The Internal Revenue Service has agreed with recommendations in a newly released government report urging the agency to increase its examinations of individual tax returns that report rental real estate losses. For many Americans this could mean a decrease in the amount of tax losses they report on their tax returns and increases in income taxes for years to come.
The report issued by the Treasury Inspector General for Tax Administration, was conducted because a Government Accountability Office report in August 2008 found that at least 53 percent of individual taxpayers with rental real estate activity for tax year 2001 misreported their rental real estate activity. When you combine the results of this report with a recent tax court case (Bailey, TC Summ. Op. 2011-22) disallowing rental properties with average rental periods of seven days or less to qualify for the 750 hour rule, its makes for the perfect storm.
The IRS will also be reformatting Schedule E where rental activity is reported to require more information from taxpayers. With these added rules and the uptick in rental audits, we recommend the following steps to help ensure a successful audit:
First and foremost Document, Document, Document! Document the services you perform on the various properties you own, document the hours you spent performing these services, document the expenses incurred on a per property basis, and document the mileage you drove managing each property. Remember you must perform at least 750 hours of service during the year in your field to enable you to take any rental real estate losses. That is almost 19 regular work weeks worth of time. You will also need to start documenting how many days out of the year each property is occupied.
Next we recommend you treat your job locating, rehabilitating, renting and managing properties like any other profession. Meaning make sure your real estate licenses or property management certification is up to date. It also means performing any necessary continuing education or training each year. This will not only help you stay up to date with the latest law changes in real estate, which will ultimately help in the decision making process when issues arise, but it also helps you look legitimate in the eyes of the IRS.
We hope this information is helpful and comforting in this era of increased government regulation and budget shortfalls. As always let us know if you you have any questions or we can help make your property management systems more efficient.