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Rental Real Estate CPA discusses Form 8825 preparation for Form 1120-S or Form 1065 | Rental Real Estate Red Flags

Form 8825 discusses rental real estate IRS red flags

Gary Bode, CPA: if you run into trouble preparing Form 8825, or suspect you may have an IRS red flag, consider calling (910) 399-2705 for a free phone consult with an experienced rental real estate CPA.

Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation

S Corporations and Partnerships use Form 8825 to report rental real estate income and deductions on the S Corporation tax return and Partnership tax return, respectively. The Form 8825 instructions are similar to Schedule E instructions (for Folks who don’t have an S Corporation or Partnership). Just attach Form 8825 to their Form 1120-S or Form 1065. So, track rental property transactions separately from other business activities of the parent company.

Hi, I’m Gary Bode, a rental real estate CPA accountant with a virtual office to serve your Form 8825 wherever you’re located. Here are some of the IRS red flags to watch for.

Form 8825 and possible IRS Rental Real Estate Red Flags

  • Losses. Especially if you’re deducting them.
    • Understand the passive loss rules.
      • The Form 8825 instructions don’t explain this well.
    • With the new investment tax, consider becoming a real estate professional per the IRS definitions.
  • Missing information. The IRS obviously looks for items on Form 8825 that shouldn’t be there. But I think missing information, like real estate taxes, for example, might trigger an audit.
    • After all, if the tax preparer forgets a legitimate deduction on Form 8825 what else might be wrong?
  • Low rental income. You don’t want the IRS thinking :
    • You’re not trying to actively rent the property.
    • Using it personally.
    • Renting to a related party at a discounted rate.
    • Various other no-no(s).
  • Out of range figures on Form 8825. Like say $20,000 of auto expense for a duplex rental property.
  • Depreciating land.
  • Presenting depreciating capital assets as expenses. For example, a new air conditioning system. Remember the new rules on capitalization vs. expense.
  • Round figures. Round figures imply estimation.
  • Figures that don’t match IRS records. Common examples include inconsistent depreciation from your earlier tax returns and rent that’s lower than the total of your Form 1099-MISC(s).
  • Not properly allocating overhead expenses if the S Corporation or Partnership has multiple rental real estate properties.
  • Not claiming depreciation and/or amortization. This is a negative red flag as discussed above. But more importantly depreciation has to recaptured when the rental real estate property is sold even if didn’t claim it.
    • So you’re taxed on gains you could have deducted through depreciation over the years.
    • Maybe your rental real estate CPA can fix that for you but the timing’s tight and that depreciation can be lost forever.
  • Not claiming prior disallowed losses when the property is sold.

Rental property CPAs look for red flags and proactively address them. If the red flag figure is correct and legitimate, we provide supplemental documentation to the IRS to head off a potential audit. I think doing so is better than just leaving a red flag up and hoping the IRS won’t question it.

Where do I get Information for Preparing Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation?

  • The IRS publishes Audit Technique Guides.
    • These explain how an IRS Agent approaches Form 8825 if your S Corporation or Partnership is audited.
  • Read the Form 8825 instructions.
  • Read the passive activity limitation section in the Form 1120-S instructions or Form 1065 instructions.
  • Publication 946 helps explain depreciation expense for Form 4562.
  • Look at websites for examples on specific issues on Form 8825. Beware of outdated postings.
  • Buy an appropriate tax book. Make sure it is the latest edition. Form 8825 tax consequences deserve due diligence. Books usually cover all aspects of rental real estate and show concepts using clear examples. Be sure to understand all possible deductions.
  • Call the IRS. Beware you can’t rely on verbal advice from them if you’re audited.
  • Read the Schedule E instructions for Form 1040. Which is equivalent to Form 8825 for individual taxpayers.
  • Consult with a rental property CPA.

Where Does the Information on Form 8825 Flow?

  • It integrates into the parent tax return, Form 1120-S for S Corporations or Form 1065 for Partnerships.
  • Both Forms 1120-S and 1065 then generate a Schedule K-1 to the individual shareholders and partners. Schedule K-1 reports the personal tax figures for the year, from the parent return to the shareholders and partners. The IRS gets a copy, too, of course.
  • Shareholders and partners bring the Schedule K-1 information into their personal Form 1040 via page two of Schedule E.

Why am I a rental property CPA? Because I have a rental property in my extended family, so, I have to keep up on emerging Form 8825 issues, or else!

Through our virtual office, we offer you excellent, responsive CPA services regardless of your location. Usually we prepare Form 8825 as part of Form 1120-S or Form 1065. My experience? I was controller for a luxury construction firm with 30+ rental property LLCs.  We offer a free initial phone consult at (910) 399-2705.

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