Real estate is one of the most complex areas when it comes to tax law. It is also one of the most complex when it comes to reporting. Both of these factors can make accurate reporting challenging – it's easy to overlook important steps, which can lead to missing out on tremendous tax savings or an error on your tax return.
Before going into the tips, let's first review a key piece of real estate reporting – the repairs account.
When I review the accounting for a real estate activity, one thing that always makes me cringe is a very large amount in the repairs account.
I find that many people use this account to capture just about everything. While it is great to capture the expense, it is not great to report a huge amount of repairs on your tax return.
The repairs account is one of those accounts that draws scrutiny during an audit. This makes it even more important to get it right.
The repairs account can also cause a hold up in the preparation of your tax return or increase the preparation fees. Managing the repairs account is a huge part of improving your real estate reporting.
Here are 3 Tips to Improve Your Real Estate Reporting
Tip #1: Identify improvements that have been classified as repairs
Often times, improvements are incorrectly treated as repairs.
Here is why this is so important. The accounting and tax reporting for repairs is much different than the accounting and tax reporting for improvements.
Repairs can be deducted immediately.
Improvements must be capitalized and are deducted over a number of years rather than all at once.
This is one of the main reasons a large amount in the repairs account will draw scrutiny if audited.
What is the difference between an improvement and a repair?
The general difference is this:
A repair simply keeps the property at its normal operating condition.
An improvement extends the useful life of the property, enhances the value or modifies it for a different use.
Review your repairs account for any items that meet the definition of an improvement.
Tip #2: Use more specific accounts
Sometimes properties have legitimately large repairs. Even in these cases, there are strategies to use to avoid reporting a large amount of repairs on your tax return.
Review your repair account for anything that can be coded differently.
For example, I've seen repair accounts that include expenses for supplies, lawn service, pest control and small appliances. These are all examples of expenses that can be coded to separate accounts.
Even though all of these items get deducted all at once, the strategy of using more specific accounts provides for cleaner reporting and the repair account won't be as large any more.
Tip #3: Get the details from your property manager
Some property manager reports will lump expenses together and report them all as repairs.
If you use a property manager, then request that your reports include an itemization of repair expenses.
This is not only helpful from a management standpoint, it also gives you the detailed information you need to properly code your expenses.