Schedule E · Also called: rental income, depreciation, section 1250 recapture
A rental is modeled with rent, vacancy, operating expenses, mortgage interest, property tax, 27.5-year depreciation, a sale with §1250 recapture, and estate inclusion.
Rent less vacancy and operating expenses, less mortgage interest and property tax, produces the taxable rental result. Mortgage principal is a cash outflow, not a deduction. Depreciation is 27.5-year straight-line, mid-month, on the building only; land is not depreciable.
Passive losses are pooled; each year's net loss is allowed up to the §469(i) active-participation allowance ($25,000; reduced by 50% of MAGI over $100,000 and fully phased out at $150,000), with the remainder carried forward. The model assumes active participation; real-estate-professional status and the married-filing-separately limits are not modeled. On sale, all suspended passive losses are released under §469(g), depreciation is recaptured at 25% under §1250, and the remainder is long-term capital gain; a sale that nets to a loss is an ordinary deduction, and §121 does not apply to a rental. The rental FMV less mortgage is included in the estate with the §1014 step-up.
Not modeled: §1031 exchanges, cost segregation, bonus depreciation, short-term rentals, and multi-state sourcing.