scclark9

[scclark9]

What is the name of your state (only U.S. law)? fl

My husband and I have a rental property in our name and another individual. I am the only named mortgage holder. We are all three on the deed. The other individual gave us $40,000which I paid capital gains tax on in 2004. My husband and I receive 11,000 dollars a year from the 2nd party to cover the mortgage. I also receive rent on the house. On my sch E I report the rent as income but not the 11000 from the 2nd party as I thought this was his 1/2 of the mortgage. I also claim all the mortgage intrest on my sch E as well as all deductions. The second party knows this and has no objections. He lived in Idaho and didn't want anything to do with this property except the future sale of it.(it was supposed to have multiple house built on the 5 acres of land) The property never sold once the real estate market plummeted in Fl. My question is do I report the 11000 as income? I am in an audit right now and I dont want them to tell me I owe something I don't but I don't want them to think I am underrepoting income

My second question concerns the fact that now the other individual is deceased. The property reverted back to us for 1$ per his request. We have since closed and the property is now ours soley. What does this mean on a tax return if anything.

Any advice is appreciatedWhat is the name of your state (only U.S. law)?What is the name of your state (only U.S. law)?

 

[LdiJ]

What is the name of your state (only U.S. law)? fl

My husband and I have a rental property in our name and another individual. I am the only named mortgage holder. We are all three on the deed. The other individual gave us $40,000which I paid capital gains tax on in 2004. My husband and I receive 11,000 dollars a year from the 2nd party to cover the mortgage. I also receive rent on the house. On my sch E I report the rent as income but not the 11000 from the 2nd party as I thought this was his 1/2 of the mortgage. I also claim all the mortgage intrest on my sch E as well as all deductions. The second party knows this and has no objections. He lived in Idaho and didn't want anything to do with this property except the future sale of it.(it was supposed to have multiple house built on the 5 acres of land) The property never sold once the real estate market plummeted in Fl. My question is do I report the 11000 as income? I am in an audit right now and I dont want them to tell me I owe something I don't but I don't want them to think I am underrepoting income

My second question concerns the fact that now the other individual is deceased. The property reverted back to us for 1$ per his request. We have since closed and the property is now ours soley. What does this mean on a tax return if anything.

Any advice is appreciatedWhat is the name of your state (only U.S. law)?What is the name of your state (only U.S. law)?

The 11K isn't income to you, but you should have only been reporting only half of the interest and property taxes (assuming that both were escrowed) because you only paid 1/2 of them.

You inherited the other party's half upon his death. There is no tax implication in that. However it did give you a stepped up basis on his portion of the property.

 

[anteater]

You inherited the other party's half upon his death. There is no tax implication in that. However it did give you a stepped up basis on his portion of the property.

LDIJ:

Would this statement imply that the transfer to the OP and husband is a bit hairier than a simple inheritance?

The property reverted back to us for 1$ per his request. We have since closed and the property is now ours soley.

Like, perhaps, one of the other owner's beneficiaries inherited the other owner's share and then sold/gifted it to the OP and husband?

 

[tranquility]

I agree with anteater. This seems a bit more than easy-peasy. I suggest the OP get a tax professional to represent him at the audit. While the facts *may* indicate an inheritance of the 1/2 of the property, they may not and I'd like to review the paperwork before coming to an opinion. There may not be a step up.

Clearly the treatment of the property was wrong. Again, I'd like to see the books and the Schedule E to make sure, but the end result will be an $11,000 increase in AGI and an auditor who will go to other returns within the statute of limitations and where the property was reported to add income or reduce expenses to reflect reality. Even then, it seems like there may be other issues related to the property agreement and allocation between the owners which are problematical. The OP really needs to see someone before giving too much information to the auditor. A tax professional can help frame the issue in a way to attempt to keep down the harm.

 

[LdiJ]

I agree with anteater. This seems a bit more than easy-peasy. I suggest the OP get a tax professional to represent him at the audit. While the facts *may* indicate an inheritance of the 1/2 of the property, they may not and I'd like to review the paperwork before coming to an opinion. There may not be a step up.

Clearly the treatment of the property was wrong. Again, I'd like to see the books and the Schedule E to make sure, but the end result will be an $11,000 increase in AGI and an auditor who will go to other returns within the statute of limitations and where the property was reported to add income or reduce expenses to reflect reality. Even then, it seems like there may be other issues related to the property agreement and allocation between the owners which are problematical. The OP really needs to see someone before giving too much information to the auditor. A tax professional can help frame the issue in a way to attempt to keep down the harm.

I was looking at it as an inheritance, because unless it was mentioned in his will, how would the executor know to sell them the property for $1.00?

However I agree that it is murky. There could have been a contract giving them the right to buy his interest for $1.00.

I also disagree that there would be a full addition of 11k to AGI. The entire 11k didn't go to mortgage interest and property taxes. At least a small portion of it went to principal. It also could be argued that 1/2 of the rental income should have been reported on the other owner's tax return, rather than on theirs.

The transfer of the property won't be subject to the audit, because that just took place.

 

[tranquility]

The sale does not need to be handled now, I agree. Before reporting, I'd talk to a tax pro for an opinion on the basis.

I also agree it probably won't be a full $11K, mostly because of principal repayment (which would bring up another complexity) and just used the number to let the OP know he's going to have a higher AGI. I think that the true agreement is the key to how the property is reported and that this is a SNAFU of casual dealing which will take a bit to unwind. I don't think it wrong to split income and expenses with co-owner although a partnership or LLC may be a better way to go. The bottom line is that the OP is in an audit with some difficult issues which may go beyond the year being audited and has almost certainly misreported the transactions which will give rise to additional taxes owed. I think the OP probably took, as an expense, items which were paid for which he was reimbursed. Just like on health insurance, if you take the deduction for the payment to the doctor, you (usually the next year) take the insurance reimbursement. Here, it all happened in the same year. While there *could* be a shifting of 1/2 of the income to the putative partner, absent a specific written agreement the economic reality would have 1/2 of the expenses go there too.

He should see a tax professional.

 

[LdiJ]

The sale does not need to be handled now, I agree. Before reporting, I'd talk to a tax pro for an opinion on the basis.

I also agree it probably won't be a full $11K, mostly because of principal repayment (which would bring up another complexity) and just used the number to let the OP know he's going to have a higher AGI. I think that the true agreement is the key to how the property is reported and that this is a SNAFU of casual dealing which will take a bit to unwind. I don't think it wrong to split income and expenses with co-owner although a partnership or LLC may be a better way to go. The bottom line is that the OP is in an audit with some difficult issues which may go beyond the year being audited and has almost certainly misreported the transactions which will give rise to additional taxes owed. I think the OP probably took, as an expense, items which were paid for which he was reimbursed. Just like on health insurance, if you take the deduction for the payment to the doctor, you (usually the next year) take the insurance reimbursement. Here, it all happened in the same year. While there *could* be a shifting of 1/2 of the income to the putative partner, absent a specific written agreement the economic reality would have 1/2 of the expenses go there too.

He should see a tax professional.

There is no doubt about it, he will definitely get audited for 2006 and 2008 as well. (I am assuming the audit is for 2007). I also agree that they took expenses that they were not entitled to take.

Had they been my clients, I would have told them that each needed to report 1/2 of the rental income and take 1/2 of the expenses...or as you said, go the route of an LLC or Partnership.

However, what's done is done there.

I am going through an audit right now with one of our firm's clients and its a real mess. The guy did not intentionally cheat at all but he made such a convoluted mess of how he handled things, that he is also going to end up with a fairly high tax liability.

 

[scclark9]

Thanks for the response. Here is some more info. The property was not inhereted back. Upon the death of the 2nd party, my husband and I were unable to locate anyone who had any information about this property, including his wife. We hired an attorney and through a local title company(where any money we received from the 2nd party came through) it was determined the executors of his affairs were located in the Nether Antilles. Upon review of the spreadsheet, they offered the property back for $1 they said"per request". Whose request is undetermined. Nonetheless, we now own this property soley.
This transaction originated very casually between two friends,one wealthy the other not so much. He sent us money once or twice a year, whenever we needed it. It was not alloted necessarily to pay the mortgage but it was used toward paying the mortgage. There was no more money sent to us after his death. He did not want to claim 1/2 the expenses. I truly do not believe he filed.
This arrangement was reviewed by an auditor for the years 2004 and 2005(I was audited in 2006 for the years 2003,2004,2005). I am now being audited for 2007 and subsequently 2006 and 2008.
I am a nurse and my husband has a small floor covering business which has been not been very prosperous the past few years(in fact, he is now a hobby). I handled my first audit myself and was quite confident going into this one. However, the auditor is not as nice as the first and she negates many things the first auditor accepted as "ok". Because my first audit went so well, I felt I was filing correctly. Appearently, not so.
Are tax attorneys very expensive? I truly do not have alot of money and it looks like I will probably have less here shortly. I thought I would try to handle this myself and if it goes south, then hire an attorney. I really thought this audit would be cut and dry, as everything that is being examined now was found to be in check 2 years ago. Are there any instances similar I can present in my favor? If I am dead wrong then so be it , I am hoping there is something out there.

Thanks

 

[scclark9]

Thanks for the response. Here is some more info.
The property was not inhereted back. Upon the death of the 2nd party, my husband and I were unable to locate anyone who had any information about this property, including his wife. We hired an attorney and through a local title company(where any money we received from the 2nd party came through) it was determined the executors of his affairs were located in the Nether Antilles. Upon review of the spreadsheet, they offered the property back for $1 they said"per request". Whose request is undetermined. Nonetheless, we now own this property soley.
This transaction originated very casually between two friends,one wealthy the other not so much. He sent us money once or twice a year, whenever we needed it. It was not alloted necessarily to pay the mortgage but it was used toward paying the mortgage. There was no more money sent to us after his death. He did not want to claim 1/2 the expenses. I truly do not believe he filed.
This arrangement was reviewed by an auditor for the years 2004 and 2005(I was audited in 2006 for the years 2003,2004,2005). I am now being audited for 2007 and subsequently 2006 and 2008.
I am a nurse and my husband has a small floor covering business which has been not been very prosperous the past few years(in fact, he is now a hobby). I handled my first audit myself and was quite confident going into this one. However, the auditor is not as nice as the first and she negates many things the first auditor accepted as "ok". Because my first audit went so well, I felt I was filing correctly. Appearently, not so.
Are tax attorneys very expensive? I truly do not have alot of money and it looks like I will probably have less here shortly. I thought I would try to handle this myself and if it goes south, then hire an attorney. I really thought this audit would be cut and dry, as everything that is being examined now was found to be in check 2 years ago. Are there any instances similar I can present in my favor? If I am dead wrong then so be it , I am hoping there is something out there.

Thanks

 

[tranquility]

Worse and worse. You probably don't need a tax attorney. A CPA or enrolled agent will be a lot cheaper and can help you determine your risk. Auditors are all over the board on training and experience. Also, the motivations of the auditor make a difference too. How their day went, what their general attitude is in life, how close to retirement, how many cases have they closed, how much money they've collected or found on other audits this month can all affect the auditor's attitude. Even though we would love to have total consistency, we must remember we are dealing with people. Quite frankly, unless the other auditor asked for your bank statements and noted your deposits as compared to your total income, the additional amounts you've received would never cause a blip in the radar.

Because people have different tax situations, they really can't agree to shifting expenses and income on the fly. Tax liabilities can radically be changed based on NOL, tax bracket, passive losses, country of residence and other factors that absent a written agreement which addressed economic reality (for example: one partner putting in more work than the other), your treatment of things was incorrect. Because the IRS will go outside the audit year when they see a mistreatment that is likely to be repeated, you have the potential to pay taxes (assuming the same numbers) on a good bit of income. I think you're looking at a bill in the thousands of dollars. Maybe in the tens of thousands when penalties and interest are added. It is well worth the time and expense to see someone who can review things and, hopefully, spin events to mitigate the damage. It's too bad you've already addressed the issue with the auditor as it will be hard or impossible to back off from your representations.

I agree with LdiJ on how to report things.

 

[scclark9]

Again thanks for the response.

I have not as yet disclosed any information to the current auditor concerning the status of this property. The audit began as an audit of my husbands small business which ,apart from the fact that he is now considered a hobby, those records were ok. The auditor determined since the floor covering business is not so profitable the last 5 years, then he is a hobby. She then asked for all my bank records or all accounts. Once I turn over the bank statements for the rental property, I will have to disclose from where the income came . So should I get a CPA now before I turn over the statements or is it a moot point.

Speaking of hobby, is there another way to prove you're a business and not a hobby if you are not fotunate enough to make a profit in 5 years.We had a store with no profit, changed locations still with no profit, tried it from home, tried a mobile showroom, then RV installations. Now, flooring is not top priority for most people. Bottom line-no profit. Are there other ways to prove you are trying to make your business work or again, is it a moot point.

Thanks for all your help

 

[scclark9]

Again thanks for the response.

I have not as yet disclosed any information to the current auditor concerning the status of this property. The audit began as an audit of my husbands small business which ,apart from the fact that he is now considered a hobby, those records were ok. The auditor determined since the floor covering business is not so profitable the last 5 years, then he is a hobby. She then asked for all my bank records or all accounts. Once I turn over the bank statements for the rental property, I will have to disclose from where the income came . So should I get a CPA now before I turn over the statements or is it a moot point.

Speaking of hobby, is there another way to prove you're a business and not a hobby if you are not fotunate enough to make a profit in 5 years.We had a store with no profit, changed locations still with no profit, tried it from home, tried a mobile showroom, then RV installations. Now, flooring is not top priority for most people. Bottom line-no profit. Are there other ways to prove you are trying to make your business work or again, is it a moot point.

Thanks for all your help

 

[tranquility]

Five years is a presumption. Your intent to make a profit is the rule. This can be shown by many factors and you have a real-piece-of-work auditor who, absent some real difficult facts where you're not going to overcome the presumption anyway, claims a person laying flooring is doing it as a hobby. How much of a loss were you taking?

Get a tax professional involved now. Call or write a polite letter telling the auditor that it seems like there are all kinds of rules getting involved you don't fully understand so you feel the need to get a tax professional to represent you at the audit. Tell them you'll have to postpone getting them any further information or meeting with them until you get one up to speed.

 

[scclark9]

Thanks again for all your help. I have decided to consult a professional, however,do you feel this will this make my auditor think I am hiding something? I am afraid she will be harder on me if I have a representitive. Can she levy my bank account or garnish my wages before the IRS has decided what to do with me. I ask this specifically because of wages for one, but my son was awarded a settlement in 2008 for a car accident. Since he was a minor at that time, I have the money in my account where it has been sitting pending the start of college. Can the irs take this money. I have check stubs etc... to prove it is his money. He is an adult now (by law anyway) but I am not really excited about giving him $13,000. The money is for school. I don't want him to lose it because of me. Can I take it out without the irs thinking I am hiding money. I appreciate all your advice.

 

[LdiJ]

Thanks again for all your help. I have decided to consult a professional, however,do you feel this will this make my auditor think I am hiding something? I am afraid she will be harder on me if I have a representitive. Can she levy my bank account or garnish my wages before the IRS has decided what to do with me. I ask this specifically because of wages for one, but my son was awarded a settlement in 2008 for a car accident. Since he was a minor at that time, I have the money in my account where it has been sitting pending the start of college. Can the irs take this money. I have check stubs etc... to prove it is his money. He is an adult now (by law anyway) but I am not really excited about giving him $13,000. The money is for school. I don't want him to lose it because of me. Can I take it out without the irs thinking I am hiding money. I appreciate all your advice.

The IRS cannot take any action against you until the audit is finished and any appeals are made.

Put your son's money in a trust account for him, using his social security number.

I doubt it will make the auditor think that you are hiding anything, but it may make the auditor think that you will fight your husband's business being considered a hobby.