A majority – some 53% – of individual landlords in the U.S. make mistakes on their income tax when it comes to reporting rental income and expenses, according to a study by the U.S. Government Accountability Office.
That means that out of about 8.9 million individual landlords in the country, nearly 5 million aren’t paying the correct tax.
And of those 5 million, fully a quarter paid too much tax and should have had a lower tax bill, the government says. The agency’s figures are based on a comprehensive review of landlords’ returns that have recently been audited. Altogether, landlords misreport their income by about $12.4 billion every year.
Landlords are far more likely to misreport their income than are other taxpayers, the report says. (By contrast, only about 10% of Americans make mistakes in reporting their income from wages.) Some 9% of landlords who make mistakes on their taxes report over $1,000 more in taxable rental income than they should, according to the study.
By contrast, 51% of such landlords underreport their income by more than $1,000, and 6% underreport their income by more than $10,000.
The most common type of error – by far – was in reporting rental expenses. The second most common error was misreporting the amount of rent received. Other common errors were reporting rental income on the wrong part of the return and misreporting rental-related losses. As for rental expenses, the government found that about 20% of landlords who made a mistake in this area could have deducted more expenses than they did, and should have had a larger deduction.
Other mistakes include deducting unsubstantiated expenses, improperly deducting personal expenses as rental expenses, miscalculating depreciation, and fully deducting expenses that should have been depreciated. About 166,000 landlords improperly included the value of the land as part of the depreciable basis in their properties.
As for misreporting the amount of rent received, landlords often make mistakes in how they handle expenses paid by tenants and unreturned security deposits. It certainly seems likely that the government will begin cracking down on landlords’ tax returns, and it would be a good idea for all landlords to brush up on the proper tax treatment of expenses and deductions.
You can read the complete report at http://www.gao.gov/new.items/d08956.pdf.