Even though your 1099-MISC says Box 1 - Rents (which is correct for an oil and gas lease bonus), confusion occurs if you try to report it as a standard real estate rental while also having any connection to the Royalties section.
The error "Line 3- 1099-misc -- income must be reported as separate properties" occurs because TurboTax thinks you are trying to combine a Rental property and a Royalty property on the same worksheet, which the IRS doesn't allow. Here is how to fix the issue.
- Delete the 1099-MISC: Go to Federal > Wages & Income > Other Common Income > 1099-MISC and delete the entry entirely.
- Delete the Schedule E Worksheet: This is the most important part.
- In Desktop: Go to Forms Mode (top right), find the Sch E Wks for this property in the left sidebar, and click Delete Form at the bottom. Do this for all Schedule E and Schedule E worksheets
- In Online: Go to Tax Tools > Tools > Delete a form and remove any Schedule E and worksheets associated with this lease.
- Close or log out of your program and open or log back in again so the changes are made.
Now re-eneter the 1099 MISC in the following manner.
- Instead of starting with the 1099-MISC section, go to Wages & Income > Rentals, Royalties, and Farm > Rental Properties and Royalties (Sch E).
- Add a new property. When it asks "Is this a Rental or Royalty?", select Royalty.
- Select Oil and Gas as the type.
- When it asks for your income, enter the 1099-MISC info there.
Even if your 1099 lists "Rent," the IRS treats a lease bonus for mineral rights as a royalty for Schedule E. Reporting it as a Royalty property avoids the extra "Real Estate" questions, like address or days rented, that can cause a Line 3 error.
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