How to Save your Real Estate Business From an IRS Audit
We recently had a conference call with a client who is investing in a new real estate niche: subleasing in Miami. Subleasing real estate is basically renting the property and getting the tenants who stay for short term rentals, typically from a week to a month. The key element for this investments is cash flow as there is no tax shelters, such as depreciation, and no taxes, interest or mortgages.
Company structure
The company structure will be a LLC as income from real estate is classified as passive and exempt from self-employment income tax that typically affects regular active business partners.
Payments in cash: use form W9
Real estate business will demand many time payments in cash for vendors who do minor fixings. For them you must get a signed W9 form and send them a 1099 if the total of the payments for the year is over $600. It is a recommendation that you also do the same for every vendor who is self-employed and for LLC vendors.
Income and expenses per property
Cash flow is king in real estate. If you own many properties, keeping a record of income and expenses separately for each one is key to measure your cash flow. This is easy to implement from an Excel spreadsheet or with Quickbooks.
Accounting and IRS Audit
The accounting of your income and expenses per property and the keeping of your receipts to back up your expenses is fundamental to know about the profitability of your real estate business. This is the first line of defense in case of an IRS audit.
Keeping records of your cash vendors and regular vendors is a good measure to protect you against the IRS if you are audited. The IRS will disallow payments to vendors if you are not able to provide credible proof. The consequences of disallowed expenses are a restatement of profits and increased taxes to partners in addition of the emotional impact that an IRS audit represent.
Being proactive in you real estate dealings is a good measure against accounting and tax surprises that could compromise your business.
We have much more helpful advice and valuable information we’d love to share with you. All you need to do is book your free consultation with one of our tax experts by emailing us at [email protected].
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FAS CPA & Consultants
9000 SW 137 AV Suite 224 Miami, FL 33186 T: 786-462-7899 E: [email protected]
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