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Skq9545 (talk|edits) said:
| 8 April 2006
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| I am been away from here for awhile, but I am back again with a new question. I have a sole proprietor who purchases a building with a bank loan and a second. Last year the tax return was done by another preparer. The owner tells me he purchased the building in October, 2002. Why would I show rental income for the building on Schedule E and deduct the mortgage interest on schedule E, as well as take depreciation on Schedule E and show a net loss of $409. Then, on Schedule C why would I report rental expense of $9,600. Also, the building has never been recorded as an asset on the balance sheet. Am I missing something here? The owner tells me he never rented the building to anyone. Could he be considered renting the building from himself if he used a Home Equity line of credit to purchase the building? Are all tax returns as crazy as the ones I have this year - what happened to the simple one?
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JR1 (talk|edits) said:
| 8 April 2006
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| Well, the reason you can't do that is because you can't do that. It's a wonderful way to dodge some SE tax, but as I learned in a seminar, oh, about 3-4 years ago...huh unh, cain't. So I inc'd my client and those old returns might have just passed under the statute. Yay. We'd like to treat it like a corp with a Sch. E and such, but the rules are clear about sole props renting from themselves. So everything is on Sch.C.
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Skq9545 (talk|edits) said:
| 8 April 2006
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| Okay, so a sole proprietor cannot rent from themselves is what I am hearing from you. I gather from what you are saying, a corporation can do something like what I described, yes? If the previous preparer did this last year, is it going to raise a red flag when I do it different this year? I assume I would take depreciation on the building on a 4562, correct? Thanks for your help.
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JR1 (talk|edits) said:
| 8 April 2006
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| Yep, you're on the right track. Building goes on depreciation just like any of his other equipment or vehicle...And it's not a red flag (Where's that red flag myth website again??) when you do it correctly! If he's got decent income, consider the S corp. tho' you've already got the 1st qtr under belt this year as a sole. In the S, he can charge the highest fmv rental, which is an income tax wash, but dodges SE tax, take a reasonable salary, and you both sleep well.
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