Overview
Income can come from different sources, like renting out property, royalties from creative works, or profits from being part of a business partnership. The IRS Form 1040, Schedule E, is a document where you report this kind of income or loss when filing taxes. This form helps to move this information into the main tax form, IRS Form 1040.
However, if the income is from partnerships, corporations, estates, or trusts, it’s not Schedule E you’ll look at but rather Schedule K-1. This is discussed in more detail in another section of Fannie Mae’s guidelines.
Royalty Income
When you earn money from royalties, which could be from things like books you’ve written or music you’ve created, this income should be noted on Schedule E. When a lender looks at your loan application, they need to see that you’ve been receiving royalty payments for at least the past 12 months. They also want to be fairly sure you’ll keep getting this income for at least three more years. This helps them feel confident that you can make your mortgage payments.
Rental Income
If you make money by renting out properties, and this income is shown on Schedule E, the lender will only consider the income from properties that you’ve listed on the Schedule of Real Estate Owned in your loan application. This means if you own property and make money from renting it out, this is the income they’ll look at.
From this rental income, you’ll need to subtract any expenses that come with owning and managing the property. This includes costs like maintenance, advertising, management fees, and utilities, among others. This helps figure out your actual cash flow, or how much money you’re really making from the rental after expenses.
The lender will also make adjustments for any depreciation or one-time expenses, such as repairs after a natural disaster. In most cases, the full amount of your mortgage payment on the rental property is considered when calculating your net rental income. However, to make sure they’re not counting expenses twice, lenders might adjust this amount. This adjustment can also affect your total debt-to-income ratio, which is a key factor in deciding whether you qualify for a mortgage.
Lenders also need to consider any “passive loss” limitations or previous losses that you’ve carried over from past years. These can affect your income calculations, so the lender may need to make special adjustments to accurately reflect your cash flow from rental properties.
References
For more details, visit Income or Loss Reported on IRS Form 1040, Schedule E of the Fannie Mae Selling Guide.