Schedule E for small landlords, line by line

If you own a couple of residential rentals and you don't have a C-corp or an S-corp wrapped around them, your rental income lands on Schedule E — “Supplemental Income and Loss” — which rides along with your personal 1040. One copy of the form has room for three properties, in columns A, B, and C. If you have more than three, you staple on another copy. That's the whole structure.

The form looks intimidating because it's laid out for every kind of rental and royalty arrangement. But a small landlord uses maybe a dozen of its lines, and once you've seen what each one wants, it stops being mysterious. Here's the walk, top to bottom, in the order the form asks.

Line 3 — rents received

This is the cash rent your tenants actually paid you during the year, on a cash basis. Not what the lease said they owed — what hit your account. If a tenant was behind in December and caught up in January, the catch-up counts in the year you received it. Late fees you collected go here too, as part of rental income.

Security deposits are the classic trap. A deposit you're holding is not income — it's the tenant's money you happen to be custodian of. It only becomes income in the year you keep some of it (for unpaid rent or damage), and at that point the part you keep is rent or a recovery, and any repair you paid for is an expense. So the deposit you collected this year does not belong on line 3.

The expense lines (5 through 19)

Schedule E breaks operating expenses into named buckets. You don't have to use every one, and the IRS isn't scoring you on which bucket a cost falls into as long as it's a real, ordinary, deductible rental expense and you're consistent. The lines a small residential landlord actually touches:

• Line 6 — auto and travel. Mileage to the property for real management tasks (a showing, a repair you handled, the bank run for a deposit). Keep a log; this is a line the IRS knows people inflate.
• Line 7 — cleaning and maintenance. Routine upkeep: turn cleans, gutter clearing, snow removal, lawn care, pest control.
• Line 9 — insurance. Your landlord / dwelling-fire policy premium, and any umbrella allocated to the rentals.
• Line 10 — legal and professional. The fee your CPA charges to prepare this very schedule, eviction filings, lease review.
• Line 11 — management fees. If you self-manage, this is zero — there's no fee you pay yourself. It's here for owners who hire a property manager.
• Line 12 — mortgage interest paid to banks. The interest portion of your mortgage payment, from the lender's Form 1098. Critically: only the interest. Your principal paydown is not a deduction — it's you buying down debt, not spending money on the building. More on that below.
• Line 14 — repairs. Fixing what's broken to keep the place in working order: a failed water heater swapped like-for-like, a patched roof, a re-keyed lock, an appliance repair.
• Line 16 — taxes. Property taxes on the rental. (Your personal residence's taxes go on Schedule A, not here.)
• Line 17 — utilities. Whatever you pay rather than the tenant — often water and sewer, trash, sometimes heat in a multi-unit.
• Line 18 — depreciation. The big non-cash line. Its own section below.
• Line 19 — other. The catch-all with a description: HOA dues, a rental license, advertising a vacancy, bank fees on the rental account.

Line 18 — depreciation, the line spreadsheets skip

This is the deduction that makes rental real estate work on paper, and it's the one a homemade spreadsheet almost always leaves off because it isn't a check you wrote. The idea: the IRS lets you treat a residential building as if it wears out over 27.5 years, deducting a slice of its cost every year even though you spent nothing that year.

You can only depreciate the building, not the land underneath it — land doesn't wear out. So the first job is to split your basis:

Building basis = total cost (purchase price + closing costs that get capitalized) − the value of the land.

A common way to find the land portion is the ratio on your county assessor's card — if the assessment says land is 20% of the parcel, you carve 20% off your cost as land and depreciate the other 80%. Then the building basis is divided over 27.5 years, which is straight-line MACRS for residential rental property.

The wrinkle is the first year. Residential rental property uses the mid-month convention: the IRS pretends you placed the property in service in the middle of whatever month you actually did, no matter the day. Buy and rent it out in March, and your first-year depreciation counts 9.5 months, not 12 and not 10. The same applies in the year you sell. After year one, you get a full year's slice until the basis runs out. Practically: a $250,000 building basis is roughly $9,090 a year once you're past the partial first year.

Depreciation isn't optional in the sense that matters. When you sell, the IRS calculates your gain as if you took it whether you did or not (“allowed or allowable”), via depreciation recapture. So skipping it doesn't save you anything later — it just throws away a deduction now. That's why leaving line 18 blank is the most expensive mistake on the form.

Repairs vs. improvements — the distinction that decides a line

Here's the call you'll make over and over: was that money a repair (deduct it all this year, on line 14) or an improvement (capitalize it and depreciate it over years)? The rough test the IRS uses is whether the work was a betterment, a restoration, or an adaptation — the “BAR” test. If it materially improves the property, restores something that was fully used up, or adapts it to a new use, it's a capital improvement. If it just keeps the existing thing running, it's a repair.

• Repair (deduct now): patch a roof leak, fix a furnace, replace a broken window pane, repaint after a tenant turn, snake a drain.
• Improvement (capitalize, depreciate): a whole new roof, a new HVAC system, a kitchen remodel, an addition, replacing all the windows. These get their own depreciation schedule from the date they go in service.

The line is genuinely fuzzy at the edges, and there are safe-harbor elections (the de minimis safe harbor, the small-taxpayer safe harbor) that let smaller costs be expensed even when they'd otherwise be capital. That's exactly the kind of judgment to flag for your CPA rather than guess at — but you make their job vastly easier if your records already separate “fixed what broke” from “made it better,” with receipts attached, so they're ruling on a clean pile instead of reconstructing your year.

Net income — and what the whole thing looks like assembled

Add the expense lines, subtract them from rents, and you get each property's net income or loss (line 21, rolling into line 26). A paper loss is common and often fine — depreciation alone can push a cash-flow-positive property to a tax loss. Whether you can use that loss against your other income depends on the passive-activity rules and your income level, which is, again, a CPA conversation. Your job is to hand over numbers that foot.

Here's the shape of a finished schedule for a three-property portfolio — rents at the top, the expense lines beneath, depreciation sitting on line 18 where it belongs, and a net per column:

The hard part of Schedule E isn't March — it's the eleven months before it. If every transaction is already sorted into its line as it happens, repairs kept apart from improvements, the mortgage split into interest and principal, depreciation computed from each property's basis and in-service date, then filing is an export, not an archaeology dig. That's the whole reason this product exists: resty.ai keeps these exact lines current per property across the year, runs line 18 on the 27.5-year mid-month convention so the non-cash deduction is never the thing you forgot, and exports the whole schedule as a CSV your accountant can read at a glance.