Key Red Flags on Form 8825 – Rental Real Estate Income and Expenses of a Partnership or an S Corporation
- Losses. Especially if you’re deducting them.
- Missing information. The IRS looks for items on Form 8825 that shouldn’t be there. But I think missing information, like real estate taxes for example, might trigger an audit.
- Low rental income. You don’t want the IRS thinking a) you’re not trying to actively rent the property, or, b) using it personally.
- Out of range figures. Like say $20,000 of auto expense.
- Depreciating land.
- Presenting depreciating capital assets as expenses. For example, a new air conditioning system.
- Round figures. Round figures imply estimation.
We look for red flags and proactively address them. If the figure is accurate and legitimate, we provide supplemental documentation to the IRS to head off a potential audit.
Where do I get Information for Preparing Form 8825?
- Read the instructions for Form 8825. It is only one page.
- Read the passive activity limitation section of Form 1120-S or Form 1065 instructions. If your rental real estate generates a loss, you want to claim active participation of it. Why? Rental real estate losses are only deductible under certain conditions. It pays to understand them.
- Publication 946 helps explain depreciation expense for Form 4562.
- Look at websites for examples on specific issues. But don’t rely on them as definitive or comprehensive. Beware of outdated postings.
- Buy an appropriate tax book. Make sure it is the latest edition. Form 8825 tax consequences deserve due diligence. Books usually cover all aspects of rental real estate and demonstrate concepts using clear examples. Be sure to understand all possible deductions.
- Call the IRS. Beware you can’t rely on verbal advice from them if you’re audited.
- Read up on Schedule E for Form 1040. Which is equivalent to Form 8825 for individual taxpayers. Here’s a link to our post on Schedule E of Form 1040.
- Consult with a CPA.
Where Does the Information on Form 8825 Flow?
- It integrates into the parent tax return, Form 1120-S for S Corporations or Form 1065 for Partnerships.
- Both Forms 1120-S and 1065 then issue Schedule K-1 to the individual shareholders and partners. This reports their tax figures for the year from the parent return. The IRS gets a copy, too, of course.
- Shareholders and partners bring the Schedule K-1 information into their personal Form 1040 via page two of Schedule E.
