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IRS Form 8825 CPA tax accountant advises on 2015 Rental Property IRS Red Flags

Form 8825 CPA Schedule E CPA

Gary Bode, CPA: I keep current on Form 8825 and Schedule E issues because I have rental property in my extended family. If you don’t have a local Form 8825 CPA and need a free consult, consider calling me. (910) 399-2705

Form 8825 CPAs worry about IRS red flags on rental property issues. Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation, is the S Corporation (Form 1120S) and Partnership (Form 1065), version of Schedule E. So the IRS Form 8825 instructions are similar. It handles the tax reporting for rental property income and expenses. Red flags are variances on your Form 8225 from what the IRS expects. The implication? IRS red flags initiate automated IRS audits. The IRS establishes baselines for Form 8825 by data mining Form 8825 (s)  from other companies, and, from your own (past) Form 8825 (s). I’m not implying I have some special relationship with the IRS. I’ll try to augment the IRS Form 8825 instructions.

Think of Form 8825 from the IRS Perspective

In rental property tax accounting, three methods exist to detect red flags; baseline, horizontal and vertical.

  • Baseline means the IRS expects certain ratios and figures with and on your Form 8825, based on other company’s Form 8825. The IRS audits some non-suspect rental real estate Form 1120S and Form 1065 tax returns just to establish the Form 8825 baseline.
    • For example, for a single residential rental property with a purchase price of $145,000 four years ago, they might expect a $13,000 loss based on the average Form 8825s from 1,000 Form 8825s submitted last year that generally match your price range and locality.
  • Horizontal analysis means they compare your 2015 Form 8825 to your past Form 8825 (s).
  • Vertical analysis of Form 8825 means running tax ratios of the current return only. If your cost of insurance for a single residential rental property is $18,000, that’s a red flag because the average expense listed on Form 8825 is far, far less.

Types of Red Flags on Form 8825 CPAs look for

Usually rental property CPAs first look for things on Form 8825 that shouldn’t be there. Like $18,000 of insurance cost for a single family residence. But I think that not presenting some expenses also raises red flags. For example, if no insurance expense appears on Form 8825 it could be a red flag. Why? Well if the tax preparer is so inept as to not present an expense that obviously exists, the return could be off on other issues. Just my opinion. But that’s the attitude I use for tax preparation of Form 1120S and Form 1065

“Often IRS red flag issues are legitimate and just need additional explanation and documentation when I e-file your 2015 Form 1120S or Form 1065.”
– Gary Bode, Form 8825 CPA and rental property accountant

Common Red Flags – Sensitive Issues

The IRS publishes Audit Technique Guidelines. There’s one on passive losses. Your Form 8825 CPA has probably read that. The IRS is good about publicizing what they watch for. Or, maybe because I have rental property in my extended family I’m just more aware of it. The IRS prefers to prevent problems. Certainly the new rules on capitalization and expense will be a sensitive topic for 2015.

How do Rental Property CPAs handle Flags on Form 8825?

  • First I find them by running the horizontal vertical analysis described above. Plus common sense of course.
  • Then I get your explanation of the issue. Most red flags are just anomalies with valid reasons.
  • I prepare a supplemental statement to file with your company’s Form 1120S, Form 1065 etc.
  • Occasionally I’ll assemble backup documentation to support the statement.

So if the red flag kicks out your Form 8825 for a closer look, a reasonable explanation is already there to prevent further scrutiny.

S Corporation cancelled debt and Partnership cancelled debt

Rental property foreclosures and rental property short sales continue in 2014. S Corporation and Partnerships have very different cancelled debt tax reporting requirements. If you receive a Form 1099-C, Cancellation of Debt, of Form 1099-A, Acquisition or Abandonment of Secured Property, the year of sale tax return gets tricky. But the main issue on the final Form 8825 is current depreciation as reported on Form 4562, Depreciation and Amortization.

Selling rental real estate – IRS red flags

You have file Form 4797, Sales of Business Property, to calculate taxable gain or loss. Part of that calculation is accumulated depreciation, So I suspect the IRS carefully matches that to your current and past tax returns. Prudence might involve reading the Form 4797 instructions and looking at the depreciation on all Form 8825s.

Do I need a Form 8825 CPA?

It depends. Rental property tax reporting gets complex, but once you understand the issues for your particular circumstances, Form 8825 might be straight forward. Sale of a rental real estate property might mean you need help on the tax return. Of course the company’s main tax return, Form 1120-S, Form 1065, etc., all have tax reporting issues too. I’ve got experience as a residential rental real estate manager. I was a controller for a real estate developer with  35+ LLCs. Our virtual office means State lines don’t interfere with our rental property services. I offer a free phone consult for rental real estate issues on Form 8825, Rental Real Estate Income and Expenses of a Partnership or an S Corporation. (910) 399-2705.

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12 comments to IRS Form 8825 CPA tax accountant advises on 2015 Rental Property IRS Red Flags

  • PETER

    I do manage properties in Maine for a Canadian lady. She is a non-residant allian. I do her tax for the first time. It look like a mess… She files since 2006 (since purchase of the properties) 1065 and 8825 form only and to me it should be 1040NR form. I appreciate if you can tell me anything Im confuse and she sound upset i dont use her form.

    Peter Canada, Outremont

  • Bill Alexander

    Gary,

    If I switch from a single member LLC to a 2 member LLC in February of a year, do I need to do a schedule E for the first 2 months, and then a 8825 with 1065 for the remaining 10 months, or can I just do a 8825 and 1065 and cover the whole year?

  • Sam Mab

    Hello Gary,
    I put a property in business during 2012, but I did not depreciate it in the last 2 years. I know that I can depreciate it over a period of 27.5 years. Can i start depreciating in 2015 and forget about the previous years? Thanks.

    • You’d have to amend 2012 and 2013 Sam. Pretty easy to do, probably. Hope that helps. You’d pay gains on the lost depreciation when you sell. You can’t deduct all depreciation in 2014. Hope that helped.

  • Elizabeth

    I have a C corp, do I need to file this form?

  • Susan

    I converted/transferred my rental business to LLC in June 2015. Please advise if I should file schedule E for Jan-May and report Jun-Dec profit/loss on Form 1065. Should I also sale the properties at net value (cost less cumulative depreciation i.e. $100k-$90k = $80k) on 1040 but then report $80k as purchase on 1065?

  • Dave

    Just started a LLC with a old friend and we are buying houses and renting them out. In 2015 we made $3190. What forms do we need to fill out? K-1, 1065, 8825? We split the profits 50- 50.

    Thanbks

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