When you go to schedule-E , it asks for the gross rental income, all the expenses such as property taxes, mortgage interests paid, repair costs, maintenance costs , legal fees etc. etc. It will also ask cost basis of the property ( which is acquisition cost plus cost of all improvements till date ) and cost of land included in the basis and the date first put out for rent. It will then compute the allowable depreciation and include that as an expense. This will generate a net profit ( taxable as ordinary income ) or a loss ( which will be transferred to form 1040 subject to Passive Loss Limitation and anything above that as suspended losses for the next year ). Does that help?
