General Rules

Rental, royalty and REMIC Income and expenses are claimed on federal Schedule E and the net income or loss is then reported on Massachusetts Schedule E, Line 1a or 1b. Types of income/loss reported are:
  • Rental Income/Loss:
    Rental income includes amounts received or accrued as rent, for the use of depreciable property used in a trade or business within the meaning of I.R.C. Section 1231. A security deposit is not considered rent unless it is not returned to the tenant.

  • Royalty Income/Loss:
    Income received from copyrights on literary, musical, or artistic works and similar property, from a patent on an invention, royalties from oil, gas, or other mineral properties are all included in gross income. Timber, coal, or domestic iron ore royalties are also included in gross income.

  • Real Estate Mortgage Investment Conduit (REMIC) Income/Loss:
    A Real Estate Mortgage Investment Conduit is a fixed pool of mortgages with multiple classes of interests held by investors holding either a regular or residual interest. Since it is not a taxable entity for federal income tax purposes, it is generally treated as a partnership, with the residual interest holders as partners. Income or loss generated from REMIC is included in gross income.
Rental, Royalty and REMIC Expenses:
Expenses in connection with these types of income are deducted from Massachusetts gross income to the extent they are deducted from federal gross income, with certain exceptions. Allowable expenses include depreciation, depletion, repairs and improvements, property taxes, cleaning and maintenance, utilities, fire and liability insurance, ordinary and necessary transportation expenses, etc.

Total Rental Real Estate and Royalty Income or Loss:
If the expenses are less than income, the difference is reported as net income. If the expenses are more than gross income, the difference is reported as a net loss.

Massachusetts vs. Federal Law Differences:
There are certain differences between total rental, royalty and REMIC income on the U.S. return and the same type of income on the Massachusetts return. These differences are entered as adjustments on Massachusetts Schedule E, line 2 and include the following:

  • fiduciary trust income or loss that is reported on a Form 2 - Massachusetts Fiduciary Return, is not reported on Massachusetts Schedule E;
  • royalties from certain U.S. Energy Conservation Patents that are approved by the Massachusetts Division of Energy Resources as being useful for energy conservation or for alternative energy development are deductible;
  • passive losses from tax year 1987 are added back to income since these losses were already claimed for Massachusetts tax purposes but carried over for U.S. tax purposes because of the passive activity loss limitation rules;
  • Massachusetts Business trust income or loss that is reported on Form 3F - Income Tax Return of Corporate Trust, is not reported on Massachusetts Schedule E. If, however, the business trust income is derived from a Real Estate Investment Trust (REIT) or a Real Estate Mortgage Investment Conduit (REMIC), then the income is reported directly by the beneficial owner. Ordinary income from a REIT or a REMIC, organized as a business trust in Massachusetts, is reported on Schedule E.
Abandoned Building Renovation Deduction is available, if taxpayer qualifies, from Massachusetts income on Schedule E, Part 1. This will increase any loss or reduce any income that has already been calculated.

Where to Report on Original Tax Return; What to Enclose:

  • Taxpayers reporting rental, royalty, REMIC, partnership, S corporation, trust income/loss must file electronically. Complete Schedule E, Part 1 and enter amount on Mass Form 1, Line 7 or Mass Form 1-NR/PY, Line 9