Gain on Real Estate

Today TaxMama hears from Toni in the TaxQuips Forum, who tells us.  “I’m doing my own partnership taxes and am confused about entering information. In 2009, I bought, fixed up and sold 2 properties. [and Toni adds lots of details. ] I’m confused because I’ve added the gain twice from Form 4797.  What am I doing wrong?”

Dear Toni,

 When you are doing a partnership tax return, you should be using tax software.  Consider Turbo Tax Business  and  H&R Block Premium and Business . The tax software will flow the numbers from any form to all the correct places on the tax return. Some numbers flow to more than one form, for a variety of reasons.  When preparing partnership returns, some numbers flow to page 1, Schedule K, Schedule L, Schedule M-1 and/or M-2, the K-1s and who knows where else.

 Unfortunately, this free TaxMama service is not designed to walk you through the line-by-line preparation of forms. Nor to review your tax return – a good review takes an hour or two.   

Also, using Form 4797, there are several potential errors that most people make. Especially when it  comes to the recapture of depreciation as ordinary income, computing basis, and how to deal with selling costs and fix-up expenses before sale.

Yes, some of the expenses might go on the Form 8825. Others should be part of basis. However, if these were never really rental properties, if they were properties you bought and fixed up to sell, you would have to capitalize all the expenses, not deduct them. This could be a grave error, with expenses that would be disallowed on audit. And David Toelkes brings up the issue that these properties might be considered inventory – which is an interesting point of view.  

Another error is combining properties on one Form 8825.  Why would you do that? These are two separate properties with distinct purchase and sale dates and escrows, aren’t they?

 The more I think about the implications of the things you’ve written, the more potential errors I am seeing.

 And why is this a partnership? You keep saying “I”. Do other people own the properties with you?  Frankly, if you have partners, YOU should not be preparing a partnership return yourself.  It’s one thing to prepare your own tax return involving purchases, sales and fix up of real estate. You can accept the responsibility for any errors you might make.  But if you have partners, are you sure you want to expose them to the errors you’re clearly making this tax return?   

Your own personal liability as the preparer of this return could be extensive if it is audited and major errors are found. Your partners would hold you liable for their additional taxes, penalties and interest. Do you really want that?

If you can afford all this real estate, you can certainly afford to invest the few hundred dollars for a qualified, experienced tax preparer.  Do it.  I don’t want to see you getting into trouble.

 And remember, you can find answers to all kinds of questions about real estate, and other tax issues, free. Where? Where else? At

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