A Landlord's Guide to Filing Taxes

How landlords file their taxes depends on how their rental property is owned: individually or through a business entity.

Rental Property Owned Individually

Rental property is considered to be owned by an individual when the owner takes title in their own name, rather than in the name of a business entity such as a partnership or a limited liability company. Each year, individual landlords must report all their income from and expenses for their rental properties on IRS Schedule E (Form 1040), Supplemental Income and Loss.

Landlords who earn a profit must add it to any other income they receive, such as salary from a job, interest income, or investment income, and report the total. Landlords who incur a loss might be able to deduct it from their other income, but there are specific limitations on such deductions under the passive activity loss rules. Landlords who actively participate in their rental activities may qualify for a special $25,000 allowance that allows them to deduct up to $25,000 in rental losses against their ordinary income (like wages) if their modified adjusted gross income is $100,000 or less. This allowance phases out by $1 for every $2 of income above $100,000 and is completely eliminated at $150,000 of modified adjusted gross income. (See IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes) for more information.)

Rental Property With Two or More Co-Owners

If you own the property as an individual with one or more co-owners, each owner reports their share of the income and deductions from the rental property on their own tax return, filing Schedule E. Each owner's share is based on their ownership interest, which should be listed on the property deed.

For example, if you and your brother take title as tenants in common, and you own a 60% interest and he owns 40%, you would list 60% of the income and deductions on your Schedule E, and he would list 40% on his.

In the case of a tenancy in common, if one cotenant pays more than their proportionate share of the expenses, the overpayment is treated as a loan to the other cotenant and may not be deducted. The cotenant who overpays is legally entitled to be reimbursed by the other cotenant (T.C. Memo 1995-562.)

Co-Ownership by Spouses

Spouses often co-own residential rental properties. Most of the time, their joint ownership produces the same tax result as individual ownership by one of the spouses: They can report their income and deductions from the jointly owned property on a single Schedule E they file with their joint return.

Like other co-owners of rental property, landlord spouses aren't considered partners in a partnership and don't have to file a partnership tax return unless they provide significant personal services with the rental, such as maid service or food service. For rental real estate activities where spouses don't provide substantial services, the spouses might be able to elect "qualified joint venture" status. This would allow them to be treated as two separate sole proprietors rather than a partnership. This election is available only for rental activities that constitute a trade or business in which both spouses materially participate. It can't be used for typical passive rental activities. Landlords in this situation should consult with a tax professional to determine the most beneficial way to file their taxes.

Rental Property Owned by a Business Entity

Landlords who own their properties through business entities don't use Schedule E to report their rental income or losses. Instead, the partnership, limited partnership, limited liability company (LLC), or S corporation files IRS Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, to report the income and deductions from the property owned by the entity. This form is very similar to Schedule E.

Partnerships and Limited Partnerships

Partnerships and limited partnerships must file an annual tax form with the IRS, Form 1065, U.S. Return of Partnership Income. Form 1065 is used to report partnership revenues, expenses, gains, and losses. The partnership must also provide each partner with an IRS Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., listing the partner's share of partnership income and expenses (copies of these schedules must also be attached to IRS Form 1065). The partners must then file IRS Schedule E, Supplemental Income and Loss, with their individual income tax returns, showing the income or losses from all the partnerships in which they own an interest. Partners complete the second page of Schedule E, rather than the first, which is where individuals report their income and deductions from rental property.

S Corporations

S corporations must file information returns with the IRS on Form 1120S, U.S. Income Tax Return for an S Corporation, showing how much the business earned or lost and each shareholder's portion of the corporate income or loss. An "information return" is a return filed by an entity that doesn't pay any taxes itself; its purpose is to show the IRS how much tax the entity's owners owe. Like partners in a partnership, the shareholders must complete the second page of Schedule E, showing their shares of the corporation's income or losses, and file it with their individual tax returns.

Limited Liability Companies

Single-member limited liability companies are ordinarily treated like a sole proprietorship for tax purposes and are considered "disregarded entities." For rental property activities, the single member reports the rental income and expenses on Schedule E. The single member would use Schedule C, Profit or Loss from Business (Sole Proprietorship), for business activities where the taxpayer provides substantial services.

LLCs with two or more members are generally treated like partnerships for tax purposes by default, except in situations where the owners choose to have the business treated like a C or S corporation by filing the appropriate election forms with the IRS. Multi-member LLCs can also elect different tax treatments that might be more beneficial for their specific circumstances.

Next Steps and Resources

Navigating the tax implications of owning rental property can be complex, and getting it wrong can have serious implications, including IRS audits and penalties. Given the intricacies of the various filing requirements that differ based on ownership structures, landlords should educate themselves about tax deductions and consider consulting with a qualified tax professional who specializes in real estate taxation.

Additionally, landlords should maintain detailed records of all rental income and expenses and keep supporting documentation for every transaction. For the most current and detailed guidance on rental property tax requirements, check out IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes).