Tax Tips for Rental Real Estate Investors Milwaukee WI

A new report says that more than half of all individual taxpayers with rental real estate “misreport” related activities on their tax returns. The IRS believes this resulted in a loss of the better part of $13 billion in taxes in 2001, and the congressional report recommended some changes in tax reporting requirements for rental real estate activities.

The report, issued by the Government Accountability Office (GAO), is sure to intensify the IRS’s efforts to ensure tax compliance for rental real estate activities. Here’s what GAO found, followed by some tax reporting tips for rental real estate investors.

Misreporting of income and expenses

Rental income is misreported more than any other type of income GAO found that 8.7 million individual tax returns reported rental real estate activity for 2001, and the number grew to 9.1 million (5 percent) by 2005. GAO said individuals owned about 83 percent of the 15.7 million rental housing properties with fewer than 50 units, and about two-thirds were managed by their owners.

Individuals (or couples filing joint returns) tend to misreport their net income from rental real estate activities more frequently than other types of income. For example, only about 10 percent of taxpayers misreported their wage income in 2001, while 53 percent misreported rental real estate income. Although some of these mistakes resulted in taxpayers reporting too much rental income, mostly it worked the other way around.

The most common type of error was misreporting related expenses, which GAO estimated for 43 percent of taxpayers with rental real estate income. About a quarter of the tax returns with rental real estate activities were considered to have misreported expenses because owners couldn’t substantiate their expenditures. That amounts to 3.9 million taxpayers misreporting expenses and 2.1 million considered to have misreported simply because they didn’t keep proper documentation.

GAO estimated that 1.3 million tax returns misreported the amount of rental income owners received. Some taxpayers didn’t report any rental income, while others reported rental income on only some of their properties and some didn’t report the correct amount of rent received.

The agency said the main reason for misreporting is lax or confusing information reporting requirements. Among the examples cited in the report:

• Neither payers nor receivers of mortgage interest have to report the address of the rental property, making it difficult for IRS to determine what properties a taxpayer owns.
• Taxpayers with rental real estate activities not considered a trade or business don’t have to file information returns, Forms 1099-MISC, reporting payment made to individual contractors for repair services, but a sole proprietor engaged in a trade or business does.
• The rules for calculating depreciation are not clear, and many owners are not aware that they need to deprec...

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