Changes Coming to Reporting Real Estate Losses | USTaxAid

Diane Kennedy's Blog

Changes Coming to Reporting Real Estate Losses

Written by Diane Kennedy, CPA on March 18, 2011


The IRS has been targeting audits to taxpayers who take a real estate loss on their tax return, specifically people who use the Real Estate Professional status to take a deduction when they otherwise would not get one.

The IRS has found a lot of tax cheaters this way, and they’ve also caught a lot of people who correctly were taking the real estate professional status. Unfortunately for the later group, it’s cost them a lot of time, energy and professional fees to get the deductions they were supposed to get in the first place.

As a result of their findings, the IRS has determined they need to get more information from taxpayers so they know who to select for audit. Here are the proposed changes for reporting real estate starting in 2011:

  • The first proposed change will require taxpayers to provide a common description of the rental real estate property (i.e., single-family house, multi-family house, commercial property, personal use, vacation homes, land, royalties, or other). The IRS currently requires taxpayers to describe the type and location of property, but leaves the descriptions entirely up to the taxpayer. This ambiguity can cause challenges for the classifiers when attempting to identify and select tax.

    COMMENT: This is something we currently do for our clients anyway. It provides more clarity as to what is being rented and the legitimacy of the deductions.

    This can also be helpful in determining what is reasonable. For example, expenses for a single-family home rental will be different when compared to a commercial rental.

  • Taxpayers will be required to provide the actual number of days the property was occupied and the number of days the property was used for personal purposes.

    COMMENT: This change will require a little more record-keeping on the part of our clients, but should be fairly easy with which to comply. This is being used to prove that rental properties aren’t really second homes or vacation homes.

The next group of changes has to do with information you’re already reporting but that the IRS is not yet tracking. It’s not going to effect you directly, but will be one more stat they are tracking on passive losses.

  • Taxpayers will be required to file a Form 8582 if there is a passive activity limitation. The regulations state that you have complete a form, but not that you have to include it with the filed return.

    COMMENT: This change also makes sense. It never did seem to make sense that the calculation of PAL was done and then carried forward to next years, but that you didn’t have to show the IRS what the calculation was and how you derived it.

The next change is again an internal IRS one. If you’re a real estate professional, you have to complete a section on Section E. But the IRS doesn’t track who completes it and who doesn’t, at least currently. They’ll start doing so soon.

What do these changes mean for you if you’re currently taking real estate losses as a deduction against other income? Frankly, they don’t mean much if you’ve been correctly taking the deductions. If you’ve been cutting some corners, though, you’re going to get caught!

Learn more about how you can LEGITIMATELY write off real estate losses with Real Estate Loopholes.


  1. Cynthia Smith says:

    Dear Dianne,
    I am looking for a hard copy of your book “10 Secrets to Winning the rEal Esate Professional Argument with the IRS ( Physical Edition) which This is not a CD. Is this available and where?

    I am currently classifying myself as a real estate professional on my tax return. My husband and I own 4 apartment buildings jointly plus we own one apartment building with a friend and one commercial building with a friend. Can we group just the 4 apartment buildings which I only jointly with my husband as an aggregate, or do I need to lump all of our holdings together? Is the IRS clear about this? I only actively participate in the 4 apartment buildings that we own by ourselves, without our friend.

  2. wayside says:

    From Y.Y. Anyika, TC Memo. 2011-69, Dec. 58,580(M) (Passive Losses Disallowed as Taxpayer Was Not Real Estate Professional: Negligence Penalty Imposed):

    “For both years, the taxpayers’ failure to consult a professional before making their incorrect claim that the husband was a real estate professional constituted negligence.”

    So now it seems not paying someone else to do my taxes constitutes negligence!

    Holy crap!!!

  3. Diane Kennedy says:

    Charlie, I have a feeling they wore down the Court’s patience. They failed to meet some pre-trial requirements and then tried to throw Turbo Tax under the bus.

    Bottomline, it’s the old ‘garbage in, garbage out’ rule of software. They didn’t have the right information, strategy or documentation. And ignorance of the law is no exception. It is startling that they got the tougher negligence penalty (an additional cost of up to 20%)

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