The IRS is targeting Real Estate Investors??

And so it begins.  A few weeks ago big brother (AKA the IRS) sent out letters to tax pros reminding them of the penalties for tax return fraud and letting them know on what major issues the agency would be focusing.  The interesting thing to me is that the focus is not on what I had expected – such as the new 1099K, self-employment tax for the LLC or the First Time Homebuyers Credit.  Nope, they are going after Schedules A, C and E.  So, what is big brother looking for, and what does this mean for us real estate investors?

Here's the scoop…

Schedule C (used if you are a real estate "flipper")

Schedule C


The specific issues the IRS is looking for:

  • Gross receipts not being fully reported
  • Expenses not being properly claimed and/or documented

There are two recommended action items from this news:  Keep EXCELLENT records and form an LLC to move your real estate business off of your personal return (Schedule C)

Schedule E (used for your rental properties)

The Schedule E can be a little more problematic for us investors.  It's where we report flow-through entities such as S Corporations and partnerships and, of course, real estate.  Here's what they are targeting:schedule e

  • Rental depreciation not being calculated correctly
  • Rental income and expenses not being properly reported
  • Passive activity limitations, at-risk rules, and basis not being considered or properly calculated

Takeaways and recommendations:

Keep property records that will reflect the cost basis for depreciation such as closing statements, renovation invoices, and contracts.

Keep accounting records that properly reflect rental income and expenses.  Get guidance from your tax pro.

Make sure you have an experienced real estate tax accountant or attorney.  The IRS has been hitting the issue of real estate hard for a while now.  Make sure you are getting good advice.

So, do you feel like you have a target on your back?  Leave your thoughts and comments below, I'd love to hear what you think.

And, as always, thanks for reading!