The schedule e form is essential for landlords and real estate investors to report rental income and expenses to the IRS. However, because of the complexities involved in rental property accounting, mistakes on this form are common. Even small errors can result in IRS notices, audits, or missed deductions. Understanding the most frequent mistakes can help ensure accurate and compliant tax filings.
1. Misreporting Rental Income
One of the most frequent mistakes on Schedule E is not accurately reporting rental income. Some landlords only include the rent collected and forget to include other income such as security deposit forfeitures, late fees, lease cancellation fees, or services provided by tenants in lieu of rent. All of this counts as rental income and must be reported on Line 3 of Schedule E.
Additionally, income must be reported for the year it was received, not when it was due. For example, if a tenant pays January rent in December, that income should be included in the year it was received.
2. Overlooking or Misclassifying Expenses
Landlords often miss out on valuable deductions because they fail to track all their expenses or categorize them incorrectly. Commonly overlooked deductions include mileage for property-related travel, cell phone use for managing tenants, and small tools or supplies.
Another issue is placing expenses in the wrong category on the form. For instance, placing legal fees under repairs instead of Line 14 (Legal and other professional fees) can raise red flags or complicate the audit trail. Correct classification ensures deductions are fully supported and legally defensible.
3. Improper Depreciation Calculations
Depreciation is another common area where errors occur. Many landlords forget to begin depreciating the property once it’s available for rent, or they use the wrong method or life span. The IRS requires the use of the Modified Accelerated Cost Recovery System (MACRS) and a 27.5-year life for residential property.
Misreporting depreciation on Line 18 of Schedule E can result in under-claiming (missing out on tax savings) or over-claiming (leading to potential penalties). Using software or consulting a tax professional can help apply the correct calculations.
4. Mixing Personal and Rental Use
Some property owners use their rental property personally for part of the year, such as a vacation home. In this case, they must allocate expenses between personal and rental use. A common error is deducting 100% of the expenses instead of the rental-use percentage.
The IRS scrutinizes this closely, especially for short-term rentals, so it’s important to maintain a detailed log of rental vs. personal days and divide costs accurately on the form.
5. Incomplete or Missing Property Details
Schedule E requires basic information about each rental property, including address and the number of days rented. Some landlords skip these fields or provide incomplete information. Failing to include this data may delay processing or raise IRS concerns.
6. Not Filing Multiple Properties Correctly
Each property should be listed separately on Schedule E. A mistake some landlords make is combining income and expenses for multiple properties, making it hard to track individual performance or prove deduction eligibility.
Conclusion
Schedule E errors can lead to missed deductions, tax penalties, or even audits. The most common issues include inaccurate income reporting, improper expense categorization, depreciation mistakes, and misallocating mixed-use properties. Using accounting software, keeping organized records, and consulting a tax professional can help landlords avoid these common pitfalls and ensure a more accurate tax return.