Ep. 124 | ACE Series: Schedule E
Download MP3Hey, everyone. Welcome back to the teaching tax flow podcast episode 124 today as we wrap up our three part a series and look at schedule e. But before we do that, as always, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:Alright, everybody. We are back here again. Again, as you heard in the intro, the last part of our a series. So part three of three, we're looking at Schedule e. Yeah.
John Tripolsky:That has a little rhyme to it. Disregard that. But, Chris Pacquero, welcome back to your own show, sir. How we doing?
Chris Picciurro:I'm wonderful. How are you doing today?
John Tripolsky:I'm doing good, man. I feel like my voice is is is lowering. Like, I'm losing my voice already, probably because we've been talking about all this stuff. It is the quote unquote, I'm gonna say it, so don't punch me, tax season. It's it's in the it's in this it's like deer hunting, I feel like.
John Tripolsky:Right? Like, there's a start and a stop date a little bit, and why I say I like to say that to poke the bear with Chris a little bit because we don't believe in tax season here at Teaching Tax Flow. And, Chris, why do we even tell tell the audience why we don't believe in that that term.
Chris Picciurro:Well, quite frankly, the your tax return is a verb and not a noun. So tax yes. We have tax compliance, heavy tax compliance time, which the majority of people, partake in tax compliance during the months of February, March, and April. But, ultimately, your tax return is just an accumulation of all the transactions that occurred for the previous year, and it's very reactive. So if you want to legally and ethically change the tax you pay in your lifetime, you have to do the proper tax planning and strategy.
Chris Picciurro:Many people use real estate to as a tax advantage investment, and that's why it's part three of our a series, schedule e. We talked about schedule a, which is your item which are your itemized deductions, schedule c for self employed, and then schedule e. This is where we we report, all of your rental activity. Now schedule e is attached to a form ten forty, which is a personal tax return. If you own property in a partnership or in an s corporation, typically you don't wanna own rental properties in an s corp, but in a partnership, you're gonna file a form similar to schedule e, but it's not gonna be schedule e.
Chris Picciurro:Schedule e is specifically for people that are reporting rental income and deductions and attaching it to a personal tax return that could be an individual filer or someone filing jointly with a spouse.
John Tripolsky:And this may this may not be the, the sexiest of forms, I'd imagine. Right? There's some other ones that are a little bit more interesting, but, nevertheless, it is very important. Right?
Chris Picciurro:Absolutely. I mean, this is this is required if you have a rental property, and it is often, screwed up for lack of a better term. And we're gonna talk through what goes on schedule e and what are some of the very important numbers that go on there, what are some of the nonfinancial information that's required, and then a couple tidbits, tips, from the pros about things that often get missed. So let's talk about it. Schedule I'm looking at this as kind of a one zero one course on Schedule e, but Schedule and and might I backtrack?
Chris Picciurro:Schedule e is you know, it's called a supplemental income and loss schedule. This is where you put your rental properties, but you're also reporting royalties. You know, if you own maybe oil and gas or or you're getting paid a royalty for a passive investment, it's not just rental properties. It could be other type of, let's say, passive income, but the vast, vast majority of schedule e is going to be, the reporting of rental property. So, yeah, it gets attached to your personal tax return.
Chris Picciurro:One of the things that you have to keep in mind, and we're gonna put a link to in the podcast notes of of when you look at the schedule, is that someone could have several schedule e's attached to their personal return. In fact, John, I've we've seen clients in our private CPA practice that have had over 200 rental properties, owned. And, and remember, if you're a single member LLC, that gets reported on schedule e. You're a disregarded entity.
John Tripolsky:And can these forms be e filed as well too, or do we have to kill a small tree to mail all these?
Chris Picciurro:No. No trees are killed in the preparation of schedule e. They are e filed. And so with schedule e, yeah, you'll you'll report three properties on each schedule e, and you could have several schedule e's attached to a personal tax return. But it's important for people to remember that probably the number one takeaway before we start diving into what goes on it, each property is reported separately on a schedule e.
Chris Picciurro:I can't tell you how many times I've seen, somebody have 10 properties and either themselves or their tax professional was lazy and they or didn't know what they were doing and they just slapped it onto one, you know, onto one column. Ultimately, what schedule e is, it's a profit and loss statement for your property. There are some balance sheet items, meaning there's some assets that we're gonna talk about, but it's a profit and loss statement for your properties, and it's very important for each property to be reported separately due to passive activity loss rules, and and, you know, different properties could be have different use. You could have a commercial property. You could have a short term rental.
Chris Picciurro:You could have a long term rental. You, you know, you could have a you could have land. You know? You could have land that you're just renting out. So there's a lot of things that could be put on schedule e.
Chris Picciurro:So first thing, remember, schedule e, you're gonna each property is gonna have a separate line. Now let's say you have a duplex. Then I would put that on that duplex would just be one property
John Tripolsky:because it's all attached. Let's say you own
Chris Picciurro:an apartment building. That'd be and there's eight units in the apartment building. That's still you don't have to report each unit separately. That'd be one, you know, schedule e. But let's say you own eight condominiums in a condominium in a in a, let's say, vacation rental area all in the same complex, and there's 200 condominiums there and you own eight of them, each condominium would be a separate, profit and loss statement.
John Tripolsky:Gotcha. So, basically, you're lumping it together. Like, as you mentioned, it's more the the overall property footprint, if you will, not number of doors. Like, that's commonly used in the real estate investment
Chris Picciurro:world. That that's a good way to put it. Absolutely. So Perfect. Yep.
Chris Picciurro:So with Schedule e, we're starting off at the top. It's an interesting question that just came about in the last few years with IRS added to Schedule e, and it's simply saying, did you make any payments that require a ten ninety nine to be issued from you to somebody else? And it's a yes or no question. You know, so that that's interesting. Right?
Chris Picciurro:And we have some other content on when you issue a ten ninety nine, but don't ignore that question. What I don't like about schedule e is there's nowhere on schedule e for you to report if the property's owned by a single member LLC or a disregarded entity. Just insider tip, I think that's gonna change in the future. I think at some point schedule e will get modified. But the first step is you're gonna the the scheduling is gonna say, hey.
Chris Picciurro:What's going on? Do you do you owe are you supposed to issue any ten ninety nines? Then they're gonna it's gonna ask for the property address. Then it's gonna ask what type of property. This is something very, very important that I see a lot of errors on.
Chris Picciurro:It has remember I said schedule e is really a profit and loss statement? But type of property is extremely important. There are different codes, based on what type of property that you have. So that code could be a single family home, that could be land, that could be a vacation rental, that could be a multifamily, that could be a commercial property. And different types of property have different types of rules when you can, maybe deduct the losses, may or different depreciation schedules.
Chris Picciurro:So commercial property is depreciated over thirty nine years, where residential's twenty seven and a half years. So these are things that could easily trigger an audit if you put the wrong type of property in the type of property area.
John Tripolsky:Interesting. And what what we'll do too, I think you may have mentioned a little bit earlier, we'll put in the show notes here a direct link to the form itself or Schedule e form ten forty. And we urge you if you haven't yet or, you know, you're watching this or listening to it, just click on that form and kinda follow along with us too because, Chris, that's actually the first time, and I feel like I've pulled this form up and looked at it. I've actually missed that section that you mentioned in there that's maybe I was looking at an older form that, you know, they had asked. But, yeah, this is interesting.
John Tripolsky:It's Right. It's not interesting, but also interesting at the same time.
Chris Picciurro:I mean, it could be one of seven different types of property or the other. So if if you have a property that doesn't fit in any of these descriptions, then you're gonna put it on there under the other, category. So, yeah, so you're gonna fill out your type of property, and then it's gonna ask fair market value rental days versus personal use rental days. That's really easy. In general, the fair market value days is is gonna be the days it was available for rent.
Chris Picciurro:Does it look you know? So in in what this question is very important when it comes to vacation rentals. And if you're using it for more than fourteen days personally, then there there could be some tricky, things to navigate through, we'll say. But definitely don't ignore that fair market rental days and personal use days. The other thing to consider is that a lot of times lenders are looking at this number.
Chris Picciurro:Right? So let's say you have a short term rental property and you rented it out a hundred days. You purchased it halfway through last year, and you're trying to get financing, and you, the the underwriter might might look at that and say, well, if they rent it out for a hundred days, here's their revenue, but they only owned it owned it owned it half the year. So for a full year, we would probably double that. You know?
Chris Picciurro:So there's a different again, be the for the purposes of this podcast, this is, you know, schedule e basics. Use the accurate amount of fair market rental days and the personal use days. And then one other thing, if you are a, if you are married and you live in a community property state, your rental activity might be a QJV, which is called a qualified joint venture. And what that allows you to do is that allows you to report the property in a consolidated fashion, so both spouses, instead of creating two separate separate entities. So just be be aware of again, we haven't even jumped into how to report your revenue and deductions yet.
Chris Picciurro:These are all things that if not done properly, can inadvertently trigger an IRS examination.
John Tripolsky:So and really with this, Chris, I know the the question comes up all the time. It's like, how can I avoid an audit? Right? Well, here's one of them. Right?
John Tripolsky:Like, don't muck up you don't muck up your form, frankly. Spend the time, Go through it. And then also, you know, what I'm taking from this one, you know, the the trend being even, you know, in the couple minutes that we've been discussing this is just pay attention to what they're asking and almost don't overthink it. Right? Like, they're they're asking you very specifically what they want, and you gotta love the yes or no answers because I feel like the IRS doesn't do that very often.
John Tripolsky:They usually don't give you a very binary answer or a question.
Chris Picciurro:If the yeah. And this is what you need to think about. If the IRS and we're gonna talk let's talk about the income and then the expenses. If the IRS is asking for a specific line item, it means that's a common expense for a certain type of property. So and schedule e, they're asking, what's your rent received?
Chris Picciurro:What's your royalties received? Right? Royalties are gonna be from things like, you know, you could purchase, an oil and gas well. You could purchase I mean, quite frankly, if, John, let's say you wrote a hit song and I bought the rights to that song, I'm buying that royalty from you. And then rents received is those those are the two income items on schedule e.
Chris Picciurro:But then on schedule e and we're on page one of schedule e or, then it then it lists several different expenses. Now it doesn't mean you have to have all of these expenses, but these are the common expenses for a rental property. Advertising, auto and travel, cleaning, commissions, insurance, you know, I'm gonna stop, but management fees, you know, repair supplies, utilities. So if you have something that doesn't fit one of those categories, that's okay. You're gonna add it and report it on kind of that others, what we call line 19, catchall.
Chris Picciurro:But, typically, you're gonna see that those are the common expenses for a rental property. And the reason that those are out there is that I'm sure the IRS is taking that information and trying to figure out, you know, what is there what percentage of revenue is that, and does it seem like what we would call an anomaly, or does it seem like it might trigger something to look at it? So for instance, if you report that you're a commercial property that's been rented out for the entire year and you have a huge large 20% of your revenues management fee, that seems high. But if you're reporting you're a short term rental property and you're paying a 20% management fee, that seems normal. Right?
Chris Picciurro:Because that's typically the that would be a common management fee for someone that manages a short term rental property for you. So those are the things utilities. Utilities for a short term rental property are probably gonna be a lot higher, as a percentage of, you know, than maybe a long term rental. Because if I if you're renting my house on a long term basis, you're you're probably getting the lot of the utilities in the renter's name. They might be there for several years versus someone that's temporarily there.
Chris Picciurro:So those are the things you've gotta look at. You know, looking at repairs, like, we talk about the de minimis safe harbor election, but if you have a significant amount of repairs, should those be capitalized and depreciated over a period of years or should they be expensed? So just be aware of what you're doing when you're looking at the expenses. One more pro tip. If you have a Schedule e, pull out your tax return.
Chris Picciurro:Hopefully, it's in a PDF at this point. Look at insurance. Look at mortgage interest. I can't tell you how many times people forget to deduct insurance or mortgage interest. And a lot of times, it's it's missed accidentally.
Chris Picciurro:Let's say you own a rental property with a that has an escrow account, very common. Right? And the mortgage interest statement you get from the bank at the end of the year, credit union, etcetera, says, hey. I paid x amount of mortgage interest. Part of that payment is gonna be your insurance and property taxes.
Chris Picciurro:You might easily miss that. So a lot of times there's expenses that are missed, and the final thing I see missed a lot, oh, good gracious, depreciation. You're required to take a depreciation deduction. Now we talk a lot about cost segregation studies and accelerating depreciation. There are you know, as you know, John, I'm very fortunate to teach, you know, what the National Association of Tax Professionals, our tax season updates course, which is a sixteen hour course that I myself and a lot of people way more talented and intelligent than me teach all over the country.
Chris Picciurro:I've had the opportunity to teach between three and four hundred other tax professionals this fall and winter. My point is on this is that we had an hour and twenty minute segment in this course just on missed depreciation and how to fix it. So if you find on your tax return you don't have a deduction in the depreciation expense line, You're not the only one. Right? But there's a way to fix it.
Chris Picciurro:There's ways to fix it that could actually reduce your taxable income significantly.
John Tripolsky:And I feel like, Chris, it's almost a little bit serendipitous that we're having this conversation now because, roughly, by the time we released this a few days before, I had a great, kind of a casual, call it a fireside chat, if you will, with Mike Reed from your team. So and why bring that up, right, is we we talked to tried to answer the question of, you know, are you my accountant? Kind of that infamous question, but what came up a few times in that was just the the weight it carries on having your books in order. Right? So even though this might be very scary to some people, like, how do I know how much I spent in advertising?
John Tripolsky:How much do I know I spent in utilities? The good thing is is keeping your books in line as much as you can for the year, it gives you the answers. You're basically just moving numbers over. Right?
Chris Picciurro:Absolute. I mean, yes. You you you having accurate records is very important. So I I would say if you have a rental property, at a minimum, maybe set up a separate bank account that you can capture your income and deductions through that are easy to export those transactions to some type of software or even, you know, you summer I mean, you summarize them at the end of the year. So yeah.
Chris Picciurro:Absolutely. Other thing to consider, couple real quick tidbits on this, you know, you have to make sure that so by default, I don't wanna go down too many too many rabbit holes here, but by default, rental income is considered passive. Now there are exceptions to that, which for real estate professional status and for short term rental loophole. Definitely check out the Teaching Tax Slow YouTube channel for that information. But if you have a loss from a rental property and it's deemed to be a passive loss and you can't deduct that loss in the current year, which is extremely common, that gets reported on a form eighty five eighty two.
Chris Picciurro:A form eighty five eighty two lists all your passive activity losses, and that also flows from the schedule e. My point is this. One thing I see missed all the time, we might have even talked about this on one of the previous episodes, is that let's say, John, you're preparing your own return or you go to another new tax professional. You have a rental property, and you give them you give them all the information needed to prepare the return. You always need to look back at the previous year return to the c if, one, where the depreciation schedule is, meaning your you know, how much cost basis of the property is and depreciation reduction.
Chris Picciurro:But two, are there passive activity losses that have to get entered into the new software? They're so easy to miss, and they're very, very valuable, especially when you sell that property or sell another property. So I would say eighty five eighty two is definitely linked to Schedule e. They might not be brother and sister, but they're going to the same, holiday party or family reunion.
John Tripolsky:Oh, they're that's a good way to put it, man. And and I'm thinking, you know, again, me not being the tax guy here, I look at this as almost if you do say we'll just take example. You say you have one rental property. Right? Sure.
John Tripolsky:You might know how well it's doing. You know, at any given time, you kinda have a gut feeling. But this really is like your annual report card. Right? Like, you had mentioned on there, sometimes you forget about mortgage insure or, your mortgage interest or your insurance.
John Tripolsky:Frankly, I mean, it kinda goes without saying, you might look at this even if it's not prepared by you, might be prepared by your tax professional. You might get this. It's pretty important that you look at it because you might say, holy cow. Like, I'm paying way too much in this, and you go out and look at other options. So at kinda what I'm trying to do is add a little life to a very static perspective form.
John Tripolsky:Right? Using it for a good thing.
Chris Picciurro:This is yeah. I'm gonna leave you with a couple, yeah, a couple action items, pro tips, on Schedule e. So Schedule e, let me leave you with this. For on page two of Schedule e, that's where you're gonna report any k ones. We have a whole separate episode.
Chris Picciurro:I think k ones for dummies, basics for partnership and s corp returns. Any k ones you're getting from a partnership or an s corporation are gonna get reported on page two of schedule e. Let's focus on page one. What are your takeaways from here? One, most commonly missed deduction, depreciation.
Chris Picciurro:If you've missed it, it's fixable. Go talk to a tax professional. Two, make sure you break down the categories of your expenses. I can't tell you how many times, John, in my over well, over twenty year career someone said, well, I got a rental property. Yes, sir.
Chris Picciurro:Can we what are the income and deductions? Well, I make a hundred bucks a month. Oh, yeah. That's not what we put on our return. My mortgage is $1,100, and I and I rent them 1,200 of rent.
Chris Picciurro:Okay. That's great, but we need to break down to that. You put that on a tax return, and I pretty much, I'm not gonna promise anything, but your chances of getting examined are extreme much higher. So break it down, make it easy for your tax professional to help you mix and then the final takeaway is make sure you properly categorize the type of property in the rental days. And, oh, one more bonus that I already talked about, be very mindful of form eighty five eighty two and how that plays a role.
Chris Picciurro:As always, shameless plug, if you've got rental property, definitely jump in our defeating taxes private Facebook group, defeatingtaxes.com. Ask any question, John. We run something almost every Friday where we we ask members of the, of the Facebook group. Ask any question that you want, and we reply within one business day. We now, you know, it's funny, John.
Chris Picciurro:We now we have a ton of tax professionals in that group that always love to jump in and help out the taxpayers.
John Tripolsky:Absolutely. And even that, Chris, I mean, I don't have mentioned this a few episodes ago given the time frame here. If anybody's looking for somebody to prepare these returns that actually knows what they're talking about, I shouldn't say that in a bad way. It's not that a lot don't, but are very familiar with this form. What goes into a strategies behind it?
John Tripolsky:You guys offer that through your private practice and other resources and whatnot. So and that's just at 2025.tax. So two zero, the numerical, two zero two five dot tax and has that form on it. So you get a shameless plug. I get a shameless plug, sir.
John Tripolsky:We both get a point on the scoreboard.
Chris Picciurro:We'll take it. We need all the points we can get as we enter March Madness time as our segue. And for everyone that listened, honestly, thank you so much for jumping into the ace, these three weeks of the of the ace content. You know, again, like you said, John, this isn't the sexiest stuff. We've had some really cool, content as far as tax strategy.
Chris Picciurro:We've got very excited about what's coming up. But the ace, schedule a, schedule c, schedule e, that that is the nuts and bolts of foundation of of tax preparation and tax planning. If you'd like what you're hearing, again, we can't thank you enough for people that have subscribed to the YouTube channel and given us a five star review because it really that's the fuel to our fire, and it's it allows us to keep cranking out great content and and coming up with more topics based on what our community, the tax planning community, tells us to do.
John Tripolsky:Absolutely. And as always, we'll see everybody back here again on the Teaching Tax Flow podcast next week. So it's gonna be a different day, different day, roughly about the same time, but different topic. Thanks, Chris, again, as always. And one more thing before we wrap up here.
John Tripolsky:We wanna know what you guys wanna hear. Right? So we constantly get these topics through our defeating taxes, through that, Facebook group. We get messages from people. If there's anything you want to hear us discuss, sometimes we don't have the best answers.
John Tripolsky:That's what I love going to Chris for and say, hey, we got a great topic. Go find a great guest. And that's really what, you know, Chris, as you mentioned, that that's the fuel of our fire. Send us those ideas. We'd love it.
John Tripolsky:We have so many of them. We just wanna make sure that what we're doing is exactly what you guys wanna hear. Without going into exactly what it is, we are extremely proud of just the absolute sheer volume of people that have downloaded this podcast going on, like, two years, almost now a little bit over. So keep them coming. We love it.
John Tripolsky:And, again, we'll see you next week.
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