Rental Property Issue

[cynamoats]

Have a taxpayer who has an ocean rental. For the past three years, they have claimed $1200 in rental income and their expenses - reported expenses net - have been in the neighborhood of $ 12,000 - $ 14,000 in rental losses.

Should I have a discussion with the client that this could be an audit flag and if so, do I take the losses again this year or advise them to report more income???? I mean, technically, with mortgage interest and real estate taxes these losses are not generated by huge amounts reported for repairs and maintenance or supply purchases.

Any insight or advise would be appreciated.

[Matt Sova]

Rental

What do they have here? A rental with the same renter in it year round, charging only $100/month? I highly doubt it. What you probably have is a taxpayer with a vacation home that they rent out part of the time. This will be subject to the rules regarding such activity. Or, you have someone who is giving you a line of BS about how much rental income they actually have. Why would you tell them to report more income? Do you feel that they actually received more? Did they tell you they received $X but only report $1,200?

Matt

[stern100]

So I'm assuming no mgt company or 1099, thats odd for a summer beachside rental.
Also assuming their other income doesn't phase out the rental loss.
Tell them to report the legit income & explain the personal use rules.

[cynamoats]

No there is mortgage interest and real estate taxes. I did mention that. No they did not tell me that there was more rental income or the real estate expenses were false. No I am not saying I was going to tell them to inflate their income. I was just starting out some brainstorming.

[rosieea]

It sounds like you've done your due diligence. You can accept what the client has told you and prepare the return accordingly. If they are hiding income or being less than honest with you, that's their problem, not yours.

[Mark Goldberg]

Is it rented more than 14 days

If theproperty is rented 14 days or less then they do not report the income and deduct interest and taxes on Schedule A. If it is rented 15 days or more then I think they are charging less than FMV and they have another set of problems. You really need to get the facts straight with them. There is no way an ocean rental should prioduce only $1200 of income if rented more than 14 days.

[jainen]

that's their problem

>>that's their problem, not yours<<

According to Circular 230, it's very much your problem. This is an example of a client statement that has an internal inconsistency. They are claiming it is a rental business but are not operating it in a business-like fashion by collecting market rate rents. You must resolve this inconsistency, or decline to prepare the return.

[cynamoats]

I think there has been a lot of good points brought up and certainly given me some things to think about.

If I decide to either report a large percentage as personal usage and have not in the past, will that be a problem? If I do that, can I take all of the interest and R/E taxes on Schedule A?

Thanks for everyone's input. Sometimes it's hard to see the forest for the trees.

[cynamoats]

Just want to keep this up top. Hoping for some advise on the last posting I made.

[oceanlovin'ea]

Seasonal rentals

That sounds like some of the rentals in Florida. Snowbirds come to Florida for the winter and people have mobile homes in senior parks that they rent to these Northerners.

They rent them for 3 or 4 months in the winter and get 2000 or 3000 depending on the length of time they are rented. Then the units are empty rest of the year.

I also remember when I lived in Michigan many years ago. In upstate Michigan there were cottages that were only rented out in the summer.

So a beach area might have seasonal rentals also. I would think that asking the right questions would lead to knowing the real situation.

Linda F