Do You Know the New IRS Red Flags?

The federal deficit is growing and the government is looking for ways to balance it.  There is one thing that’s been effective lately – IRS audits.  The IRS audit teams have been successful at raising money and that means the number of audits is increasing.

The target for 2007 was real estate investors with losses.  They specifically targetted taxpayers with limited partnerships, who took real estate professional status and who owned multiple properties.  That’s still a red flag, but there are more now:

Sole Proprietorships

Capital gains/loss calculations (they’re going to want to see proof of basis when you sell)

Offshore accounts

JUST IN! One more.  Big mortgage interest payments.  You are allowed to take a mortgage interest deduction for $1 mill of purchase indebtedness.  Many people refinanced properties to take money out for other purchases, consolidate debts and other purposes.  The interest on that is not deductible!

Filing your return has never been more treacherous!  Watch out for the new red flags!


Tags:

5 Responses to “Do You Know the New IRS Red Flags?”

  1. Alb says:

    “You are allowed to take a mortgage interest deduction for $1 mill of purchase indebtedness. Many people refinanced properties to take money out for other purchases, consolidate debts and other purposes. The interest on that is not deductible!”

    1)Does the part about 1 million of purchase indebtedness mean that you can write off up to 1,000,000 worth of interest cost for real estate mortgages?

    2)If you cash out refinance with a new loan or heloc/Home equity loan, The IRS would figure out original loan balance and still let you write off that interest and would disallow all the interest from the newer portion of debt interest taken on? are they even that meticulous to look that deep?

    3)so interest when taking out more money from the equity of your home is not tax deductible? we dont pay taxes on money taken out from the property until it is sold right? What if we reinvest the money taken out on the first property and buy another property, what would be the implications then tax wise?

  2. Diane Kennedy says:

    Thank you for the questions Alb.

    The $1 million indebtedness means the amount of the debt. So if you owed $2 mill, only half of the interest would be deductible.

    If you buy a house for a half mill, refi it and pull out cash so that you have a bigger loan, the interest due to the extra amount is NOT deductible. Do I think the IRS will look for this? Yes. They’ve said it’s a target and with Obama’s latest statement that he is doubling the number of auditors I think they will be looking.

    If you take the extra cash from a cash-out refi and invest it in property, then it would be an investment expense. Trick here is to have a very good paper trail.

  3. Unreal! What an exciting thought writing. Thank-you for making me getting the hang of this eminently in the entirety afternoon :-)

  4. Hi, Is the mortgage interest deduction 1.0M or 1.1M? I thought that you could pull out $100K for any purpose and that would still be deductible as mortgage indebtedness?

  5. Diane Kennedy says:

    Richard, great point. The $100K ‘extra’ deduction is for home equity indebtedness. The IRS has told us that if the extra $100K otherwise qualifies as home equity indebtedness, then you can take $1.1 mill.

What do you think?