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. 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 8825s from other companies, and, from your own (past) Form 8825s. 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 10 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 2013 Form 8825 to your past Form 8825s.
- 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 the $18,000 of insurance cost mentioned above. 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.
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 2014.
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.
Rental property cancelled debt for S Corporation and Partnerships
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. 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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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
Hi Peter, maybe she setup an American company for these properties?
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?
Hi Bill. I think the proper CPA answer is Schedule E for two months and Form 8825 for 10 months. But I’m sure some Folks would just file Form 1065 and 8825. Hope that helps.