Rental, Royalty, Passive and Pass-Through Income

Schedule E items combine an income question (what is rent?) with a limitation question (how much loss gets through?). The SEE uses short computations: the phase-down of the $25,000 allowance, vacation home expense splits, and depreciation for a building placed in service mid-year.

Keep the order of the loss limits fixed in your head. Each limit only sees what the previous one let through.

• •Advance rent (including last month's rent) is income when received, whatever period it covers.
• •Security deposits are not income while refundable; they become income if kept for unpaid rent or damage.
• •Tenant pays the landlord's bill: report the payment as rent and deduct it if deductible. $12,000 of rent + $1,000 advance rent + $1,500 of tax paid by the tenant = $14,500 of rental income.
• •Repairs vs improvements: a betterment, restoration or adaptation is capitalized; replacing a whole roof is a restoration. Fixing a faucet or repainting is a deductible repair (Treas. Reg. 1.263(a)-3).
• •Personal property rental outside a business goes on Schedule 1 as other income, with expenses as an adjustment (IRC 62(a)(4)).
• •Royalties go on Schedule E unless the taxpayer is in the business of writing or creating, which moves them to Schedule C.

Depreciation example: a $275,000 building (land excluded) placed in service in March 2025 gives $10,000 a year; mid-month convention allows 9.5 months, so $7,917 for 2025 (Pub. 946 (2025), Table A-6).