Calculate Income from Rents, Royalties, Partnerships, and Other Estates and Trusts

In order to file Form 1040 or Form 1041, you will need to determine if the taxpayer (whether trust, estate or decedent) has earned any incomes from rents, royalties, partnerships, or other estate or trusts. If any of these forms of income apply to the taxpayer, you will need to complete Schedule E, Supplemental Income and Loss. You must also determine if these supplemental incomes (or losses) are active or passive.

If any of the following circumstances apply to your decedent, estate, or trust, supplemental forms of income were earned and you will, consequently, need to complete Schedule E, Supplemental Income and Loss:

  • Owned rental property.

  • Had an interest in any mining activities.

  • Published any works, or had an interest in published works.

  • Was a member of a partnership.

  • Was a beneficiary of another estate or trust.

Part I of Schedule E covers the income and/or loss from rental and royalty income. Part II gives you space to show the same information from Partnerships and S Corporations. Part III is for income from other estates or trusts that you may have to report on this return.

In addition to being the collection point for information on all these types of income, Schedule E is also the spot where you need to decide whether the income you received is active or passive. Basically, you need to determine whether the participant actively participated in the business or was merely an investor.

If you’re preparing Form 1041, the answer to this question is simple. Trusts and estates are rarely active participants in partnerships and S corporations, and rental and royalty income is, by definition, passive, so the income and/or losses from these activities are typically passive. If you’re filing a 1040 return for the decedent, consult a tax expert or tax guidelines to determine whether you’re dealing with active or passive income.

Whether you’re filing Form 1040 or Form 1041, if you have passive losses you may deduct them only against passive income. Passive losses that exceed passive income are suspended. Calculate your passive loss limitations on Form 8582, Passive Activity Loss Limitations.