictions or lease review, CPA fees for the rental, bookkeeping software. |
| 11 | Management fees | Property manager fees, tenant-placement fees, online rent-collection platform fees. |
| 12 | Mortgage interest paid to banks | From Form 1098. The interest portion only — principal is never deductible. |
| 13 | Other interest | Interest on loans for the property other than the primary mortgage (e.g. a HELOC used for rental repairs). |
| 14 | Repairs | Fixing things that keep the property in working order — see repairs vs improvements below. |
| 15 | Supplies | Light bulbs, filters, cleaning supplies, small tools, lock boxes. |
| 16 | Taxes | Property tax, local rental license fees, special assessments for services (not improvements). |
| 17 | Utilities | Any utilities you pay rather than the tenant — water, sewer, trash, gas, electric, internet if provided. |
| 18 | Depreciation (from Form 4562) | Usually the single largest deduction. Covered in detail below. |
| 19 | Other | HOA dues, bank fees, lease-prep costs, software, education specific to the rental, postage. |
| 20 | Total expenses | Sum of lines 5–19. |
| 21 | Income or loss | Line 3 minus line 20. Negative numbers are subject to passive-loss rules (below). |
Depreciation is a non-cash deduction that lets you recover the cost of the building over its useful life. It's the single biggest reason rentals often show a tax loss even while producing positive cash flow.
Example: you buy a rental for $375,000. The assessor's records say land is 20% of value, so $75,000 is land (non-depreciable) and $300,000 is the building. Annual depreciation = $300,000 ÷ 27.5 = $10,909 per year. That $10,909 reduces your taxable rental income every year for 27.5 years with no cash leaving your pocket.
Larger investors use a cost segregation study to break the building into components (appliances, carpet, fixtures, land improvements) that depreciate over 5, 7, or 15 years instead of 27.5 — front-loading deductions. Combined with bonus depreciation (40% for 2026 under the current TCJA phase-out), this can produce large first-year write-offs. For a 1–4 unit small landlord, a full cost-seg study often isn't cost-effective, but appliances and carpet bought separately can be depreciated on their own shorter schedules or expensed under the de minimis safe harbor.
This is the distinction landlords get wrong most often, and it materially changes your deduction timing.
Three safe harbors help you expense things that would otherwise be capitalized:
Rental real estate is, by default, a passive activity. Passive losses can normally only offset passive income — not your W-2 wages or business income. After depreciation, many rentals show a paper loss, and without relief that loss would just suspend and carry forward.
Two important exceptions:
Suspended losses aren't lost — they carry forward indefinitely and free up when you have passive income or when you sell the property in a fully taxable transaction.
Rental activity that rises to the level of a "trade or business" can qualify for the 20% qualified business income deduction under Section 199A. The IRS provides a safe harbor (Rev. Proc. 2019-38): if you perform 250+ hours of rental services per year, keep contemporaneous records, and treat the activity as a separate enterprise, the rentals qualify for QBI. Many small landlords with one or two properties won't hit the safe harbor but may still qualify under a facts-and-circumstances trade-or-business analysis. Talk to a CPA — the 20% deduction is worth pursuing if you qualify.
Two tax events hit at sale:
You can defer both by using a 1031 like-kind exchange to roll the proceeds into another investment property within the strict 45-day identification / 180-day closing windows. This is the primary tax-deferral tool serious landlords use to build a portfolio without paying tax at each sale.
Rent received: $24,000. Mortgage interest: $9,200. Property tax: $3,600. Insurance: $1,400. Repairs: $1,800. Management (8%): $1,920. Mileage (1,000 mi × 70¢): $700. Depreciation ($300k ÷ 27.5): $10,909. Total expenses: $29,529. Tax loss: −$5,529 — even though cash flow was positive, because depreciation is non-cash. With MAGI under $100k and active participation, the full $5,529 offsets W-2 income.
Combined rents: $72,000. Combined cash expenses (interest, tax, insurance, repairs, management, mileage): $44,000. Combined depreciation: $28,500. Net Schedule E loss: −$500. Investor's MAGI is $135,000, so the $25,000 allowance is partially phased out — they can deduct $7,500 of losses ((150,000 − 135,000) ÷ 2). The remaining loss suspends and carries forward.
The hardest part of Schedule E for a multi-property landlord is keeping each property's income and expenses cleanly separated all year so the three-column form fills itself in. PayStream Pro is built for exactly this:
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Landlords who earn rental income from real estate and aren't real estate dealers or providing substantial hotel-like services. Most owners of long-term residential rentals file Schedule E. Short-term rentals with substantial services may instead file Schedule C and owe self-employment tax.
Generally no. Rental income on Schedule E is not subject to the 15.3% self-employment tax, unlike Schedule C business income. That's one of the main advantages of holding rentals as passive investments. The exception is short-term rentals where you provide substantial hotel-like services, which can be pushed to Schedule C.
Residential rental buildings are depreciated over 27.5 years straight-line. You depreciate only the building, not the land, so you allocate the purchase price between land and structure (often using the assessor's ratio). A $300,000 building yields about $10,909 of annual depreciation that offsets rental income with no cash outlay.
If your rental produces a tax loss (common after depreciation), passive rules normally prevent deducting it against wages. But active participants with MAGI under $100,000 can deduct up to $25,000 of rental losses against other income. The allowance phases out between $100,000 and $150,000 MAGI. Disallowed losses carry forward.
No. Repairs (fixing a leak, repainting, replacing a broken window) are deducted in full the year you pay them. Improvements (new roof, kitchen remodel, addition) are capitalized and depreciated. The de minimis safe harbor lets you expense items under $2,500 per invoice immediately.
Mortgage interest, property taxes, insurance, repairs and maintenance, management fees, advertising for tenants, utilities you pay, HOA dues, legal and professional fees, supplies, depreciation, and auto/travel for managing the property (mileage between properties at 70¢/mi for 2026).
One Schedule E form has columns for up to three properties (A, B, C). If you own more than three rentals, you file additional pages. Each property's income and expenses are tracked separately, which is why per-property bookkeeping throughout the year saves enormous time at tax season.
When you sell, the IRS recaptures the depreciation you took (or were allowed to take) at a maximum 25% rate via unrecaptured Section 1250 gain. Always claim depreciation even in loss years — the IRS recaptures depreciation 'allowed or allowable,' so you'll owe recapture whether or not you actually deducted it. A 1031 exchange can defer both gain and recapture.