client took pymts on house as rental income

[schirallicpa]

UGH!  Another question!  I'm tired of messy clients this year.  

Now - another new client.  has had a rent-to-own deal on a property that since 2006.  took money on schedule e as rental income.  but - it should have been a 6252.  the property was paid up in december 2015 and the sale closed right at the beginning of the year so paperwork fell into his 2016 folder.  if only i had never known.

The sale price was contracted at 28000.  payments included interest detailed in the contract at 8.5%.  paid in total 37200 (all reported as rental income).  House on depreciation schedule at 42000 plus land of 4000.  A/D is 20006.  So basis is 21994 plus land of 4000 totals 25994.  

I don't know what to do with this.  

Now let me try to rationalize my way out of this - 

I only have last years return to look at, but he takes a loss on schedule E which is basically the  "travel" ,insurance, tax and depr.  (some might wonder why I put quotes on travel expense....)  Last years loss is 2000, so no 8582 limitation.  He also itemizes and could have put the tax on schedule A.  He would have had reduced tax rate on cap gains, and he would have reported interest income.  (wonder if the buyers took an interest expense......)   

Interestingly he has lived in NY for all this time, and has always sent his tax info down to some guy in GA.  

What do my ATX friends think of this?

I'm going home and drinking a nice glass of Riesling -  that will help me decide.

 

[WITAXLADY]

wow - good luck - maybe 2 glasses!

[jklcpa]

I don't know how long ago you accepted his work or how much you really need or want this revenue, but I don't know that I'd want to be the one to untangle this mess.  If you are going to amend anything, you only have a couple of weeks to straighten out 2013. In all the years of being in practice, I've only sent a handful packing when I saw their messes, and this sounds like one I'd walk away from.  Why isn't he using GA preparer this year?

In each of those years from 2006 through last year, he reported the "rent" that should have been P&I, and yes, he could have had the benefit of the cap gain rate vs ordinary rate, but he also kept deducting expenses and kept taking depreciation too, and that depreciation alone comes to more than $13K over the last 9 years.

Have you come up with a strategy yet?  Start to schedule it out to see where they should have been at the end of 2012 to maybe fix the open years?  How to get the property off the depreciation schedule if you don't go back and fix this?

[schirallicpa]

12 hours ago, WITAXLADY said:

wow - good luck - maybe 2 glasses!

After a while - anything is "riesling-able".....HAHAHA

[Terry D EA]

I think I'd run from this one at this time of year as well. But, like Judy said, you are up against the wire on 2013. If you decide to keep his guy, I would give him a rough estimate of what he will owe as a result of correcting the earlier returns. If he says he isn't going to amend, then it is not your problem. You didn't prepare the earlier returns and really can only advise the guy as to what his responsibility is. If he accepts your offer to amend, then charge for 2013 more than you normally would due to the urgency. The years prior to 2013, you can amend to prevent the IRS from coming back and doing it for you simply because he will owe and they will always accept it.

Good after season project. Maybe he can get the guy in GA to pay for the mistake.