 Looking at the income tax formula, we're focused on line one income. Remember, in the first half of the income tax formula is in essence and income statement, although just an outline, other forms and schedules flowing into these line items. One of those, the schedule E in essence and income statement in and of itself having rental income minus rental expenses. The net rental income flowing into line one income of the income tax formula. Reporting rental income, expenses and losses. Clearly, the first form that comes to mind when we think about income taxes is the form 1040. Then we generally think about other forms and schedules that ultimately flow into the form 1040. When most people think about rental income, we generally think about it as a kind of side hustle, another type of business. It's going to be formatted in an income statement type of format where we have rental income minus the expenses that needed to be consumed in order to generate the income, which are basically business expenses, business deductions. Therefore, why wouldn't we just report it on the schedule C, which is where we report all other kinds of sole proprietor and contractor businesses for the most part. And the first answer that might come to mind is that, well, the rental property is going to have a whole different set of expense categories. So we have to have this whole other form just for the rental property where all other businesses kind of fit into the schedule C form. But that's not the primary purpose that we have to be breaking out the schedule C to the rental property. With the rental property, we have this concept of kind of passive income, meaning you're not actively involved with the property. The property is basically generating income in and of itself in a similar fashion as like investment income. If you just put income, if you put money into like an investment stocks and bonds and you generate dividends and interest, you're not really actively working for it. And when we have the active working situation that are typically reported on the schedule C, then we're also going to be subject to the social security and Medicare, the self-employment tax kind of situation. When we think about the rental income, we're thinking about the property itself. Oftentimes basically, you know, doing a lot of the work and then there's a question of how active are you in in engaging in the rental property? And that becomes more and more important, not when there's income, but when there's losses involved, because when there's losses involved, the IRS is going to be kind of skeptical about the losses in part because there's another factor that's involved with the rental property for income generation. We're not just having the rental property most likely in order to get the rental income. We're also having the property because we expect the property to go up in value possibly just in terms of the location of the property, you know, if nothing else. So so you have this situation where it could be actually beneficial from a taxpayer standpoint to have the rental property. If you have losses on the rental property to take the losses and report them against other income, so you reduce your taxes while the actual property value goes up in value. So you're actually generating income, which is which is not going to be realized and therefore subject to tax until you sell the rental property. So you have this whole other dynamic that makes it a little bit more confusing when you're thinking about rental property, as opposed to like other side hustles where you're where you're basically in getting paid for your work, getting paid for what you're doing at that point in time. So that's the general idea. So obviously we'll have a schedule E generally instead of a schedule C. There will be questions about how active the participation is. And then there's generally going to be possibly more rules with regards to limiting the amount of losses that you can take with respect to the rental property, as opposed to like a schedule C type of situation, and then of course, the self-employment situation. You might not be subject to self-employment tax if it if it's not a schedule C or active, fully active participation in the business situation. OK, so figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on schedule E form 1040. Obviously, logistically, you know, that's the first step that's going to happen. We're going to have to get the bookkeeping done just like any other business. It's going to basically be an income statement. We're going to populate that income statement, usually not into the schedule C, but rather into the schedule E. And the schedule E only has an income statement. We don't typically have the balance sheet, although we might have depreciation schedules that we have to deal with. There are activities that don't qualify to use schedule E, such as when the activity isn't engaged in to make a profit or when you provide substantial services in conjunction with the property. So obvious if it wasn't engaged in for profit, the reason that's a situation and we see this with the normal business income activity, because if it's not engaged for profit, then it's likely you're going to have losses. And the IRS doesn't want to have your pay you for your hobby losses or something like that. And then if there's substantial services involved, like if it was a hotel or something like that, then you're not really just making passive money by just renting it out and collecting the rent on it. You are actually you actually a lot of what you're doing in a hotel is providing the service of keeping up the hotel, maintaining the hotel and all that kind of stuff. So now you are actively involved and you would think it might be more subject to like a schedule C and you might be subject to self-employment and that kind of stuff. So there are also limitations that may need to be applied if you have a net loss on schedule E, that's the big one. A lot of people often have might have losses because you would think the general planning when you're when you're dealing with rental income is not just to to make money on the rental property possibly, but you might have more long term plans for the property value to go up in the property. So you might be willing to sustain losses in the short run in order to own the property, which you think will go up in value in the long run. So you can get more complex, long term planning because of the structure of the rental property and that's and then the losses become kind of a messy situation. So there are two, one, the limitation based on the amount of investment you have at risk in your rental activity and two, the special limits imposed on passive activities. So you may also have a gain or loss related to your rental property from a casualty or theft. This is considered separately from the income and expense information you report on schedule E.