Schedule E and Capital Gains and Losses

Schedule E tax is used by taxpayers in the United States to report Supplemental Income and Loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs).

Taxpayers use Schedule E to report rental income and deduct allowable expenses related to operating the rental properties, such as mortgage interest, property taxes, maintenance costs, and depreciation, to calculate their net rental profit or loss for the tax year. This net amount is then transferred to their individual income tax return (Form 1040). 

In addition to reporting rental real estate income and expenses, Schedule E is also used to report income or losses from partnerships, estates, trusts, and S-corporations.

Capital gains and losses refer to the increase or decrease in the value of an asset, such as stocks, bonds, real estate, or other investments, over the period of time that the asset is owned. A capital gain occurs when an asset is sold for a higher price than its original purchase price, resulting in a profit. A capital loss occurs when an asset is sold for a lower price than its original purchase price, resulting in a loss.

Understanding capital gains and losses is important for investors as they have tax implications. Capital gains are generally taxed as income, while capital losses can be used to offset other capital gains.

Objectives

At the end of this lesson, the student will:

1. Know the types of income reported on Schedule E
2. Understand the difference between repairs and improvements
3. Know where to find the rental property depreciation chart
4. Know the holding periods for different types of property
5. Understand the difference between short-term and long-term capital gains
6. Be able to identify capital assets
7. Know how to determine basis before selling an asset
8. Understand when the primary residence is excluded from capital gain