Supplemental Income and Loss

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Page 1 of 8 of 2008 Instructions for Schedule E (Form 1040)

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Department of the Treasury
Internal Revenue Service

2008 Instructions for Schedule E (Form 1040)
Use Schedule E (Form 1040) to report income or loss from rental real estate, royalties,
partnerships, S corporations, estates, trusts, and residual interests in REMICs.
Supplemental
You can attach your own schedule(s) to report income or loss from any of these sources.
Use the same format as on Schedule E.
Income and
Enter separately on Schedule E the total income and the total loss for each part. Enclose
loss figures in (parentheses).
Loss
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
Other Schedules and Forms
You May Have To File
• Schedule A to deduct interest, taxes,

and casualty losses not related to your business.
• Form 3520 to report certain transactions with foreign trusts and receipt of certain large gifts or bequests from certain
foreign persons.
• Form 4562 to claim depreciation (including the special allowance) on assets
placed in service in 2008, to claim amortization that began in 2008, to make an election under section 179 to expense certain
property, or to report information on listed
property.
• Form 4684 to report a casualty or theft
gain or loss involving property used in your
trade or business or income-producing
property.
• Form 4797 to report sales, exchanges,
and involuntary conversions (not from a
casualty or theft) of trade or business property.
• Form 6198 to figure your allowable
loss from an at-risk activity.
• Form 8082 to notify the IRS of any
inconsistent tax treatment for an item on
your return.
• Form 8582 to figure your amount of
allowable passive activity loss.
• Form 8824 to report like-kind exchanges.
• Form 8826 to claim a credit for expenditures to improve access to your business
for individuals with disabilities.
• Form 8873 to figure your extraterritorial income exclusion.

• Form 8910 to claim a credit for placing a new alternative motor vehicle in service for business use.
Single-member limited liability company
(LLC). Generally, a single-member do-

mestic LLC is not treated as a separate entity for federal income tax purposes. If you
are the sole member of a domestic LLC,
file Schedule E (or Schedule C, C-EZ, or F,
if applicable). However, you can elect to
treat a domestic LLC as a corporation. See
Form 8832 for details on the election and
the tax treatment of a foreign LLC.
Information returns. You may have to file
information returns for wages paid to employees, certain payments of fees and other
nonemployee compensation, interest, rents,
royalties, real estate transactions, annuities,
and pensions. You generally use Form
1099-MISC, Miscellaneous Income, to report rents and payments of fees and other
nonemployee compensation. For details,
see the 2008 General Instructions for
Forms 1099, 1098, 5498, and W-2G.

If you received cash of more than
$10,000 in one or more related transactions
in your trade or business, you may have to
file Form 8300. For details, see Pub. 1544.

Reportable Transaction
Disclosure Statement
Use Form 8886 to disclose information for
each reportable transaction in which you
participated. Form 8886 must be filed for
each tax year that your federal income tax
liability is affected by your participation in
the transaction. You may have to pay a penalty if you are required to file Form 8886
but do not do so. You may also have to pay
interest and penalties on any reportable
transaction understatements. The following
are reportable transactions.
• Any listed transaction that is the same
as or substantially similar to tax avoidance
transactions identified by the IRS.
• Any transaction offered to you or a related party under conditions of confidentiality for which you paid an advisor a fee of
at least $50,000.

E-1
Cat. No. 24332T

• Certain transactions for which you or
a related party have contractual protection
against disallowance of the tax benefits.
• Certain transactions resulting in a loss
of at least $2 million in any single tax year
or $4 million in any combination of tax
years. (At least $50,000 for a single tax
year if the loss arose from a foreign currency transaction defined in section
988(c)(1), whether or not the loss flows
through from an S corporation or partnership.)
• Certain transactions of interest entered into after November 1, 2006, that are
the same or substantially similar to transactions that the IRS has identified by notice,
regulation, or other form of published guidance as transactions of interest.
See the Instructions for Form 8886 for
more details.

At-Risk Rules
Generally, you must complete Form 6198
to figure your allowable loss if you have:
• A loss from an activity carried on as a
trade or business or for the production of
income, and
• Amounts in the activity for which you
are not at risk.
The at-risk rules generally limit the
amount of loss (including loss on the disposition of assets) you can claim to the
amount you could actually lose in the activity. However, the at-risk rules do not apply
to losses from an activity of holding real
property placed in service before 1987.
They also do not apply to losses from your
interest acquired before 1987 in a
pass-through entity that is engaged in such
activity. The activity of holding mineral
property does not qualify for this exception.
In most cases, you are not at risk for
amounts such as the following.
• Nonrecourse loans used to finance the
activity, to acquire property used in the activity, or to acquire your interest in the activity that are not secured by your own
property (other than property used in the
activity). However, there is an exception
for certain nonrecourse financing borrowed

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by you in connection with the activity of
holding real property (other than mineral
property). See Qualified nonrecourse financing below.
• Cash, property, or borrowed amounts
used in the activity (or contributed to the
activity, or used to acquire your interest in
the activity) that are protected against loss
by a guarantee, stop-loss agreement, or
other similar arrangement (excluding casualty insurance and insurance against tort liability).
• Amounts borrowed for use in the activity from a person who has an interest in
the activity (other than as a creditor) or who
is related, under section 465(b)(3)(C), to a
person (other than you) having such an interest.
Qualified nonrecourse financing. Quali-

fied nonrecourse financing is treated as an
amount at risk if it is secured by real property used in an activity of holding real property that is subject to the at-risk rules.
Qualified nonrecourse financing is financing for which no one is personally liable for
repayment and is:
• Borrowed by you in connection with
the activity of holding real property (other
than mineral property),
• Not convertible from a debt obligation
to an ownership interest, and
• Loaned or guaranteed by any federal,
state, or local government, or borrowed by
you from a qualified person.
Qualified person. A qualified person is a
person who actively and regularly engages
in the business of lending money, such as a
bank or savings and loan association. A
qualified person cannot be:
• Related to you (unless the nonrecourse financing obtained is commercially
reasonable and on substantially the same
terms as loans involving unrelated persons),
• The seller of the property (or a person
related to the seller), or
• A person who receives a fee due to
your investment in real property (or a person related to that person).

For more details about the at-risk rules,
see the Instructions for Form 6198 and Pub.
925.

Passive Activity Loss Rules
The passive activity loss rules may limit the
amount of losses you can deduct. These
rules apply to losses in Parts I, II, and III,
and line 40 of Schedule E.
Losses from passive activities may be
subject first to the at-risk rules. Losses deductible under the at-risk rules are then
subject to the passive activity loss rules.
You generally can deduct losses from
passive activities only to the extent of income from passive activities. An exception
applies to certain rental real estate activities
(explained later on this page).

Passive Activity
A passive activity is any business activity
in which you did not materially participate
and any rental activity, except as explained
later on this page. If you are a limited partner, you generally are not treated as having
materially participated in the partnership’s
activities for the year.
The rental of real or personal property is
generally a rental activity under the passive
activity loss rules, but exceptions apply. If
your rental of property is not treated as a
rental activity, you must determine whether
it is a trade or business activity, and if so,
whether you materially participated in the
activity for the tax year.
See the Instructions for Form 8582 to
determine whether you materially participated in the activity and for the definition
of “rental activity.”
See Pub. 925 for special rules that apply
to rentals of:
• Substantially nondepreciable property,
• Property incidental to development
activities, and
• Property related to activities in which
you materially participate.

Activities That Are Not Passive
Activities
Activities of real estate professionals. If

you were a real estate professional for
2008, any rental real estate activity in
which you materially participated is not a
passive activity. You were a real estate professional for the year, only if you met both
of the following conditions.
• More than half of the personal services you performed in trades or businesses
during the year were performed in real
property trades or businesses in which you
materially participated.
• You performed more than 750 hours
of services during the year in real property
trades or businesses in which you materially participated.
For purposes of this rule, each interest in
rental real estate is a separate activity, unless you elect to treat all your interests in
rental real estate as one activity. To make
this election, attach a statement to your
original tax return that declares you are a
qualifying taxpayer for the year and you are
making the election under section
469(c)(7)(A). The election applies for the
year made and all later years in which you
are a real estate professional. You can revoke the election only if your facts and circumstances materially change.
If you are married filing jointly, either
you or your spouse must meet both of the
above conditions, without taking into account services performed by the other
spouse.
A real property trade or business is any
real property development, redevelopment,
construction, reconstruction, acquisition,

E-2

conversion, rental, operation, management,
leasing, or brokerage trade or business.
Services you performed as an employee are
not treated as performed in a real property
trade or business unless you owned more
than 5% of the stock (or more than 5% of
the capital or profits interest) in the employer.
If you were a real estate professional for
2008, complete Schedule E, line 43.
Other activities. The rental of your home

that you also used for personal purposes is
not a passive activity. See the instructions
for line 2 on page E-3.
A working interest in an oil or gas well
that you held directly or through an entity
that did not limit your liability is not a passive activity even if you did not materially
participate.
Royalty income not derived in the ordinary course of a trade or business reported
on Schedule E generally is not considered
income from a passive activity.
For more details on passive activities,
see the Instructions for Form 8582 and Pub.
925.

Exception for Certain Rental Real
Estate Activities
If you meet all of the following conditions,
your rental real estate losses are not limited
by the passive activity loss rules. If you do
not meet all of these conditions, see the Instructions for Form 8582 to find out if you
must complete and attach Form 8582 to figure any losses allowed.
1. Rental real estate activities are your
only passive activities.
2. You do not have any prior year unallowed losses from any passive activities.
3. All of the following apply if you have
an overall net loss from these activities:
a. You actively participated (defined below) in all of the rental real estate activities;
b. If married filing separately, you lived
apart from your spouse all year;
c. Your overall net loss from these activities is $25,000 or less ($12,500 or less if
married filing separately);
d. You have no current or prior year
unallowed credits from passive activities;
and
e. Your modified adjusted gross income
(defined on page E-3) is $100,000 or less
($50,000 or less if married filing separately).
Active participation. You can meet the ac-

tive participation requirement without regular, continuous, and substantial
involvement in real estate activities. But
you must have participated in making management decisions or arranging for others
to provide services (such as repairs) in a
significant and bona fide sense. Such management decisions include:
• Approving new tenants,

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• Deciding on rental terms,
• Approving capital or repair expendi-

tures, and
• Other similar decisions.
You are not considered to actively participate if, at any time during the tax year,
your interest (including your spouse’s interest) in the activity was less than 10% by
value of all interests in the activity. If you
are a limited partner, you are also not
treated as actively participating in a
partnership’s rental real estate activities.
Modified adjusted gross income. This is
your adjusted gross income from Form
1040, line 38, or Form 1040NR, line 36,
without taking into account:
• Any allowable passive activity loss,
• Rental real estate losses allowed for
real estate professionals (see Activities of
real estate professionals on page E-2),
• Taxable social security or tier 1 railroad retirement benefits,
• Deductible contributions to a traditional IRA or certain other qualified retirement plans under section 219,
• The student loan interest deduction,
• The tuition and fees deduction,
• The domestic production activities deduction,
• The deduction for one-half of self-employment tax,
• The exclusion from income of interest
from series EE and I U.S. savings bonds
used to pay higher education expenses, and
• Any excluded amounts under an
employer’s adoption assistance program.

Recordkeeping
You must keep records to support items reported on Schedule E in case the IRS has
questions about them. If the IRS examines
your tax return, you may be asked to explain the items reported. Good records will
help you explain any item and arrive at the
correct tax with a minimum of effort. If you
do not have records, you may have to spend
time getting statements and receipts from
various sources. If you cannot produce the
correct documents, you may have to pay
additional tax and be subject to penalties.

Specific Instructions
Filers of Form 1041. If you are a fiduciary

filing Schedule E with Form 1041, enter the
estate’s or trust’s employer identification
number (EIN) in the space for “Your social
security number.”

Part I
Before you begin, see the instructions for lines 3 and 4 to
determine if you should report
your rental real estate and roy-

alty income on Schedule C, Schedule
C-EZ, or Form 4835 instead of Schedule E.

Income or Loss From
Rental Real Estate and
Royalties
Use Part I to report:
• Income and expenses from rental real
estate (including personal property leased
with real estate), and
• Royalty income and expenses.
• For an estate or trust only, farm rental
income and expenses based on crops or
livestock produced by the tenant. Do not
use Form 4835 or Schedule F (Form 1040)
for this purpose.
If you own a part interest in a rental real
estate property, report only your part of the
income and expenses on Schedule E.
Complete lines 1 and 2 for each rental
real estate property. Leave these lines blank
for each royalty property.
If you have more than three rental real
estate or royalty properties, complete and
attach as many Schedules E as you need to
list them. But fill in the “Totals” column on
only one Schedule E. The figures in the
“Totals” column on that Schedule E should
be the combined totals for all properties
reported on your Schedules E. If you are
also using page 2 of Schedule E, use the
same Schedule E on which you entered the
combined totals for Part I.
Personal property. Do not use Schedule E

to report income and expenses from the
rental of personal property, such as equipment or vehicles. Instead, use Schedule C
or C-EZ if you are in the business of renting
personal property. You are in the business
of renting personal property if the primary
purpose for renting the property is income
or profit and you are involved in the rental
activity with continuity and regularity.
If your rental of personal property is not
a business, see the instructions for Form
1040, lines 21 and 36, to find out how to
report the income and expenses.
Husband-wife qualified joint venture. Do

not use Schedule E to report income and
expenses from a rental real estate business
that is a qualified joint venture conducted
by you and your spouse, if you file a joint
return for the tax year.
Generally, if you and your spouse
jointly own and operate an unincorporated
business and share in the profits and losses,
you are taxed as a partnership. However, if
you and your spouse each materially participate as the only members of a jointly
owned and operated business, and you file
a joint return for the tax year, you can make
an election to be treated as a qualified joint
venture instead of a partnership. For an explanation of “material participation,” see
the instructions for Schedule C, line G, that
begin on page C-3.

E-3

To make the election, you must divide
all items of income, gain, loss, deduction,
and credit attributable to the business between you and your spouse in accordance
with your respective interests in the venture. Each of you must file a separate
Schedule C or C-EZ. On each line of your
separate Schedule C or C-EZ, you must
enter your share of the applicable income,
deduction, or loss. See the instructions for
Schedule C or C-EZ and Publication 527
for more details.
As long as you remain qualified, your
election cannot be revoked without IRS
consent.
Note. Rental income reported on Schedule
E is not taxable for self-employment tax
purposes. Electing qualified joint venture
status and using the Schedule C or C-EZ
does not alter the application of the
self-employment tax or the passive loss
limitation rules.
Extraterritorial income exclusion. Except
as otherwise provided in the Internal Revenue Code, gross income includes all income from whatever source derived. Gross
income, however, does not include extraterritorial income that is qualifying foreign
trade income under certain circumstances.
Use Form 8873 to figure the extraterritorial
income exclusion. Report it on Schedule E
as explained in the Instructions for Form
8873.
Chapter 11 bankruptcy cases. If you were

a debtor in a chapter 11 bankruptcy case,
see page 20 of the instructions for Form
1040.

Line 1
For rental real estate property only, show
all of the following.
• The kind of property you rented (for
example, townhouse, commercial building,
mobile home, and self-storage unit).
• The street address, city or town, state,
and ZIP code. If the property is located in a
foreign country, enter the city, province or
state, country, and postal code.
• Your percentage of ownership in the
property, if less than 100%.

Line 2
If you rented out a dwelling unit that you
also used for personal purposes during the
year, you may not be able to deduct all the
expenses for the rental part. “Dwelling
unit” (unit) means a house, apartment, condominium, or similar property.
A day of personal use is any day, or part
of a day, that the unit was used by:
• You for personal purposes,
• Any other person for personal purposes, if that person owns part of the unit
(unless rented to that person under a
“shared equity” financing agreement),
• Anyone in your family (or in the family of someone else who owns part of the

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unit), unless the unit is rented at a fair rental
price to that person as his or her main
home,
• Anyone who pays less than a fair
rental price for the unit, or
• Anyone under an agreement that lets
you use some other unit.
Do not count as personal use:
• Any day you spent working substantially full time repairing and maintaining
the unit, even if family members used it for
recreational purposes on that day, or
• Any days you used the unit as your
main home before or after renting it or offering it for rent, if you rented or tried to
rent it for at least 12 consecutive months (or
for a period of less than 12 consecutive
months at the end of which you sold or
exchanged it).
Check “Yes” if you or your family used
the unit for personal purposes in 2008 more
than the greater of:
• 14 days, or
• 10% of the total days it was rented to
others at a fair rental price.
Otherwise, check “No.”
If you checked “No” you can deduct all
your expenses for the rental part, subject to
the At-Risk Rules and the Passive Activity
Loss Rules explained beginning on page
E-1.
If you checked “Yes” and rented the
unit out for fewer than 15 days in 2008, do
not report the rental income and do not
deduct any rental expenses. If you itemize
deductions on Schedule A, you can deduct
allowable interest, taxes, and casualty
losses. If you do not itemize, you can increase your standard deduction by certain
state or local real estate taxes and a net
disaster loss attributable to a federally declared disaster.
If you checked “Yes” and rented the
unit out for at least 15 days in 2008, you
may not be able to deduct all your rental
expenses. You can deduct all of the following expenses for the rental part on Schedule
E.
• Mortgage interest.
• Real estate taxes.
• Casualty losses.
• Other rental expenses not related to
your use of the unit as a home, such as
advertising expenses and rental agents’
fees.
If any income is left after deducting
these expenses, you can deduct other expenses, including depreciation, up to the
amount of remaining income. You can
carry over to 2009 the amounts you cannot
deduct.
See Pub. 527 for details.

Line 3
If you received rental income from real estate (including personal property leased

with real estate) and you were not in the
real estate business, report the income on
line 3. Use a separate column (A, B, or C)
for each rental property. Include income
received for renting a room or other space.
If you received services or property instead
of money as rent, report the fair market
value of what you received as rental income.
Be sure to enter the total of all your rents
in the “Totals” column even if you have
only one property.
If you provided significant services to
the renter, such as maid service, report the
rental activity on Schedule C or C-EZ, not
on Schedule E. Significant services do not
include the furnishing of heat and light,
cleaning of public areas, trash collection, or
similar services.
If you were in the real estate sales business, include on line 3 only the rent received from real estate (including personal
property leased with real estate) you held
for investment or speculation. Do not use
Schedule E to report income and expenses
from rentals of real estate held for sale to
customers in the ordinary course of your
real estate sales business. Instead, use
Schedule C or C-EZ for these rentals.
For more details on rental income use
TeleTax topic 414 (see the Instructions for
Form 1040, page 84), or see Pub. 527.
Rental income from farm production or
crop shares. Report farm rental income

and expenses on Form 4835 if:
• You are an individual,
• You received rental income based on
crops or livestock produced by the tenant,
and
• You did not materially participate in
the management or operation of the farm.

were withheld from oil or gas payments
you received. Include taxes withheld by the
producer on line 16.

General Instructions for
Lines 5 Through 21
Enter your rental and royalty expenses for
each property in the appropriate column.
You can deduct all ordinary and necessary
expenses, such as taxes, interest, repairs,
insurance, management fees, agents’ commissions, and depreciation.
Do not deduct the value of your own
labor or amounts paid for capital investments or capital improvements.
Enter your total expenses for mortgage
interest (line 12), total expenses before depreciation expense or depletion (line 19),
and depreciation expenses or depletion
(line 20) in the “Totals” column even if you
have only one property.
Renting out part of your home. If you rent
out only part of your home or other property, deduct the part of your expenses that
applies to the rented part.
Credit or deduction for access expenditures. You may be able to claim a tax

credit for eligible expenditures paid or incurred in 2008 to provide access to your
business for individuals with disabilities.
See Form 8826 for details.
You can also elect to deduct up to
$15,000 of qualified costs paid or incurred
in 2008 to remove architectural or transportation barriers to individuals with disabilities and the elderly.
You cannot take both the credit and the
deduction for the same expenditures.

Line 6

Line 4
Report on line 4 royalties from oil, gas, or
mineral properties (not including operating
interests); copyrights; and patents. Use a
separate column (A, B, or C) for each royalty property. Be sure to enter the total of
all your royalties in the “Totals” column
even if you have only one source of royalties.
If you received $10 or more in royalties
during 2008, the payer should send you a
Form 1099-MISC or similar statement by
February 2, 2009, showing the amount you
received.
If you are in business as a self-employed
writer, inventor, artist, etc., report your royalty income and expenses on Schedule C or
C-EZ.
You may be able to treat amounts received as “royalties” for the transfer of a
patent or amounts received on the disposal
of coal and iron ore as the sale of a capital
asset. For details, see Pub. 544.
Enter on line 4 the gross amount of royalty income, even if state or local taxes

E-4

You can deduct ordinary and necessary
auto and travel expenses related to your
rental activities, including 50% of meal expenses incurred while traveling away from
home. You generally can either deduct
your actual expenses or take the standard
mileage rate. You must use actual expenses
if you used more than four vehicles simultaneously in your rental activities (as in
fleet operations). You cannot use actual expenses for a leased vehicle if you previously used the standard mileage rate for
that vehicle.
You can use the standard mileage rate
for 2008 only if you:
• Owned the vehicle and used the standard mileage rate for the first year you
placed the vehicle in service, or
• Leased the vehicle and are using the
standard mileage rate for the entire lease
period (except the period, if any, before
1998).
If you take the standard mileage rate,
multiply the number of miles driven in connection with your rental activities by:

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• 50.5 cents for miles driven from Janu-

ary 1, 2008, through June 30, 2008; and
• 58.5 cents for miles driven from July
1, 2008, through December 31, 2008.
Include this amount and your parking fees
and tolls on line 6.

You cannot deduct rental or
lease payments, depreciation,
or your actual auto expenses if
you use the standard mileage
rate.
If you deduct actual auto expenses:
• Include on line 6 the rental activity
portion of the cost of gasoline, oil, repairs,
insurance, tires, license plates, etc., and
• Show auto rental or lease payments on
line 18 and depreciation on line 20.
If you claim any auto expenses (actual
or the standard mileage rate), you must
complete Part V of Form 4562 and attach
Form 4562 to your tax return.
See Pub. 527 and Pub. 463 for details.

Line 10
Include on line 10 fees for tax advice and
the preparation of tax forms related to your
rental real estate or royalty properties.
Do not deduct legal fees paid or incurred to defend or protect title to property,
to recover property, or to develop or improve property. Instead, you must capitalize these fees and add them to the
property’s basis.

Lines 12 and 13
In general, to determine the interest expense allocable to your rental activities,
you must have records to show how the
proceeds of each debt were used. Specific
tracing rules apply for allocating debt proceeds and repayment. See Pub. 535 for details.
If you have a mortgage on your rental
property, enter on line 12 the amount of
interest you paid for 2008 to banks or other
financial institutions. Be sure to enter the
total of all your mortgage interest in the
“Totals” column even if you have only one
property.
Do not deduct prepaid interest when you
paid it. You can deduct it only in the year to
which it is properly allocable. Points, including loan origination fees, charged only
for the use of money must be deducted over
the life of the loan.
If you paid $600 or more in interest on a
mortgage during 2008, the recipient should
send you a Form 1098 or similar statement
by February 2, 2009, showing the total interest received from you.
If you paid more mortgage interest than
is shown on your Form 1098 or similar
statement, see Pub. 535 to find out if you
can deduct part or all of the additional interest. If you can, enter the entire deductible
amount on line 12. Attach a statement to

your return explaining the difference. On
the dotted line next to line 12, enter “See
attached.”
Note. If the recipient was not a financial
institution or you did not receive a Form
1098 from the recipient, report your deductible mortgage interest on line 13.

If you and at least one other person
(other than your spouse if you file a joint
return) were liable for and paid interest on
the mortgage, and the other person received
Form 1098, report your share of the deductible interest on line 13. Attach a statement
to your return showing the name and address of the person who received Form
1098. On the dotted line next to line 13,
enter “See attached.”

Line 14
You can deduct the cost of repairs made to
keep your property in good working condition. Repairs generally do not add significant value to the property or extend its life.
Examples of repairs are fixing a broken
lock or painting a room. Improvements that
increase the value of the property or extend
its life, such as replacing a roof or renovating a kitchen, must be capitalized and depreciated (that is, they cannot be deducted
in full in the year they are paid or incurred).
See the instructions for line 20.

Line 17
You can deduct the cost of ordinary and
necessary telephone calls related to your
rental activities or royalty income (for example, calls to the renter). However, the
base rate (including taxes and other
charges) for local telephone service for the
first telephone line into your residence is a
personal expense and is not deductible.

See the Instructions for Form 4562 to
figure the amount of depreciation to enter
on line 20. Be sure to enter the total of all
your depreciation in the “Totals” column
even if you have only one property.
You must complete and attach Form
4562 only if you are claiming:
• Depreciation on property first placed
in service during 2008,
• Depreciation on listed property (defined in the Instructions for Form 4562),
including a vehicle, regardless of the date it
was placed in service, or
• A section 179 expense deduction or
amortization of costs that began in 2008.
See Pub. 527 for more information on
depreciation of residential rental property.
See Pub. 946 for a more comprehensive
guide to depreciation.
If you have an economic interest in mineral property, you may be able to take a
deduction for depletion. Mineral property
includes oil and gas wells, mines, and other
natural deposits (including geothermal deposits). See Pub. 535 for details.
Separating cost of land and buildings. If
you buy buildings and your cost includes
the cost of the land on which they stand,
you must divide the cost between the land
and the buildings to figure the basis for
depreciation of the buildings. The part of
the cost that you allocate to each asset is the
ratio of the fair market value of that asset to
the fair market value of the whole property
at the time you buy it.

If you are not certain of the fair market
values of the land and the buildings, you
can divide the cost between them based on
their assessed values for real estate tax purposes.

Line 18

Line 22

You may be able to deduct, on line 18, part
or all of the cost of modifying existing
commercial buildings to make them energy
efficient. For details, see section 179D, Notice 2006-52, and Notice 2008-40. You can
find Notice 2006-52 on page 1175 of Internal Revenue Bulletin 2006-26 at
www.irs.gov/irb/2006-26_IRB/ar11.html.
You can find Notice 2008-40 on page 725
of Internal Revenue Bulletin 2008-14 at
www.irs.gov/irb/2008-14_IRB/ar12.html.

If you have amounts for which you are not
at risk, use Form 6198 to determine the
amount of your deductible loss. Enter that
amount in the appropriate column of
Schedule E, line 22. In the space to the left
of line 22, enter “Form 6198.” Attach Form
6198 to your return. For details on the
at-risk rules, see page E-1.

Line 20
Depreciation is the annual deduction you
must take to recover the cost or other basis
of business or investment property having a
useful life substantially beyond the tax
year. Land is not depreciable.
Depreciation starts when you first use
the property in your business or for the
production of income. It ends when you
deduct all your depreciable cost or other
basis or no longer use the property in your
business or for the production of income.

E-5

Line 23
Do not complete line 23 if the amount on
line 22 is from royalty properties.
If you have a rental real estate loss from
a passive activity (defined on page E-2), the
amount of loss you can deduct may be limited by the passive activity loss rules. You
may need to complete Form 8582 to figure
the amount of loss, if any, to enter on line
23. See the Instructions for Form 8582 to
determine if your loss is limited.
If your rental real estate loss is not from
a passive activity or you meet the exception
for certain rental real estate activities (explained on page E-2), you do not have to

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complete Form 8582. Enter the loss from
line 22 on line 23.

Parts II and III
If you need more space in Part II or III to
list your income or losses, attach a continuation sheet using the same format as shown
in Part II or III. However, be sure to complete the “Totals” columns for lines 29a
and 29b, or lines 34a and 34b, as appropriate. If you also completed Part I on more
than one Schedule E, use the same Schedule E on which you entered the combined
totals in Part I.
Tax preference items. If you are a partner,
a shareholder in an S corporation, or a beneficiary of an estate or trust, you must take
into account your share of preferences and
adjustments from these entities for the alternative minimum tax on Form 6251 or
Schedule I (Form 1041).

Part II
Income or Loss From
Partnerships and
S Corporations
If you are a member of a partnership or
joint venture or a shareholder in an S corporation, use Part II to report your share of the
partnership or S corporation income (even
if not received) or loss.
You should receive a Schedule K-1
from the partnership or S corporation. You
should also receive a copy of the Partner’s
or Shareholder’s Instructions for Schedule
K-1. Your copy of Schedule K-1 and its
instructions will tell you where on your
return to report your share of the items. If
you did not receive these instructions with
your Schedule K-1, see the instructions for
Form 1040 or Form 1040NR for how to get
tax forms, instructions, and publications.
Do not attach Schedules K-1 to your return.
Keep them for your records.
If you are treating items on your tax
return differently from the way the partnership (other than an electing large partnership) or S corporation reported them on its
return, you may have to file Form 8082. If
you are a partner in an electing large partnership, you must report the items shown
on Schedule K-1 (Form 1065-B) on your
tax return the same way that the partnership
reported the items on Schedule K-1.
Special rules that limit losses. Please note
the following.
• If you have a current year loss, or a
prior year unallowed loss, from a partnership or an S corporation, see At-Risk Rules
and Passive Activity Loss Rules beginning
on page E-1.
Partners and S corporation shareholders
should get a separate statement of income,

expenses, deductions, and credits for each
activity engaged in by the partnership and S
corporation. If you are subject to the at-risk
rules for any activity, check the box on the
appropriate line in Part II, column (e) of
Schedule E, and use Form 6198 to figure
the amount of any deductible loss. If the
activity is nonpassive, enter any deductible
loss from Form 6198 on the appropriate
line in Part II, column (h) of Schedule E.
• If you have a passive activity loss, you
generally need to complete Form 8582 to
figure the amount of the allowable loss to
enter in Part II, column (f), for that activity.
But if you are a general partner or an S
corporation shareholder reporting your
share of a partnership or an S corporation
loss from a rental real estate activity and
you meet all of the conditions listed on
page E-2 under Exception for Certain
Rental Real Estate Activities, you do not
have to complete Form 8582. Instead, enter
your allowable loss in Part II, column (f).
If you have passive activity income,
complete Part II, column (g), for that activity.
If you have nonpassive income or
losses, complete Part II, columns (h)
through (j), as appropriate.

Domestic Partnerships
See the Schedule K-1 instructions before
entering on your return other partnership
items from a passive activity or income or
loss from any publicly traded partnership.
You can deduct unreimbursed ordinary
and necessary expenses you paid on behalf
of the partnership if you were required to
pay these expenses under the partnership
agreement. See the instructions for line 27
on page E-7 for how to report these expenses.
Report allowable interest expense paid
or incurred from debt-financed acquisitions
in Part II or on Schedule A depending on
the type of expenditure to which the interest is allocated. See Pub. 535 for details.
If you claimed a credit for federal tax on
gasoline or other fuels on your 2007 Form
1040, or Form 1040NR, based on information received from the partnership, enter as
income in column (g) or column (j), whichever applies, the amount of the credit
claimed for 2007.
Part or all of your share of partnership
income or loss from the operation of the
business may be considered net earnings
from self-employment that must be reported on Schedule SE. Enter the amount
from Schedule K-1 (Form 1065), box 14,
code A (or from Schedule K-1 (Form
1065-B), box 9 (code J1)), on Schedule SE,
after you reduce this amount by any allowable expenses attributable to that income.

If you are a U.S. person, you may have
received Forms 1099-B, 1099-DIV, and
1099-INT reporting your share of certain
partnership income, because payors of income to the foreign partnership generally
are required to allocate and report payments of that income directly to each of the
partners of the foreign partnership. If you
received both Schedule K-1 and Form 1099
for the same type and source of partnership
income, report only the income shown on
Schedule K-1 in accordance with its instructions.
If you are not a U.S. person, you may
have received Forms 1042-S reporting your
share of certain partnership income, because payors of income to the foreign partnership generally are required to allocate
and report payments of that income directly
to each of the partners of the foreign partnership. If you received both Schedule K-1
and Form 1042-S for the same type and
source of partnership income, report the income on your return as follows.
• For all income effectively connected
with the conduct of a trade or business in
the United States, report only the income
shown on Schedule K-1 in accordance with
its instructions.
• For all income not effectively connected with the conduct of a trade or business in the United States, report on page 4
of Form 1040NR only the income shown
on Form 1042-S (if you are required to file
Form 1040NR).
Requirement to file Form 8865. If you are
a U.S. person, you may have to file Form
8865 if any of the following applies.

1. You controlled a foreign partnership
(that is, you owned more than a 50% direct
or indirect interest in the partnership).
2. You owned at least a 10% direct or
indirect interest in a foreign partnership
while U.S. persons controlled that partnership.
3. You had an acquisition, disposition,
or change in proportional interest of a foreign partnership that:
a. Increased your direct interest to at
least 10% or reduced your direct interest of
at least 10% to less than 10%, or
b. Changed your direct interest by at
least a 10% interest.
4. You contributed property to a foreign
partnership in exchange for a partnership
interest if:

Foreign Partnerships

a. Immediately after the contribution,
you owned, directly or indirectly, at least a
10% interest in the partnership, or
b. The value of the property you contributed, when added to the value of any
other property you or any related person
contributed to the partnership during the
12-month period ending on the date of
transfer, exceeds $100,000.

Follow the instructions below in addition to
the instructions above for Domestic Partnerships.

Also, you may have to file Form 8865 to
report certain dispositions by a foreign

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partnership of property you previously contributed to that partnership if you were a
partner at the time of the disposition.
For more details, including penalties for
failing to file Form 8865, see Form 8865
and its separate instructions.

S Corporations
If you are a shareholder in an S corporation,
your share of the corporation’s aggregate
losses and deductions (combined income,
losses, and deductions) is generally limited
to the adjusted basis of your corporate
stock and any debt the corporation owes
you. Any loss or deduction not allowed this
year because of the basis limitation can be
carried forward and deducted in a later year
subject to the basis limitation for that year.
If you are claiming a deduction for your
share of an aggregate loss, attach to your
return a computation of the adjusted basis
of your corporate stock and of any debt the
corporation owes you. See the Schedule
K-1 instructions for details.
After applying the basis limitation, the
deductible amount of your aggregate losses
and deductions may be further reduced by
the at-risk rules and the passive activity
loss rules. See pages E-1 and E-2.
Distributions of prior year accumulated
earnings and profits of S corporations are
dividends and are reported on Form 1040,
line 9a.
Interest expense relating to the acquisition of shares in an S corporation may be
fully deductible on Schedule E. For details,
see Pub. 535.
Your share of the net income of an S
corporation is not subject to self-employment tax.

Line 27
If you answered “Yes” on line 27, follow
the instructions below. If you fail to follow
these instructions, the IRS may send you a
notice of additional tax due because the
amounts reported by the partnership or S
corporation on Schedule K-1 do not match
the amounts you reported on your tax return.

Losses Not Allowed in Prior
Years Due to the At-Risk or Basis
Limitations

• Enter your total prior year unallowed
losses that are now deductible on a separate
line in column (h) of line 28. Do not combine these losses with, or net them against,
any current year amounts from the partnership or S corporation.
• Enter “PYA” in column (a) of the
same line.
Prior Year Unallowed Losses
From a Passive Activity Not
Reported on Form 8582

• Enter on a separate line in column (f)
of line 28 your total prior year unallowed
losses not reported on Form 8582. Such

losses include prior year unallowed losses
that are now deductible because you did not
have an overall loss from all passive activities or you disposed of your entire interest
in a passive activity in a fully taxable transaction. Do not combine these losses with,
or net them against, any current year
amounts from the partnership or S corporation.
• Enter “PYA” in column (a) of the
same line.

Unreimbursed Partnership
Expenses

• You can deduct unreimbursed ordinary and necessary partnership expenses
you paid on behalf of the partnership on
Schedule E if you were required to pay
these expenses under the partnership agreement (except amounts deductible only as
itemized deductions, which you must enter
on Schedule A).
• Enter unreimbursed partnership expenses from nonpassive activities on a separate line in column (h) of line 28. Do not
combine these expenses with, or net them
against, any other amounts from the partnership.
• If the expenses are from a passive activity and you are not required to file Form
8582, enter the expenses related to a passive activity on a separate line in column (f)
of line 28. Do not combine these expenses
with, or net them against, any other
amounts from the partnership.
• Enter “UPE” in column (a) of the
same line.

Line 28
For nonpassive income or loss (and passive
income or losses for which you are not
filing Form 8582), enter in the applicable
column of line 28 your current year ordinary income or loss from the partnership or
S corporation. Report each related item required to be reported on Schedule E (including items of income or loss stated
separately on Schedule K-1) in the applicable column of a separate line following the
line on which you reported the current year
ordinary income or loss. Also enter a
description of the related item (for example, depletion) in column (a) of the same
line.
If you are required to file Form 8582,
see the Instructions for Form 8582 before
completing Schedule E.

Part III
Income or Loss From
Estates and Trusts
If you are a beneficiary of an estate or trust,
use Part III to report your part of the income (even if not received) or loss. You
should receive a Schedule K-1 (Form 1041)
from the fiduciary. Your copy of Schedule

E-7

K-1 and its instructions will tell you where
on your return to report the items from
Schedule K-1. Do not attach Schedule K-1
to your return. Keep it for your records.
If you are treating items on your tax
return differently from the way the estate or
trust reported them on its return, you may
have to file Form 8082.
If you have estimated taxes credited to
you from a trust (Form 1041, Schedule
K-1, box 13, code A), enter “ES payment
claimed” and the amount on the dotted line
next to line 37. Do not include this amount
in the total on line 37. Instead, enter the
amount on Form 1040, line 63, or Form
1040NR, line 59.
A U.S. person who transferred property
to a foreign trust may have to report the
income received by the trust as a result of
the transferred property if, during 2008, the
trust had a U.S. beneficiary. See section
679. An individual who received a distribution from, or who was the grantor of or
transferor to, a foreign trust must also complete Part III of Schedule B (Form 1040)
and may have to file Form 3520. In addition, the owner of a foreign trust must ensure that the trust files an annual
information return on Form 3520-A.

Part IV
Income or Loss From Real
Estate Mortgage Investment
Conduits (REMICs)
If you are the holder of a residual interest in
a REMIC, use Part IV to report your total
share of the REMIC’s taxable income or
loss for each quarter included in your tax
year. You should receive Schedule Q
(Form 1066) and instructions from the
REMIC for each quarter. Do not attach
Schedules Q to your return. Keep them for
your records.
If you are treating REMIC items on
your tax return differently from the way the
REMIC reported them on its return, you
may have to file Form 8082.
If you are the holder of a residual interest in more than one REMIC, attach a continuation sheet using the same format as in
Part IV. Enter the combined totals of columns (d) and (e) on Schedule E, line 39. If
you also completed Part I on more than one
Schedule E, use the same Schedule E on
which you entered the combined totals in
Part I.
REMIC income or loss is not income or
loss from a passive activity.
Note. If you are the holder of a regular

interest in a REMIC, do not use Schedule E
to report the income you received. Instead,
report it on Form 1040, line 8a.
Column (c). Report the total of the
amounts shown on Schedule(s) Q, line 2c.

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This is the smallest amount you are allowed
to report as your taxable income (Form
1040, line 43). It is also the smallest
amount you are allowed to report as your
alternative minimum taxable income
(AMTI) on Form 6251, line 29.
If the amount in column (c) is larger
than your taxable income would otherwise
be, enter the amount from column (c) on
Form 1040, line 43. Similarly, if the
amount in column (c) is larger than your
AMTI would otherwise be, enter the
amount from column (c) on Form 6251,
line 29. Enter “Sch. Q” on the dotted line to
the left of this amount on Form 1040, line
43, and Form 6251, line 29, if applicable.
Note. These rules also apply to estates and

trusts that hold a residual interest in a
REMIC. Be sure to make the appropriate
entries on the comparable lines on Form
1041.

Do not include the amount
shown in column (c) in the total
on Schedule E, line 39.
Column (e). Report the total of the
amounts shown on Schedule(s) Q, line 3b.
If you itemize your deductions, include this
amount on Form 1040, Schedule A, line 23.

Part V
Summary
Line 42
You will not be charged a penalty for underpayment of estimated tax if:
1. Your gross farming or fishing income
for 2007 or 2008 is at least two-thirds of
your gross income, and
2. You file your 2008 tax return and pay
the tax due by March 2, 2009.

law. Generally, tax returns and return information are confidential, as required by section 6103.
The time needed to complete and file
this form will vary depending on individual
circumstances. The estimated burden for
individual taxpayers filing this form is included in the estimates shown in the instructions for their individual income tax
return. The estimated burden for all other
taxpayers who file this form is approved
under OMB control number 1545-1972 and
is shown below.
Recordkeeping . . . . . . . . .

Paperwork Reduction Act Notice. We ask

for the information on this form to carry out
the Internal Revenue laws of the United
States. You are required to give us the information. We need it to ensure that you are
complying with these laws and to allow us
to figure and collect the right amount of
tax.
You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless
the form displays a valid OMB control
number. Books or records relating to a form
or its instructions must be retained as long
as their contents may become material in
the administration of any Internal Revenue

E-8
Printed on recycled paper

3 hr.

Learning about the law or
the form . . . . . . . . . . . . . . 1 hr., 13 min.
Preparing the form . . . . . . 1 hr., 27 min.
Copying, assembling, and
sending the form to the IRS

34 min.

If you have comments concerning the
accuracy of these time estimates or suggestions for making this form simpler, we
would be happy to hear from you. See the
instructions for the tax return with which
this form is filed.