Schedule E Rental Income – Real Estate Owned

We’ll be honest, we’re going to “keep it simple” and not go too far into the weeds on how the Qualifying Income for rental income is calculated. That said, we can provide the concept and a good rule-of-thumb if you’re trying to use the Debt To Income Calculator to determine how much you can afford.

The Concept

To truly calculate the net rental income and expense from each rental property owned we start with the gross revenue and the subtract the total expenses – then we add back anything relating to the actual mortgage as well as “paper losses”. Example: we can add-back mortgage interest, homeowners insurance, property taxes, HOA dues, and depreciation & depletion. We can do add-backs for one-time big expenses BUT that has to be properly documented.

On the Schedule E we basically want to determine what the expenses that are outside of the mortgage. We will ultimately count the full PITI (principal interest, taxes, and insurance, and association dues) payment of each property in the total monthly debts and then apply the income (or loss) from the Schedule E.

Once you have figured out the Schedule E income calculation for each property you then have to determine the qualifying income. For conventional loans you can use the most recent tax year’s figure, for government loans (like FHA, VA, USDA) you have to take a two-year average OR use the most recent tax year’s income if that amount is less than the previous year’s figure.