Rent Received for Post Office Bldg - not taxable?

[TaxLadyinPA]

I have a new client almost 90 years old.

They have owned the Post Office building for over 50 years.

The preparer who has done their return (all those years) NEVER claimed the rental income on the post office. He retired this year so they came to me.

They receive a 1099-misc - Rents from the Government.

I looked at 2 previous returns 05 & 06 (done by pen and paper btw) and I asked them why there was no rental income attached to the return.

They said their old preparer said they didn't have to claim income received from the Post Office rental and they have never claimed it.

Am I missing something here? Is there some law I don't know about that says you don't have to claim rental income on Post Office buildings?

[ChEAr$]

Just when you think you've seen 'em all

Up comes this one. Previous preparer must have though there was an exemption for
rents received from US gobment. He was wrong, as you rightly know.

Countdown!
14 days to go.

[TaxLadyinPA]

I'm trying to figure

how to explain this to a 90 year old ....

who informed me ..... "We just thought the world of ole Charlie. He prepared our return for years, such a sweet man."

Now who am I to suddenly say "Well tuff tushy ... He has been doing it wrong so he isn't so great after all" *L*

I'm totally exhausted and getting a *If you don't like the way I do it, then take it someplace else to be prepared ... I'm not wasting my time to explain the law ... I do it right or you go elsewhere* I really am brain wasted *L* ... and yes ... I too am counting the days yet looking at the piles waiting on me yet *sigh*

Thanks for your 2 cents worth of response

[thomtax]

A couple of thoughts for you, and judging from your email, you may not be in the mood to listen to them.

1. Their tax preparer may have been a really good guy, and you might have liked him also. That doesn't mean he is correct, but, to me, it's refreshing to hear someone say something nice about the last preparer, as opposed to all the bad-mouthing that usually goes on. If you think about it, wouldn't you like for someone to say that about you.

2. These people are putting their trust in you to do it correctly. I feel that part of the service that I have to offer is to help educate the client and that this will make things better for both of us in the future. I don't know, was there at some time in the distant past where payments from the US Gov. were not taxable and the preparer just did not know when it changed?

These observations are in no way meant as criticism of you. Ask yourself, if this came up at some other time besided the 15th crunch, would you feel the same way.

I try (don't always succeed) to keep in mind the old saying:

"When you are up to your rear in alligators, it's hard to remember that your original intention was to drain the swamp."

I wish you the best of luck and hope the rest of the year goes better.

LT

[TaxLadyinPA]

You are absolutely right ... which is why I said that *sarcastic* remark.

How on earth can I possibly explain this to them. (My remarks were my alter ego saying this is what you should say .... when my own sweet persona said .. now now .. you *gotta* be nice) LOL

I'm actually hoping I can just do the return and not have to explain anything. They won't even notice I added it to the return. *L*

And I also wondered if eons ago there was a exemption from claiming that rental income. It may very well have been something to entice people to take on all the expense of keeping up a building for the use of the government.

Anyhow ... I really was just being sarcastic ....
But I really appreciated the way you responded. It actually had a very calming affect on my hyperactive stress filled 13 days left mind.

[Gene V]

I agree and sympathize with you, one thing I would do is try and call the retired tax preparer and get his side, also how much are they renting the building for?

Gene

[BOB W]

Don't just walk away from this return>>RUN........ You will have more grief and what about prior depreciation...................Do you even know cost basis of the building, probably zero by now. All the rent will be taxable income. for the time you are going to spend you will never get paid enough and you will end up as the bad girl.

[TaxLadyinPA]

Run don't walk .....

Well I can't run from the return. I will do it sympathetically with a Schedule E attached.

And as for the depreciation ... it absolutely would be totally gone by now *IF* it had been done. The use it or lose it factor will kill them when they sell. Which btw they told me they were putting in on the Market this summer for $ 80,000. (Maybe I should buy it if I don't have to claim the rental income *LOL* )

They received the 1099 in the amount of $ 5000 which when you think about that. it sure isn't much rent to receive for a year.

I really don't understand why the IRS has never caught this 1099. That is quite a bit of money to be forgetting on a return.

[JohnH]

6% isn't bad

$5K per year rent on an asset with a FMV of $80K isn't bad, especially since that $80K will only generate about $2K-$3K on a CD right now. Add to that the fact that the $80K building would net them $60K or less in cash after taxes, and the ROI goes up significantly. I'm assuming there are no other significant expenses associated with the building.

Plus, with the Post Office being the lessee, there's no possibility of a default. In essence, renting a building to the Post Office is the rough equivalent of having a Federally Insured CD, but also enjoying the benefit of capital appreciation on teh asset. If I owned the building and it really had a FMV of $80K, and I was reasonably sure they weren't going to vacate, I'd probably need a $100K offer before I'd consider selling.

[ChEAr$]

Except, JohnH,

and unless ye old Post Office decides to build a new building to replace an outdated and
undersized one in today's market.

[erchess]

Should These People

come clean with the IRS about the past or is it better that they wait? If it could be proved, would the fact that they told prior preparer about the rent protect them from fraud charges, and if so can the fact be proved? (Am thinking that prior preparer has strong temptation to lie and there is even the outside chance he has honestly forgotten.)

As I understand Circular 230, Tax Lady has the obligation to estimate the potential cost of being caught by the IRS and the potential comparative savings from turning themselves in, and let the taxpayers decide what to do.

[Black Bart]

As I see it,

...Tax Lady has the obligation to...

prepare a Schedule E and that's all. The less said about it, the better. She's already advised them it's taxable and they know they owe lots of tax. If they want to excavate half a century's buried bodies (which I seriously doubt), then the ball's in their court. As to the cost, she could just tell 'em it'll be an arm and a leg and that wouldn't be too far off. I don't know if IRS could/would call it civil fraud and go all the way back, but if so, then that's probably talking about a tax/pen/int bill of more than the building's selling price.

Anyway, I'd have them sign something stating I'd advised them that amended returns were required; at least I guess that's what I'd say (how do you amend fifty years?). Although I don't generally believe in abandoning ship on a client and things like this are very educational/very good for the growth of your professional experience, I'm sort of like Bob W about it and would really, really rather not be in the midst of such a calamity.

These are the times that try mens' souls. -- Thomas Paine

[ChEAr$]

Circular 230

come clean with the IRS about the past or is it better that they wait? If it could be proved, would the fact that they told prior preparer about the rent protect them from fraud charges, and if so can the fact be proved? (Am thinking that prior preparer has strong temptation to lie and there is even the outside chance he has honestly forgotten.)

As I understand Circular 230, Tax Lady has the obligation to estimate the potential cost of being caught by the IRS and the potential comparative savings from turning themselves in, and let the taxpayers decide what to do.

says nothing about estimating potential cost of being caught; rather enjoins us
to advise client to "do the right thing", although it's client's decision always.

[lenboush]

Well I can't run from the return. I will do it sympathetically with a Schedule E attached.

And as for the depreciation ... it absolutely would be totally gone by now *IF* it had been done. The use it or lose it factor will kill them when they sell. Which btw they told me they were putting in on the Market this summer for $ 80,000. (Maybe I should buy it if I don't have to claim the rental income *LOL* )

They received the 1099 in the amount of $ 5000 which when you think about that. it sure isn't much rent to receive for a year.

I really don't understand why the IRS has never caught this 1099. That is quite a bit of money to be forgetting on a return.

In regard to the "use it or lose it" factor, would it be feasible to use the change in accounting Form 3115 to prevent this problem? We have used that for a number of clients who never took depreciation and have never had it questioned by the IRS. Of course those clients always DID claim the income for the property.

[TaxLadyinPA]

In regard to the "use it or lose it" factor, would it be feasible to use the change in accounting Form 3115 to prevent this problem? We have used that for a number of clients who never took depreciation and have never had it questioned by the IRS. Of course those clients always DID claim the income for the property.

Oh my ... I would think that would definately open up a can of worms. If I filed that form it would make the IRS look into why I'm filing it.

My plan is to just do the Sch E, claim the income and what little expenses they may have and just tell them, I'm sorry but it is taxable rental income. If they again say that their ole Charlie never did it, I'll just have to explain that he must have forgotten it in the past few years but that I have to put it on the return. ( I don't really know how far back ole Charlie never put it on the return. I only know that the past couple years I looked at .. he didn't and when I questioned them, they said "Charlie said it wasn't taxable")

I would think that if they sell it and claim the 80,000 or however much they sell it for, the IRS will just grab that money and not even question anything.

I do appreciate all the responses on this. and John H has me thinking maybe I should be a buyer LOL