Rental Real Estate, Royalties, Partnerships, S Corporations, Trusts, etc

While Form 1040’s Line 12 is used for general “business income,” Line 17 is used for a more narrow class of business-related income sources, including: real estate rental, partnerships, S-corporations, trusts, and estates. Earnings from these various sources (except real estate rental) are reported and sent to the taxpayer on a Schedule K-11. The taxpayer is then able to complete a Schedule E, which asks for the following information for each income source:

Real Estate Rentals: Taxpayers are required to list all property addresses and types used as an income source during the year. Additionally, all rental and royalty income values as well as any expenses must be listed. This section also gives instructions in the event an unfortunate taxpayer faces a year-end loss from his/her rental business.

Partnerships and S-Corporations: Taxpayers are required to list all passive and non-passive income and losses. Passive income is generally all income earned from rental activities as well as any other activity in which the taxpayer does not materially participate (including internet advertising revenue and some royalty and licensing income). Non-passive income includes any income earned through active business involvement by the taxpayer (including salaries, wages, payments for services, and even investment “portfolio” income). Finally, taxpayers are to list any Section 179 expense deduction2 that the partnership or S-corporation elected to take.

Trusts and Estates: This section requires the same information from taxpayers as the Partnerships and S-Corporations section.

Whether a taxpayer earned income from real estate rentals only or from all three sections above, Schedule E provides instructions for tallying various income amounts before transferring a single value to Form 1040’s Line 17.

1Schedule K-1’s can vary in appearance depending on whether the underlying income source is a Partnership, S-Corporation, or a Trust or Estate 
2This tax deduction involves treating the cost of certain property as a deductible expense, rather than a capitalization and depreciation, for income taxes purposes

Photo by: Mr. T in DC