Understanding how to report rental income is crucial for landlords. The method you use can vary depending on how you own your rental properties and your specific tax situation. Here’s a breakdown of the most common ways landlords report rental income.
Reporting Rental Income on Schedule E
Most landlords own properties either as a disregarded entity or in their personal name. In these cases, they report rental income on Schedule E of their personal income tax return (Form 1040). Schedule E is used to report income and losses from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in REMICs.
Using an LLC or Other Entity
Some landlords hold their rental properties in an LLC or other type of entity and elect S Corporation status. If this is the case, they will file Form 1120-S, which is the U.S. Income Tax Return for an S Corporation. This method requires a separate tax return for the rental income.
Partnership Reporting
Other landlords may own properties jointly with others and operate as a partnership. In such situations, the rental income is reported on a partnership return (Form 1065). Each partner then receives a Schedule K-1, which outlines their share of the income, deductions, and credits to be reported on their individual tax returns.
Asset Protection Considerations
Many landlords prefer to hold their rental properties in an entity to separate their rental business from personal assets. Common choices include Series LLCs or traditional LLCs. The tax code provides limited liability companies various options for electing tax statuses. For example, an LLC can be a disregarded entity, meaning its income flows through to the owner’s personal tax return, or it can elect S Corporation status and file an 1120-S.
Best Practices for Reporting Rental Income
While there are multiple ways landlords can report federal income tax, the most typical and recommended method is to use an entity like an LLC for asset protection and select the appropriate tax status for each specific situation. Tax election depends on individual circumstances and should be decided in consultation with a CPA or tax lawyer.