Use Schedule E rather then C

[Lantis]

I have a new client and his previous tax preparer filed his rental under the TP's prior business on a schedule C - will it create problems if I use schedule E? The TP has not had the business in a few years.

[TomJ]

I think the real question is not whether doing the right thing will create a problem. It's whether doing the wrong thing created a problem and whether you want to try to fix it (amended returns). Was the depreciation captured properly (bldg using SL 27.5 with proper mid-month conventions and land excluded)? Would the rental have generated a passive loss that was not treated as such b/c it's on the C and not the E? When the business was closed or otherwise disposed of, was that handled properly (recapturing depreciation on Sec 179 assets that were converted to personal use, for example)? Has the rental been impacting self-employment taxes (I would think so, one way or the other). Don't forget about the state returns too, which don't always conform with Federal rules.

If you redid the previous returns showing the rental on Sch E and the tax worked out the same as filed with no suspended passive loss carryforwards then you're probably ok to just move over to E and don't look back. I doubt that's the case though. Not sure how to fix it all. 3115 could handle the depreciation issues? Amend previously returns? I'm not an expert in this area at all... just thinking out loud. I'm sure others on this board have dealt with this situation in the past.

[Super Mom]

My first thought was that someone wanted to report a huge loss by using schedule c when maybe they didn't qualify to show the loss on E. If this is not a business, would DEFINITELY use E to report rental income. I don't know if you would have an obligation legally to amend the previous returns or not.

[taxea]

What kind of business did he have? Did he provide services for this rental? How many years are you talking about? . I would especially research how the depreciation was handled and determine why it was a Sch C rather than Sch E. I would amend from the beginning and see whether there is any substantial difference, as stated above.
And, just for the record, I hate when preparers screw the client like this. I would suggest the TP take the preparer to Small Claims, if necessary, to recover some of your prep fees for having to fix this mess.

[JON]

Important

what is being rented, lenght of rental period and services provided. I do not think you have the option you just have to decide based on the facts what it is.

[kathyc2]

Schedule C may be the correct treatment depending on the facts. Non-real estate or short term rents are more appropriately accounted for on Schedule C.

[TXEA]

Just a thought, was this Schedule C filer renting his own building to the Schedule C business? If so, not allowed, and the expenses revert back to the Schedule C.

We need to know what was being rented by the taxpayer.

[Lantis]

At one point, the TP ran a business in one part and rented out the back to an auto repairman. So it appears that the preparer put everything on the 'C' rather than doing a 'C' and an 'E'. There are no loss carryovers and no depreciation on the building. The TP's business has been closed for several years. He now rents out the entire building.

[Lantis]

By the way, thanks for all of your responses.