New IRS Rules That You Should Know About
Dear Clients, Customers, and Friends,
I hope you are all enjoying the holiday season thus far and that this writing finds you in good health. I haven't written in a while due to other circumstances but I'm excited to be back at the keyboard and communicating with all of you.
I'm writing today to make sure everyone, especially our property owners, knows about a few rule changes with the IRS that can and will have an effect on your tax reporting for 2016 and the years to follow. With that I must properly disclose that, as a licensed Real Estate Broker in Texas, I am not allowed to give either legal or tax advice. The information I convey in this letter is intended purely to compel you to discuss these matters with your chosen tax professional. If you do your own taxes, then please do your own research and take the proper care before filing your next return.
One big change for us internally here at Linnemann Realty is a subtle but critical change to the rules of 1099 reporting to the IRS. As you know, we will issue a 1099 to each property owner in January reporting the gross amount of rents collected for 2016. Formerly, the 1099 was due to the client no later than the 31st of January and the reports to the IRS due by the end of February, giving us a month to make any needed corrections before the deadline. Now the rule is that the 1099’s must be delivered to the client and to the IRS by the 31st of January. This is going to put a lot of pressure on our team to get the 1099's out in time to our clients so we can make any needed adjustments prior to the end of January. You will get your 1099 earlier this January than ever before, and we'll need you to let us know if there’s any errors as soon as possible. While it might sound small, this is going to wreak havoc for us internally for a week or two.
The other change deals with reporting your rental property expenses on your Schedule E. I've learned the hard way that the IRS wants you to depreciate most of your repair items nowadays, as opposed to expensing them off in the current year. Up until my conversation last week with my tax professional I thought this was only for major repairs (full HVAC replacement, new irrigation, new roof, etc.). I now have learned that this applies to any individual repair greater than $250 (some exceptions apply).
I feel this is a terrible rule that will put an undue burden on the owners of rental property. Not just a financial burden but a documentational burden to boot. Not only can you not immediately expense that new refrigerator, but you have to create a separate depreciation schedule for it and track that for the next few years. Tax returns just got a lot more difficult.
Again, I need to reiterate that I'm not a tax professional and am not allowed to give tax advice. That being said, I've been paying taxes for decades and have some experience with the IRS when they don't like how you file a return that includes rental properties. Like the Direct TV commercial says "Don't be that me." The only advice I’m giving here is to consult with someone who knows what they're doing before you file that 2016 return as the rules have changed and they haven't changed in your favor.
Do they ever?