I own a few rental properties, should i use schedule C or schedule E? what are the advantages/disavantages of both?

[ChelsiE2 · Accepted solution]

Generally, Schedule E should be used to report rental income/loss.  

According to the IRS: "Generally, Schedule C is used when you provide substantial services [i.e. hotel like services] in conjunction with the property or the rental is part of a trade or business as a real estate dealer."

Schedule C: 

• Advantage:  Losses reported on a Schedule C are not limited by the Passive Activity Loss Rules.  
• Disadvantage: Income on Schedule C is subject to Self Employment Taxes.

Schedule E: 

If you file a Schedule E, you may be able to deduct up to $25,000 of losses from a Schedule E if you Actively Participate in the rentals.  The IRS defines Active Participation as: 

Active participation:  You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

For more information please see: IRS Publication 527

[DCowboys]

I own a single-family home that I rent out. I consider it a passive activity -- although I make the management decisions, I spend less than 750 hours a year managing this property. This rental activity generates a few thousand dollars in profit after property taxes, insurance, and depreciation. Last year I purchased a small computer to track expenses on for this rental property and want to depreciate it as a Section 179 expense.

But because I had a small (less than $400) loss on another small business I own and that I report on Schedule C, the Turbotax software says that I cannot write off the computer on Schedule E because of the loss on Schedule C. Does anyone know if that is correct? Thank you.

DCowboys

[Carl]

Residential Rental Real Estate is reported on SCH E 99.999999999999% of the time. If you only own 1-3 rental properties and report it on SCH C, you can fully expect to be audited on it 24-36 months after you file. While its not impossible for residential rental property to qualify as a SCH C business, it is uncommon enough to practically guarantee an audit, unless your tax return shows that rental income is your *PRIMARY SOURCE* of income and you have enough rentals that generate enough income for you to support yourself (and family if married) for the tax year.

Being that this is obviously your first time dealing with rental property, or first time dealing with it in the TurboTax program, the below information provides clarity that (in my personal opinion) the program does not.

When dealing with rentals, absolute perfection in that first year of tax reporting is not an option. It's a must. Even the tiniest of mistakes will grow exponentially over time. THen when you catch the error years down the road, the cost of fixing it will be expensive. So if you have questions or need further clarity, please ask. The only stupid question is the one you didn't ask. It's not like you learn this stuff through osmosis.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

[texasclerkgirl]

Hi.

I own ONE rental property since 2018.  We corporately rented the property fully furnished.  We did not provide cleaning, but all exterior maintenance (like mowing, etc) and pest control was furnished by us.

For my 2018 taxes, I used Schedule C to report my RENTAL income.  I also have a part time job and my husband has a full time job.

After reading the above entries, should I AMEND my 2018 Tax Return to use Schedule E rather than Schedule C?

Thanks.

CJP

[MaryK4]

Yes, if you did not provide significant services related to the rental, you may have passive loss limitations- you will want to amend 2018 and use the Schedule E going forward.  

@texasclerkgirl

[texasclerkgirl]

Significant services provided were - (1) fully furnished rental (2) mowing and lawn care (3) all repairs like guttering and replace light fixtures (4) pay all utilities (ie electric, gas, internet, cable).  Is that enough to qualify for 'significant services'?

TIA

[MaryK4]

No, you must provide more than basic services to tenants. Housekeeping, linen service, maid service and meals are examples of substantial services that would require a landlord to use Schedule C. In essence, once you start providing substantial services, you're not just renting property; you're running a hotel or boarding house. Those count as businesses -- thus the requirement for Schedule C. Landlords must also use Schedule C if they rent property as part of their business as a real estate dealer.  

From Schedule C Vs. Schedule E for Rental Income.

[babume2000]

So there is a obvious distinction..

Rental - I own and rent couple of properties while I have a main source of income (Sch E)

Short Term rental - Full time business - Where I am responsible for all funtiure, linen, Gas, water, Electricity washer, drier, Pool furniter, kitchen utincils, towels, AC , lawn service, pool service , garbage collection... Its same as I have a hotel room but the whole house..  just cheaper hotel I also have a property manger to manage day to day emergencies.. so its - Sch C .. 

is my understanding correct..

[Carl]

all funtiure, linen,

If the house sits empty for three months, nothing changes. There's nothing special about providing a furnished place, other than it opening you up to having to pay local tangible personal property taxes. Short term rentals expect that tax.

Electricity

You pay the electric bill weather there's a tenant in the place or not.

washer, drier,

So? If you don't provide a washer/dryer they just go to the local laundry mat. You're not performing a service here. You are only providing the asset necessary for the tenant to perform their own services.

Pool

That pool gets maintained weather you have a tenant or not. It's not directly beneficial to the tenant to the point that if you didn't do it, the tenant would. (The tenant would not most likely, since it's short term)

 Everything you mentioned can be interpreted as not 'DIRECTLY* beneficial to the tenant. You are going to do all that stuff even if the house sits empty for 3 months.
examples of "directly" beneficial to the tenant would be things such as:

 - Continental breakfast prepared for the tenants every money.

 - Laundry service provided for the tenants on a recurring basis. (Providing a washer and dryer is not providing your tenants a service. It only provides them the means to provide their own service.)

 - Recurring house keeping services. (Just cleaning between tenants is not providing a recurring service.)

However, there are other aspects that allow a rental (even a long term rental) to operating as a SCH C business. For example, if rental income is my "PRIMARY" source of income and I spend more than 50% of my "work" "related" "time" directly involved with the rental property and management of same, that (along with a few other minor requirements) would be enough for this to be classified as a SCH C business. However, I damn well better be able to prove it if audited. Three golden rules to keep in mind when dealing with this IRS stuff.

 - You are guilty until proven innocent.

- The burden of proof is on the accused (that would be YOU!) and not the accuser.

- If it's not in writing, then it *did* *not* *occur*.

The bottom line is, you're gonna do what you're gonna do. All we can do is provide you with information from all around so that you can make a well informed and educated decision.

[tagteam]

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@babume2000 wrote:

is my understanding correct..

---

Not exactly. The amount of time you spend on your rental properties, the term, and the responsibilities you mentioned do not necessarily dictate Schedule C treatment for the income.

Your rental income would properly be reported on Schedule C if you provided "significant services to the renter, such as maid service" or you were a "real estate dealer".

See https://www.irs.gov/instructions/i1040se#idm140609575953904

[Carl]

Not exactly.

I'm not disagreeing with that at all. When it comes to rental property qualifying as a SCH C business, there's more than one way to skin that cat! 🙂 One just needs to be absolutely certain beyond any possibility of doubt, that they've got their ducks in a row.

[nutbrain]

I have several rental properties I file with schedule E.

Did a like kind exchange on one to buy a condo in vacation spot. Owners under HOA rules are not allowed to live full time in the property. The HOA provides a rental program for owners, and hires a management company to administer short term rentals (less than 30 days), provide cleaning and housekeeping service for guests (included in their resort fees.). They also pay occupancy tax to the county, manage reservations, payments, etc. and take a whopping 50% of rental revenue. Guests can also purchase lift tickets and massage through the rental management company (which I do not receive revenue for.) No meals are provided other than coffee in reception area.  Because this is a Hotel/Condo style property, I was told that even though I am not providing services personally, by arranging for a management company to provide personal services for guests. Management company provides me a 1099 at end of year with breakdown of costs. Do I have to report this on Schedule C because of the personal services management company performs for guests?  If so, since this is a residential property, how do I depreciate? 27.5 years on schedule C? or do I have to consider this commercial property? Thanks in advance. 

[Critter-3]

@nutbrain 

What you have is the definition of a Vacation Rental since you use the property personally for some part of the year and rent it for some part of the year.   This is still a passive income reported on a Sch E.  It is still passive income since YOU  don't personally work at this business so it is not earned income.  Follow the interview screens carefully and the program will complete the section correctly.

[nutbrain]

Thanks, Critter- I was confused because instructions say somewhere that if you do provide personal services like maid service that it's schedule C even if you've contracted with  someone else to provide that service. Hope you're correct.

-Nut