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2007 Instructions for Schedule E (Form 1040)

taxmap/instr/i1040se-000.htm#TXMP20e16f29 Supplemental Income and Loss

2007

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.

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.

Enter separately on Schedule E the total income and the total loss for each part. Enclose loss figures in (parentheses).

taxmap/instr/i1040se-000.htm#TXMP2f584229 What's New

taxmap/instr/i1040se-000.htm#TXMP4ad7b9f2 Husband-wife qualified joint venture.

Beginning in 2007, you and your spouse, if you are married filing jointly, may be able to elect to be taxed as a qualified joint venture for purposes of reporting income and expenses from a business that you jointly own and operate. To make this election, each of you must file a separate Schedule C or C-EZ. See Husband-wife qualified joint venture on page E-3.

taxmap/instr/i1040se-000.htm#TXMP0dc6b313 General Instructions

taxmap/instr/i1040se-000.htm#TXMP58dd3829 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 by you in connection with the activity of holding real property (other than mineral property). See 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.

taxmap/instr/i1040se-000.htm#TXMP44013a74 Qualified nonrecourse financing.

Qualified 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.

taxmap/instr/i1040se-000.htm#TXMP3cbc269d 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.

taxmap/instr/i1040se-000.htm#TXMP5415ad9c 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 on page E-2).

taxmap/instr/i1040se-000.htm#TXMP3a0d6306 Passive Activity

A passive activity is any business activity in which you did not materially participate and any rental activity, except as explained on this page and page E-2. 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.

taxmap/instr/i1040se-000.htm#TXMP3aa6d45d Activities That Are Not Passive Activities

taxmap/instr/i1040se-000.htm#TXMP384db071 Activities of real estate professionals.

If you were a real estate professional for 2007, 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, 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 2007, complete Schedule E, line 43.

taxmap/instr/i1040se-000.htm#TXMP14289e3a 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.

taxmap/instr/i1040se-000.htm#TXMP2b4faecd 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:
   1. You actively participated (defined on this page) in all of the rental real estate activities;
   2. If married filing separately, you lived apart from your spouse all year;
   3. Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately);
   4. You have no current or prior year unallowed credits from passive activities; and
   5. Your modified adjusted gross income (defined below) is $100,000 or less ($50,000 or less if married filing separately).

taxmap/instr/i1040se-000.htm#TXMP1222bc37 Active participation.

You can meet the active 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,
• Deciding on rental terms,
• Approving capital or repair expenditures, 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.

taxmap/instr/i1040se-000.htm#TXMP75172f50 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 on this page),
• 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.

taxmap/instr/i1040se-000.htm#TXMP1936670e 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. 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 under conditions of confidentiality for which you paid an advisor a fee of at least $50,000.
• Certain transactions for which you 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 resulting in a tax credit of more than $250,000, if you held the asset generating the credit for 45 days or less.

See the Instructions for Form 8886 for more details.

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