One of the main advantages of real estate investing is the tax deductions investors can make. Upgrades, repairs, office supplies, and the wages that you pay any personnel are just a few of the things that you can deduct. That’s why it’s so important to save all of your receipts, invoices, or any other records that reflect your business expenses. Those items can save you a lot of money at tax time. Also, in the event that you’re audited by the IRS, these records will help show that you’re not creating numbers out of thin air. But before it comes to that, let’s take a look at the most common triggers for an IRS audit.
- Real Estate Deductions
Rest assured that audits are pretty uncommon. In 2020, only 0.5 of all tax returns were subject to an audit. Having said that, real estate deductions are one of the most common reasons for an audit. Or, rather, unsubstantiated deductions are the most common reasons for an audit. Unfortunately, there are some unscrupulous investors who will claim deductions for repairs they haven’t made or other expenses that they haven’t incurred. As we said above, make sure to save your paperwork or electronic records of any expenses connected to your real estate investments. They are as valuable as cash.
- Missing Capital Gains
When you sell an investment property, we always recommend putting it into a 1031 exchange if you plan on buying another investment property. This way, you won’t be taxed on the capital gains from your sale. If you don’t plan on reinvesting your capital gains, they will be taxed. It’s up to you to report those capital gains correctly.
- Missing Dividends and Interest
If the dividends or interest that you made from your investments are barely enough to cover your grocery bill, you probably don’t have anything to worry about. The 1099-Misc form is for miscellaneous income, including profits from investments, and it’s one of the most common mistakes. Having said that, the IRS takes this more seriously when the dividends and interest are substantial. When you’re preparing to file your taxes, always make sure that you have a 1099-Misc to report this income.
- Failure to Report Cryptocurrency
The IRS now asks filers at the top of the 1040 form if they’ve invested in cryptocurrency, so if you invest in, sell, or hold any cryptocurrency, you are required to report it. This is especially important to keep in mind because some brokers and exchanges because many brokers or exchanges may not be consistent about sending 1099 forms. In an effort to redress this oversight, all cryptocurrency exchanges operating within the U.S. will be required to send Form 1099-B beginning in the 2023 tax year.
As we said, audits are rare, but they do happen. The best way that you can avoid getting audited is keep meticulous records. Even if you hire a bookkeeper or accountant, which we recommend, being able to hand over clear records of your income and expenses will minimize that unwelcome notice from the IRS.
