Schedule E for US Expats: Reporting Rental & Supplemental Income

For many expats with supplemental income, no tax return is complete without IRS tax form Schedule E. Not only can failing to file this form result in IRS penalties and audits — it may also prevent you from claiming deductions that can lower your taxable income. To reach full compliance and minimize your tax burden, it’s imperative to file Schedule E accurately and on time.

But what is a Schedule E IRS tax form exactly, who needs to file it, and how do you complete it? We’ll go over all of those questions and more below.

What is IRS Schedule E?

Schedule E (Form 1040): Supplemental Income and Loss is an addendum to Form 1040 used to detail profit and loss for certain types of unearned income, including from:

• Real estate activities, including rental income from both residential and commercial properties 
• Royalties, such as those generated by patents, copyrights, and land with natural resources like minerals or oil and gas
• Partnerships and S corporations
• Estates and trusts
• Real Estate Mortgage Investment Conduits (REMICs)

Who Needs to File Schedule E?

Anyone with income that falls into the categories above must file Schedule E. This might include:

• Landlords
• Patent & copyright holders
• Members of a partnership 
• Owners of an S corp
• Those who have received an inheritance
• Beneficiaries of trusts
• REMIC holders

Tips for completing Schedule E

Reporting income

You can make filing Schedule E much smoother if you keep accurate records of your income throughout the year. In some cases — such as if you’re the beneficiary of a trust — you’ll receive an annual Schedule K-1 detailing your income and/or loss. In other cases, you’ll need to keep track of your income independently.

Many choose to use bookkeeping software like QuickBooks or Xero that automatically track incoming transfers to their bank accounts. Some real estate owners use dedicated bookkeeping platforms for landlords like Buildium, Stessa, or Avail.

Remember that you must always report your income on your US tax returns in USD. If the income you receive is in a foreign currency, you’ll need to convert it using a reliable source (Wise offers a great online currency converter).

Claiming expenses

Accurately reporting income-related expenses is key to claiming deductions that reduce your overall taxable income. Many of the bookkeeping services mentioned above automatically track expenses in addition to income. Regardless, it’s a good idea to hold onto any expense-related receipts and invoices you receive for at least three years in the off chance of an audit.

It’s not uncommon to have expenses that don’t explicitly fit into the categories included on Schedule E. Tax professionals have an extensive knowledge of what you can and cannot deduct for tax purposes. Working with one can help you claim as many expenses as possible while preventing you from claiming ineligible expenses.

Attempting to deduct expenses that are ineligible, such as personal expenses, can result in penalties, audits, and in extreme cases, even criminal charges. To avoid mixing up your personal expenses with business expenses, it’s often beneficial to set up a separate bank account.

Claiming Passive Activity Loss (PAL)

If any of the investments you report on Schedule E incur losses, you may be able to use them to offset other income — at least in part — through PAL rules. 

Passive activity is defined as:

• Trade or business activities you didn’t materially contribute to (typically, this means you dedicated fewer than 500 hours to it over the year), and
• Rental activities (excluding real estate professionals)

Generally, you can only deduct passive losses from other passive income — not earned income (e.g. salary, wages, commissions, etc.). If you don’t have net-positive passive income from other sources, you usually cannot claim passive losses.

However, there are exceptions to this rule. For example, those who actively participate in real estate rental activities and have a Modified Adjusted Gross Income (MAGI) of $100,000 or less can deduct up to $25,000 in passive losses. Furthermore, they can deduct these passive losses from earned income.

For each dollar above the $100,000 threshold, you can claim $.50 less. With a MAGI of $150,000 or more, you can no longer claim a real estate rental loss.

How to File Schedule E, Step by Step

Now that you have a high-level understanding of Schedule E and its filing requirements, let’s dig into how to complete it.

Part I: Income or Loss from Rental Real Estate and Royalties

The first section is for those with real estate or royalty income. In the beginning of the section, you’ll share basic information like whether you needed to issue Form 1099, the address and type of your property, and which days the property was used by tenants versus for personal use. 

Then, you’ll need to detail your royalty and rental income and expenses (such as mortgage interest). Note that you cannot claim expenses on days when you used the property for personal use.

At the end, you’ll calculate your gross income and gross losses to arrive at your net income or loss for rental real estate and royalty income.

Property depreciation

While calculating most expenses is fairly straightforward, calculating depreciation is a bit more involved. Depreciation rules allow you to deduct a certain amount as your property “wears out” or loses value for tax purposes over time (27.5 years for residential rental property in the US, 39 years for commercial property in the US).

Property outside the US differs from domestic property under U.S. tax law. Residential rental property abroad is depreciated over 30 years, while foreign commercial rental property is depreciated over a 40 year useful life. Using a longer recovery period (30 or 40 years) for property abroad means smaller annual depreciation deductions compared to U.S. property, which can slightly reduce your tax benefits for owning and renting out foreign real estate. 

To calculate depreciation, you’ll deduct the adjusted cost basis — the cost of the building (excluding land) plus certain acquisition costs and capital improvements — divided by the number of relevant years.

The formula for owners of property located outside of the US is as follows:

Example: Martin is a US expat based in the United Arab Emirates (UAE) who rents out a single-family home in Dubai that he bought in 2020. Factoring in the initial cost of the property (excluding land) and acquisition costs, his adjusted cost basis was $1,200,000. 

To calculate his allowable depreciation, he takes the adjusted cost basis of $1,200,000 and divides it by 30 years, since he is an owner of residential property based abroad.

Part II: Income or Loss from Partnerships and S Corporations

In the next section of Schedule E, you’ll share some details about any partnerships or S corporations that you hold interest in. 

Then, you’ll report your share of income or loss from these businesses. If the businesses are US-based, they should send you a Schedule K-1 you can reference when reporting both passive and non-passive income and losses. 

This section also includes a column for the Section 179 expense deduction, which allows businesses to immediately expense the cost of certain depreciable business assets (e.g. office furniture, computers, company vehicles).

At the end, you’ll calculate your total partnership and S corporation income or loss.

Part III: Income or Loss From Estates and Trusts

If you’re the beneficiary of any estates and trusts, this section is where you’ll report that information.. 

Again, US-based trusts should distribute a Schedule K-1 containing the information you need to fill out the columns for passive and non-passive income or losses. If the estates or trusts are foreign, you may need to file Form 3520 or Form 3520-A.

At the end, you’ll calculate your total estate and trust income or loss.

Part IV: Income or Loss From Real Estate Mortgage Investment Conduits (REMICs)

This section is only for residual holders of a niche investment vehicle called REMICS. 

A REMIC is a tax-advantaged investment vehicle that pools together mortgage loans (or sometimes mortgage-backed securities), then issues securities based on the cash flow of those assets. REMICS offer different types of securities organized into “tranches,” each of which has its own level of risk and reward. 

Only residual interest holders of REMICS need to complete Part IV. Regular tranche holders have the top priority in payment, while residual holders receive payments from the amount left over after paying the regular holders.

If you’re a residual holder of a REMIC, the REMIC should provide you with a Schedule Q that you can use to fill out columns C through E. Then, you’ll total D and E to arrive at your individual taxable share of the REMIC’s income or loss. 

Part V: Summary

In this section, you’ll total your income and loss from all of the previous sections. While there are special considerations for farming and fishing income and real estate professionals, these fields do not apply to the vast majority of Schedule E filers.

Using the Foreign Tax Credit (FTC) to avoid double taxation

All Americans are subject to US income tax. As such, any American citizen or U.S. permanent resident who earns above a certain threshold must file (and potentially pay) US taxes — even those who live abroad.

This means that American expats who are tax residents in other countries risk paying taxes on their income to both the US and their country of residence. Fortunately, the US offers a couple of tax breaks that can largely mitigate that risk.

The one most relevant for passive income is the Foreign Tax Credit (FTC). The FTC gives Americans dollar-for-dollar US tax credits on any foreign income taxes they’ve paid. This essentially lets you deduct your foreign taxes paid from your US tax liability.

If you live in one of the many countries with higher tax rates than the US, the FTC will often erase your US tax liability completely. It can even give you surplus credits to use on future tax bills. To qualify for the FTC, taxes must be:

• Legal
• Based on income
• Paid
• Made out in your name

You can claim the FTC by filing Form 1116. 

Get expert help with Schedule E & beyond

Schedule E is an essential tax form for many US expats with certain types of passive income. This includes anyone who has received rental income or income from royalties, partnerships, S corporations, estates, trusts, and REMICS.

Not only does reporting your passive income bring you up to IRS compliance — claiming eligible expenses helps reduce your overall tax burden. To ensure accuracy, maximize your allowable deductions, and ensure you submit all of your required forms, it’s best to work with a tax professional. This is especially true if you have multiple or complex income streams. 

Resources:

1. Passive Activity Loss Rules
2. Section 179: Definition, How It Works, and Example
3. Real Estate Mortgage Investment Conduit (REMIC) Definition, Rules
4. Residuals in Preferred Stock and Common Stock Structures