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Landlords Beware - Keep Detailed Records on Rental Properties

Posted by Rachel Santana Posted on Oct 25 2012
I like to share experiences with our clients that we learn from throughout the year.  A new client that came to us this year was pulled for an audit covering 2009 & 2010.  He had three rentals and though he knew the audit would be a distraction, he did not think he had much to worry about.  What he learned:
1.)  Any expenses incurred prior to the home being available and advertised for rent must be capitalized, not expensed meaning that the repairs, etc are depreciated over the life of the dwelling which is 27.5 years for a rental home.
2.)  Any repair bills must be detailed as to what is being done so that the auditor can distinguish  between a repair and an improvement.
3.)  The break-down of the home on the depreciation schedules between land and house must follow the % on the tax appraiser's website unless there was an appraisal done at the time the property became a rental breaking down the dwelling and land.
4.)  All write-offs require a receipt, not just a credit card statement, and the address of the property should be written on the receipt.  The auditor wants to see what was purchased and will also want to know why.
5.)  If you use a management company, make sure that they don't have full authority to screen and decide on tenants.  That decision must be the owners in order to establish that they "actively participate" in managing the property.

This audit was an excruciating experience for this client and it is not over. I am hoping that this will help us to better prepare all of our clients that own rental property to be successful if they find themselves before an auditor.

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