How should Arthur's rental income and expenses be reported on his federal income tax return?

Arthur's rental income and expenses should be reported on Schedule E of his federal income tax return because this form is specifically designated for reporting income or loss from rental real estate. In this case, if Arthur has incurred a $1,000 loss from his rental activities, it should be reflected directly on Schedule E, which allows landlords to report their rental income and expenses, including operating costs like repairs and depreciation, as well as any losses they are experiencing.

By using Schedule E, Arthur can accurately report his rental income, offset it with allowable expenses, and capture the resulting net loss, which can be beneficial for tax purposes. This approach enables the loss from rental activities to potentially offset other income, thereby reducing his overall taxable income.

It's important to recognize that while rental properties often involve both personal use and rental periods, the reporting for tax purposes is primarily handled through Schedule E, where losses are clearly delineated. This makes it the most straightforward answer for accurately reporting his rental activities for tax compliance.