John Bullis: IRS will audit more rental real estate returns

If you have real estate property that is rented, you should be aware that IRS has been urged to increase the examinations of rental real estate.

The Government Accountability Office reported in 2008 that "at least 53 percent of individual taxpayers with rental real estate activity in 2001 misreported their rental activity." The returns IRS examined found potential net misreporting of an estimated $13 billion of taxes from this item. So, IRS will be doing more audits of returns with rental properties in the future.

If you are an owner, you are probably aware of the Passive Activity Loss Limitation Form 8582. The deduction for rental real estate losses generally allows taxpayers to deduct up to $ 25,000 of losses against other income, but only if the Modified Adjusted Gross Income is less than $150,000 and you "actively participate" in the management.

Different rules apply to a "real estate professional." That's a topic for a future article.

The $25,000 maximum rental loss allowance is only available to natural persons with modified adjusted gross income of less than $150,000. The calculation of modified adjusted gross income has many add backs such as tuition deductions, one-half of self employment taxes and adoption expenses, etc. Form 8582 and its various worksheets is another example of unreasonable complexity of our tax laws.

IRS will also be looking at vacation home rentals to see if the number of days it was occupied and used for personal purposes are reported correctly. The threshold for disallowance of many vacation rental expenses is if the personal use was more than the greater of: (a) 14 days or (b) 10 percent of the total days rented at market value.

IRS audits found all kinds of mistakes such as (1) expenses not substantiated; (2) depreciation not computed correctly; (3) improperly deducting personal expenses; (4) underreporting rental income; (5) some even claimed depreciation on the land which is not allowed since land never wears out.

Complete records for the rental activity will help you avoid problems if your return is selected for audit. We urge folks to save all those records for at least four years after the return is filed.

Owning rental real estate can be an inflation hedge of sorts and provide additional retirement income. However, be sure you keep good records to avoid any problems if your return is selected for audit by IRS. Maybe you should check with your CPA firm to see if you will be able to "survive" an IRS audit of your rental activities?

Many IRS audits turn out "no change." Don't fear the IRS, just be prepared to show you have adequate documentation and good records for your rental activity.

Did you hear "One laugh of a child will make the holiest day more sacred still" by Robert G. Ingersoll.

• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.


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