Tax Implications of Rental Property

Rental property can be a sound investment as it can bring in a consistent, predictable flow of income. Unfortunately, it can also make taxpayers targets of IRS scrutiny. In 2008, the Government Accounting Office estimated that over half of tax filers who own rental property misreported their income and losses on their tax returns. The Treasury Inspector General called for action, leading to the IRS ramping up its scrutiny, audits, and adjustments when it comes to rental real estate.

If you own rental property and you have been audited or your tax return has been adjusted, I know from experience that the IRS does not always get it right. In fact, it may be worth your while to appeal the adverse finding.

Tax Implications When You Own Rental Property

When you earn rental income from a property, you are required to report this as income on your tax return. This includes all rent, non-refundable deposits, and advances. On the other side of the coin, you are permitted to deduct expenses, such as property taxes, mortgage interest payments, depreciation, operating expenses, and upkeep and repair costs.

Record keeping is critical

When challenging an IRS auditor’s report, it is critical to establish your paper trail to show that the IRS got it wrong. This includes all contracts, bank deposit records, proof of payment, receipts, and cancelled checks relating to income and expenses.

Consider a Tax Appeal

So long as your Form 1040 was prepared using documentation and that documentation supports what you reported in rental property income and expenses, you will have solid footing on appeal. The tax appeal officer is part of a separate office from IRS auditor that rejected your claim. This is significant because it means that you are receiving a new set of eyes on the tax ruling you are challenging.

It is to your benefit to consult an experienced tax attorney for your appeal. This is not just because a tax attorney knows the law, but because it will make the IRS appeals officer take your claim seriously. A tax attorney can inspect your records, identify your best arguments that are supported by the law, and craft a strong letter in response to the IRS auditor’s report. Further, an attorney will guide you through the appellate process, and if necessary, the U.S. tax court.

The Law Offices of Robert S. Thomas Can Help You

The Law Offices of Robert S. Thomas handles IRS tax appeals. I have practiced in the area of tax law for over twenty years and take pride in providing accurate legal advice and zealous advocacy. I have a Master of Law Degree (LLM) in Taxation, and am licensed to practice in the United States Tax Court. If you want to appeal an adverse IRS action, contact The Law Offices of Robert S. Thomas at 847-392-5893 for an initial appointment or visit our website today.

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