Warning: IRS Stepping Up Scrutiny of Passive Real Estate Losses
The Internal Revenue Service (IRS) is stepping up scrutiny of real estate professionals and passive investors under the tax code and warning taxpayers to closely follow the reporting requirements for “passive activity losses.”
The passive activity loss rules were enacted in 1986 to prevent individuals from using tax shelters to reduce tax liability on their tax return by offsetting passive activity losses and passive activity tax credits against other taxable income. But the tax rules went beyond that and covered real estate investors and silent partners in businesses.
Now, the IRS is warning filers to “avoid netting or combining income against losses or expenses not reported on Form 8582, Passive Activity Loss Limitations” and to “refer to the instructions for Form 8582 on how to properly report passive activity losses.”
However, some taxpayers have said that, when filing what they believe is the proper documentation, they are being ensnared in seemingly endless IRS requests for even more documentation.
The IRS claims that wrongly reported passive activity losses account for a large chunk of the tax gap — the difference between what is owed the government under IRS rules and what is actually paid.
While the tax gap is an important tax policy issue, NAHB is concerned that regulatory or legislative proposals and actions to close the gap may impose significant burdens on businesses, and in particular, small businesses. NAHB believes it is critical for the Department of the Treasury to comprehensively study the tax gap more before adopting rules that have the potential to harm small business.
For more information on reporting passive activity losses, download the following IRS documents:
For further guidance, contact the IRS and work with a qualified tax accountant.
For updates on basic tax information of interest to builders from NAHB, visit www.nahb.org/taxes.