Investors: 6 Tips for Avoiding an Audit on Your Tax Return

Especially e-filing, which is becoming the norm. Hmmm. Something to think about.

This is very valuable info. Can't wait for Chapter 2!

Karen

good accountant

I used a CPA this year and they still reccomended e-filing to get refund quick, but it is a question to ask them maybe. I did already get both state and fed refund.

...Provided they are necessary, ordinary, and reasonable in amount, repairs to your rental property are operating expenses that are fully deductible in the year in which they are incurred. Improvements (betterments, adaptations, restorations), however, must be depreciated over several years; for residential properties, over 27.5 years! (Effective date for this new regulation was to take effect on January 1, 2012, but has been delayed until January 2014; thus, taxpayers have the option of applying this new regulation for 2012 and 2013)

What is considered an improvement vs a repair? First you need to determine what constitutes a unit of property (UOP)according to IRS regulations. The larger the UOP, the more likely the work done on a component will be considered a repair as opposed to an improvement. A UOP is considered 'improved' whenever it undergoes a Betterment, Adaptation, or Restoration.
here are some examples:
Replacing entire wood shingle roof that is damaged by a storm, with same type of wood shingles is a repair; however, replacing entire wood shingle roof with superior type of shingles is considered an improvement.
Replacing entire wiring system in a property to comply with building code is considered a restoration; replacing wiring in on room because it was damaged is a repair.
Replacing a few broken windows is considered a repair; however, replacing most windows on a property with superior type of windows is considered a restoration.
Replacing wood flooring in entire property is considered a restoration; however, replacing wood flooring in a few rooms of the property is considered a repair.

If you're making changes to a property to make it more accessible for disabled or elderly persons, you can deduct $15,000 per tax year instead of having to depreciate it.

Your tax adviser should review your depreciation, repair, and improvement records to make sure that you are complying with the new regulations

here's another tidbit of info...

You may deduct the cost of gifts that you make in the course of your rental business, for example, to thank or maintain goodwill with a vendor, tenant, employee, PM, etc.
However, the gift expense deduction is limited to $25 per person per year! you may spend more if you like, but any amount you spend over the $25 is not deductible. (If you're wondering why this amount is so low, it's because this threshold was established in 1954)
This applies to gifts to individuals, not to an entire company; gifts to companies are deductible in any amount, as long as they are reasonable.

Because many have abused the gift deductions, this is one of the hot-button items for the IRS, so 5 facts must be documented in order to deduct:
- the date you incurred the expense
- the amount, including tax
- the description of gift
- the activity relationship (how does the person relate to your business)
This information can be shown on a receipt, a credit card slip combined with log entry, or by an entry in your agenda.

* If you don't want to keep paper copies of your records, you can make digital copies by scanning them and storing them on your computer or a cd. IRS has approved the use of electronic storage systems for this purpose

God post val. Just let everyone know your not a cpa, lawyer or tax person..

Keith,

I'm just a real estate investor, like everyone else here, trying to do things right, learning as much as I can, and sharing whatever I know.

I bought this book from Stephen Fishman, J.D. who is a San Francisco based attorney and tax expert; he also wrote "Deduct It! Lower Your Small Business Taxes". He gives great advice in his books, so I'm just sharing here what I've been reading...

some more useful information that I've read...

when you hire employees, you have to withhold or pay state or federal payroll taxes for them; however, when you hire an Independent Contractor (IC)you don't have to do this.
But... yes, there is one, so read on...
if you pay an unincorporated IC $600 or more during the year for business-related services, you must file IRS form 1099-MISC letting the IRS know how much you paid the IC (doesn't matter if you made one payment for one job for $600, or if you made several payments for different jobs that add to $600). You don't need to include in this threshold payments you made to IC for merchandise. Also, you don't need to count payments for services performed on your personal residence, i.e. gardeners, housekeepers, etc.
To complete a 1099-MISC you will need the IC's taxpayer identification number, so it is advisable that you obtain it prior to making any payments to IC. If you don't have it when you file the 1099-MISC, IRS will require you to withhold taxes from IC and submit to IRS; and if you fail to do so, IRS will impose an assessment against you equal to 28% of what you paid the IC. (yikes!)

The exceptions to this new rule are:
- landlords who obtain substantially all of their rental income from renting their principal residence on a temporary basis.
- if the annual rental income is less than a minimum amount established by the IRS
- other investor-landlords for whom complying with the reporting requirements would cause hardship; the IRS will adopt regulations providing guidelines on what constitutes a hardship.

The penalty for not complying is $250 for each 1099-MISC you intentionally fail to file. (if it's not intentional, the fine will range from $30 to $100, depending on how quickly you fix 'the error' by filing the 1099-MISC)
Forms 1099-MISC must be filed by February 28 (or March 31 if filling electronically); you can ask for an extension with an explanation.

* If a property manager manages your properties, he/she must comply with the reporting requirements. He/She also is required to report to the IRS the amount of rent he or she pays you each year.