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How Schedule E Part I Works

Schedule E Part I reports income and expenses from rental real estate. Each property is listed separately with its own income and expense totals. The combined net income or loss flows to Form 1040 Schedule 1, line 5.

Passive activity loss rules

Rental activity is generally classified as passive. Losses can only offset passive income unless you actively participate in the rental activity — in which case up to $25,000 of loss may be deductible, subject to a phase-out between $100,000–$150,000 of adjusted gross income. Real estate professionals who meet the IRS material participation tests may deduct losses without limit.

Depreciation

Residential rental property is depreciated over 27.5 years under MACRS (Modified Accelerated Cost Recovery System). Only the building value is depreciable — not the land. Depreciation reduces taxable income annually but is recaptured at sale as unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.

Canadian residents with US rental property

If you are a Canadian resident earning US rental income, you must file Form 1040-NR (non-resident return) and attach Schedule E. You may elect to treat the income as effectively connected income, which allows deduction of expenses. Under the Canada–US Tax Treaty, Canada generally credits the US tax paid to avoid double taxation.

Days rented vs. personal use

If you use the property personally for more than 14 days — or 10% of the days it was rented at a fair price, whichever is greater — the IRS treats it as a vacation home. Expense deductions are limited to rental income, and losses cannot be carried forward.