Schedule E vs Schedule C

[Yes Jay]

Last year I filled schedule E with 1040 what would it take to change to schedule C? In other words, what makes the difference between Schedule E & Schedule C? What is a scenario or example for each? 

[KarriC · Accepted solution]

Schedule E's are for Rental Income (passive), while Schedule C's are for business income (non-passive).

Generally speaking, Rental Income is passive. Passive income can include rent collection, dividends, interest, in other words, income you get but don't work for to get.

Non-passive income is income like your salary or in exchange for services or commission.

For rental property to be non-passive you usually need to be a real estate professional (REPS status) and participate in the day-to-day operations of your rental business.

Bed and Breakfast properties can sometimes qualify as Schedule C because there is active work in preparing meals and other services. The main difference here is the fact that you would provide services to the renters.

[Yes Jay]

So, If I start an LLC to maintain rental properties without a real estate license, will that be included in the non-passive? In other words, will a property management LLC be considered for schedule C?

[KarriC · Accepted solution]

In general, to qualify as a real estate professional (doesn't mean you have to be a licensed Realtor):

• more than 1/2 of the your total personal services are performed in real property trades or businesses in which you materially participate
• you perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate

Another thing to mention is that Sch E filers aren't subject to self-employment tax. If you file a Sch C, you will be subject to self-employment tax.