The 2017 tax law has made it more difficult to itemize deductions, but accountants say rental property owners and home business entrepreneurs still have opportunities to take write-offs.
And they often get very creative with them.
CPAs will never forget these enterprising property owners who devised their own cockeyed real estate deductions that, left unchecked, could have resulted in some crazy misdeals for the IRS.
1. When the accountant said, 'I don't!'
Cleveland-area CPA Elizabeth Dittrick admits that while she approved of the sentiment behind one client’s proposed travel deduction, she wasn’t about to say yes.
“There was a guy who had rental property and tried to deduct a limousine charge in the year he got married by claiming that he had taken his renters out for a night on the town, when I knew that it was for his wedding,” she says.
“I ended up refusing to sign the return.”
2. The security system with real bite
One Texas CPA had a client whose security expenses for his rental properties seemed a tad too high but wrote them off as the cost for installing automated systems at each location.
That is, until the IRS audited the landlord’s taxes.
"It turns out that his security expense was his dog and all of the dog food and veterinarian expenses," the CPA recalls.
As for those site-specific expenses? They were for taking the dog to the different properties.
3. Her tax return needed a reno
If you work from home, you’re allowed to deduct improvements to the office portion itself, while improvements elsewhere may be depreciated based on the percentage of home office use.
But one of Dallas CPA Ken Sibley's clients almost stumbled big-time.
"The most troubling return was a lady that was self-employed who demanded that she get to deduct more than $30,000 she had paid in remodeling her home," says Sibley.
He adds: "The only trouble was, the area that was remodeled did not include her actual home office."
4. The case of the costly adoption
A 65-year-old Kissimmee, Florida, woman took such a liking to her 20-something student renter and handyman that she decided to adopt him — at least on her taxes. The move enabled her to not claim his rent payments income for three years.
When the IRS caught on, it slapped her with $7,000 in back taxes and penalties.
Ironically, because her new “nephew” had remodeled part of her home, she could have offset that expense against the rental income — and wound up in better shape than claiming him as a dependent.
5. Wholly unholy travel expenses
Dallas CPA Sibley remembers a new client and man of the cloth who sought an unholy tax break.
"The minister wanted to take travel and related costs incurred when the full family traveled the country looking for real estate investment property," Sibley recalls. "But none was ever found and none had been purchased for the past several years."
Hey, he could have been searching for the Promised Land.
6. 'And if the fridge breaks, I'd starve!'
Ah, the old home security system ploy. We've seen legitimate home businesses try to claim their dogs and even cats as a security expense. Me-yow!
But the Hunter Group in Fair Lawn, New Jersey, once recalled a client who had an even more creative reason for trying to write off the cost of her home security.
"Rationale? If the client's home was burglarized and she was killed, she could no longer pay taxes,” the CPA chuckled.
Reckon she could write off food and clothing as well.
7. The client who came with too much baggage
Sometimes tax preparation can involve some off-the-books negotiation.
Don Meyer of the New Jersey Society of CPAs recalls when a manager and family member of a famous entertainer sought an immediate, full-price tax write-off on a $2 million office building they were thinking of buying.
"At one point in the drama, a suitcase with a very significant amount of cash appeared as incentive for the accountants to somehow 'make it work,'" Meyer recalls.
So what happened? "The suitcase full of money was refused, and the extravagant claim never made it onto the tax return — at least not the one the accountants prepared before they resigned the account!"
8. They needed counseling, not a CPA
Elizabeth Dittrick recalls one particularly uncomfortable client meeting with a married couple. The property deduction was legitimate; it was the underlying asset that proved to be the problem.
“We were going over their tax information and the tax manager asked the gentleman, ‘Now what about the mortgage interest deduction for the condo in Utah?’” she recalls.
Unfortunately, the guy's wife didn’t know about the condo in Utah — because that's where he had set up his mistress.
"It was a ‘big oops’ moment," Dittrick says. "There was this stony silence in the room. It was absolutely awful."
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