{"id":3998,"date":"2022-01-20T09:30:21","date_gmt":"2022-01-20T13:30:21","guid":{"rendered":"https:\/\/propertyonion.com\/education\/?p=3998"},"modified":"2026-03-17T11:24:45","modified_gmt":"2026-03-17T15:24:45","slug":"how-to-avoid-getting-audited-by-the-irs-when-real-estate-investing","status":"publish","type":"post","link":"https:\/\/propertyonion.com\/education\/how-to-avoid-getting-audited-by-the-irs-when-real-estate-investing\/","title":{"rendered":"How to Avoid Getting Audited by the IRS When Real Estate Investing"},"content":{"rendered":"<p>Knowing how to <strong>avoid IRS audit real estate<\/strong> investors fear starts with understanding which deductions, transaction structures, and reporting patterns draw the most scrutiny from the IRS when it comes to investment activity.<\/p>\n<p>Knowing how to <strong>avoid an IRS audit as a real estate investor<\/strong> starts with understanding which deductions, transaction structures, and reporting patterns draw the most scrutiny from the IRS when it comes to real estate investment activity.<\/p>\n\n<p>\u201cNothing is certain but death and taxes.\u201d This quote credited to Benjamin Franklin is as true today as it was when he signed the U.S. Constitution over 200 years ago. When it comes to investing in real estate, taxes are often one of the least enjoyable tasks, especially the dreaded IRS audit.<\/p>\n\n\n\n<p>An&nbsp;<a href=\"https:\/\/requestlegalhelp.com\/what-is-an-irs-audit\/\" target=\"_blank\" rel=\"noopener noreferrer\">IRS audit<\/a>&nbsp;is an examination of your accounts and financial information that ensures your taxes are accurate and comply with federal laws. While an audit doesn\u2019t necessarily mean calamity, it can be a stressful, time-consuming, and expensive ordeal that\u2019s best avoided when possible.<\/p>\n\n\n\n<p>While there is no guaranteed way to completely avoid an audit, there are some steps you can take to reduce your chance of getting that feared notice that Uncle Sam wants to take a closer look at your taxes.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 ez-toc-wrap-left counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">In this Article:<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/propertyonion.com\/education\/how-to-avoid-getting-audited-by-the-irs-when-real-estate-investing\/#Basic_Considerations\" >Basic Considerations<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/propertyonion.com\/education\/how-to-avoid-getting-audited-by-the-irs-when-real-estate-investing\/#Real_Estate_Specific_Considerations\" >Real Estate, Specific Considerations<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/propertyonion.com\/education\/how-to-avoid-getting-audited-by-the-irs-when-real-estate-investing\/#Dealing_with_an_Audit\" >Dealing with an Audit<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/propertyonion.com\/education\/how-to-avoid-getting-audited-by-the-irs-when-real-estate-investing\/#Prevention_Is_Key\" >Prevention Is Key<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Basic_Considerations\"><\/span><strong>Basic Considerations<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Whether you\u2019re a full-time real estate investor or are simply <a href=\"https:\/\/propertyonion.com\/education\/2022-goals-that-every-newbie-real-estate-investor-should-set\/\" target=\"_blank\">exploring real estate<\/a> as a side hustle, there are some general actions that can help you stay clear of an IRS audit. These principles apply regardless of what kind of income you report.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">File a Tax Return Every Year<\/h3>\n\n\n\n<p>Even if you don\u2019t think you made any money, owe taxes, or have much of an income, you still need to file a return. <strong>One of the biggest red flags for IRS audits involves missing returns.<\/strong> It will benefit you in the long run to have accurate records each year. <\/p>\n\n\n\n<p>You also want to make sure you file on time each year. That doesn\u2019t mean you can\u2019t have a year or two when you need to file for an extension, but running late every year might raise some eyebrows at the IRS.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Stay Honest<\/h3>\n\n\n\n<p>It might be tempting to try to hide income or falsify information on your return. Not only can dishonesty make it more likely that you\u2019ll get an audit notification, but you could face severe penalties.<\/p>\n\n\n\n<p>According to <a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/7201#:~:text=Any%20person%20who%20willfully%20attempts,of%20a%20corporation)%2C%20or%20imprisoned\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\">Title 26 of the U.S. Tax Code<\/a>, individuals or corporations that willfully commit tax fraud can be fined (up to $250,000 for individuals and $500,000 for corporations) or spend time in jail (up to five years).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Work with a Professional<\/h3>\n\n\n\n<p>There are tons of ways to manage your taxes each year. There are several tax preparers who claim they can reduce your taxes by a substantial amount. <\/p>\n\n\n\n<p>Unfortunately, the IRS has a list of tax preparers who tend to push the limits year after year. These folks are more likely to trigger an audit than anyone else. Find a reputable tax preparer who understands the ins and outs of real estate investing.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Keep Accurate Records<\/h3>\n\n\n\n<p>It\u2019s common knowledge that you should keep an accurate ledger of money spent and money earned from your investment property. While keeping these records is a critical part of preparing your taxes, a shoebox of receipts represents just the minimum effort. <\/p>\n\n\n\n<p>Make a note in your accounting spreadsheet, on the receipt\/invoice, or somewhere else in your records that helps describe the expense\/payment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Real_Estate_Specific_Considerations\"><\/span><strong>Real Estate, Specific Considerations<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Real estate lends itself to complex and somewhat confusing tax issues. That means real estate investors are under more scrutiny than other entrepreneurs and workers. There are several common tax situations for real estate investors to consider to help avoid an audit or at least be prepared if one comes your way.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Active vs. Passive<\/strong><\/h3>\n\n\n\n<p>If your investment property or rental loses money, you may not be able to deduct those losses. Passive investors are those who don\u2019t spend a lot of time participating in the property. This could be from the employment of a management company or in situations where you act as a silent partner in regular operations.<\/p>\n\n\n\n<p>When an investor spends significant time managing and operating the property, they can earn the right to support deductions for real estate losses. <strong>To prove this to the IRS, you want to have a detailed log of the number of hours spent being involved. <\/strong><\/p>\n\n\n\n<p>Keep a daily calendar that outlines everything you do to show that your investment is full-time. Otherwise, you shouldn\u2019t try to claim any losses.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>The Sale Is in the Details<\/strong><\/h3>\n\n\n\n<p>The goal of most investors is to buy low and sell high. If this happens and you have a gain on a real estate property, you must report this gain correctly. Of course, there are a host of tax deductions that you can make regarding your <a href=\"https:\/\/propertyonion.com\/education\/home-staging\/\" target=\"_blank\">flipped property<\/a>.<\/p>\n\n\n\n<p>Some of the most popular are capital expenditures (expenses required to purchase the house, which can include closing costs, sales commission, etc.), renovation costs, business expenses (if you <a href=\"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/\" target=\"_blank\">operate under an LLC<\/a> or other business filing), and more.<\/p>\n\n\n\n<p>Flipping a house often results in capital gains taxes. <strong>These special taxes are taxes on the profits made on the sale of your flip.<\/strong> There are numerous strategies to avoid or reduce capital gains taxes, including the following:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Keep the house for more than a year. A fast flip is subject to short-term capital gains taxes, which start at 10% of the profits. Keeping the house longer helps reduce the tax.<\/li><li>Document and claim expenses. The more expenses you have, the fewer taxes you\u2019ll have to pay.<\/li><li>Flip the home inside of a 1031 exchange. Within the strict rules and boundaries of a 1031 exchange, the IRS allows you to avoid paying capital gains taxes on the sale of your flip. Using a 1031 exchange is complicated and should involve a tax professional to ensure it is completed correctly.<\/li><\/ul>\n\n\n\n<p>Your job is to keep accurate records. The best method is to keep records knowing that an audit could come your way. One popular method is to use the \u201cFour Ps\u201d of expense tracking:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Place: where the money was spent. This information is typically on your receipt.<\/li><li>Price: how much was spent.<\/li><li>Players: who was involved in the transaction: contractors, marketing teams, landscapers, etc.<\/li><li>Purpose: why the expense was made. This information isn\u2019t necessary for taxes, but it will come in handy if you go through an audit. Keeping this kind of record can also ensure you remember the important details years later.<\/li><\/ul>\n\n\n\n<p>Your tax professional can help ensure you claim everything correctly to stay off the IRS\u2019s radar.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Don\u2019t Be Suspicious<\/strong><\/h3>\n\n\n\n<p>There will be years when the cost of maintaining your rental properties, making repairs, paying the mortgage and property taxes, and operating your investment business is more than what you bring in from the property. While the goal of these kinds of investment properties is to create enough cash flow to cover all your expenses, that may not always be the case.<\/p>\n\n\n\n<p>There may be a year when your property needs <a href=\"https:\/\/propertyonion.com\/education\/managing-your-own-rental-properties-as-an-investor\/\" target=\"_blank\">major repairs<\/a> or upgrades, like a new roof or complete remodel. Reporting a loss on your taxes isn\u2019t necessarily a red flag by itself. There are cases, however, when an investor continues to lose money year after year. This activity may raise a few eyebrows, especially if it\u2019s a small loss each year.<\/p>\n\n\n\n<p>The reality is that you may have a few years of small losses, but even real situations can look suspicious.<strong> There may be times when it behooves you not to report a loss. <\/strong>You are legally required to report all your income, but you don\u2019t have to report all your expenses.<\/p>\n\n\n\n<p>You might find that omitting a few expenses now and again and showing a small net profit will take some pressure off of you. Of course, discuss this with your tax professional to ensure you make the right decision.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Dealing_with_an_Audit\"><\/span><strong>Dealing with an Audit<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If you happen to have an audit come your way, don\u2019t panic! An audit doesn\u2019t necessarily mean you are guilty of anything or will be penalized. It does, however, mean a ton of hassle and the risk that the IRS will catch any mistakes.<\/p>\n\n\n\n<p><strong>The first thing to keep in mind is that you will only be notified of an audit via a letter in the mail. <\/strong>The IRS does not make phone calls to discuss taxes. There are quite a few scams out there where people try to take advantage of those who don\u2019t understand the rules.<\/p>\n\n\n\n<p>If you\u2019ve kept good records, you can soar through your audit smoothly. If you don\u2019t have the proper documentation for the deductions being questioned, the situation could turn messy. This is when you review bank statements to find the appropriate transactions.<\/p>\n\n\n\n<p>Once you locate these expenses, you might be able to get official receipts. This isn\u2019t something you\u2019ll want to do alone, so make sure you work with a tax pro who offers audit programs.<\/p>\n\n\n\n<p>Assuming you kept great records, just make sure you respond to the audit questions in a timely fashion. It\u2019s also wise to request delivery confirmation from the post office to record that everything was delivered.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Prevention_Is_Key\"><\/span><strong>Prevention Is Key<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The most sure-fire way to survive an audit is to avoid it in the first place. While there is no way to guarantee that an audit never comes your way, there are ways to reduce your risk. Keep in mind that your chances of being audited are somewhat low. According to&nbsp;<a href=\"https:\/\/www.cnbc.com\/2020\/01\/08\/attention-taxpayers-irs-audits-have-fallen-significantly.html\" target=\"_blank\" rel=\"noopener noreferrer\">CNBC<\/a>, your chances of being audited are only about 1 in 220 (roughly 0.45%).<\/p>\n\n\n\n<p>The exact things that can trigger an audit vary from year to year, but the IRS tends to keep an eye out for excessive deductions, misfiled capital gains, and repeated losses. These things may happen naturally, but they can be a little suspicious.<\/p>\n\n\n\n<p><strong>To avoid looking like you\u2019re hiding something, it is paramount that you keep detailed and accurate records.<\/strong> This is a time when it\u2019s better to overshare than to be concise. Audits can happen years after taxes are submitted. You don\u2019t want to rely on your memory alone to explain why a certain deduction was necessary. Instead, you\u2019ll have notes, receipts, and other supporting documentation that justifies an expense.<\/p>\n\n\n\n<p>Ultimately, it\u2019s worth the cost to hire an experienced tax professional who understands your investments and how to best leverage your situation for an excellent outcome. It\u2019s worth considering purchasing a quality <a rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\" href=\"https:\/\/www.thebalancesmb.com\/best-document-scanners-4158036\" target=\"_blank\">fast doc scanner<\/a> and expense-tracking software for your receipts and other important paperwork. Some of the most popular options are <a rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\" href=\"https:\/\/quickbooks.intuit.com\/\" target=\"_blank\">Quickbooks<\/a>, <a rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\" href=\"https:\/\/www.expensify.com\/\" target=\"_blank\">Expensify<\/a>, and <a rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\" href=\"https:\/\/www.zoho.com\/index1.html\" target=\"_blank\">Zoho<\/a>. <\/p>\n\n\n\n<p>While no one wants to go through an audit, if you keep great records and work with a certified professional, an IRS audit will be nothing more than a minor inconvenience.<\/p>\n\n<p>One of the most common audit triggers is improper handling of <a href=\"https:\/\/propertyonion.com\/education\/real-estate-investor-taxes-depreciation-recapture-provisions\/\" target=\"_blank\" rel=\"noopener\">depreciation recapture real estate<\/a> at the time of sale, requiring careful reporting to avoid IRS scrutiny.<\/p><p>Investors who use a <a href=\"https:\/\/propertyonion.com\/education\/1031-tax-exchange-an-investors-guide-to-unlocking-maximum-returns\/\" target=\"_blank\" rel=\"noopener\">1031 tax exchange<\/a> to defer capital gains must follow strict IRS documentation requirements or risk the exchange being disqualified entirely.<\/p><p>Understanding the full scope of <a href=\"https:\/\/propertyonion.com\/education\/real-estate-investor-tax-pitfalls\/\" target=\"_blank\" rel=\"noopener\">real estate investor tax pitfalls<\/a> helps you structure investments correctly from the start rather than fixing problems when the IRS comes calling.<\/p><p>Investors who buy at <a href=\"https:\/\/propertyonion.com\/education\/understanding-foreclosure-auctions-in-florida\/\" target=\"_blank\" rel=\"noopener\">florida foreclosure auctions<\/a> should work with a real estate CPA who understands auction-specific tax issues including dealer status rules for active flippers.<\/p><p>Properly tracking all <a href=\"https:\/\/propertyonion.com\/education\/what-is-due-diligence-in-real-estate\/\" target=\"_blank\" rel=\"noopener\">due diligence real estate<\/a> expenses and keeping meticulous records for every acquisition is one of the most effective audit prevention strategies available.<\/p>\n<div style=\"background-color:#eef6fd; border-left:5px solid #1a73b8; border-radius:6px; padding:24px 28px; margin:32px 0; font-family:Georgia, serif;\">\n<p style=\"font-size:20px; font-weight:bold; color:#1a3a5c; margin:0 0 10px 0;\">Your Complete Florida Auction Investing Resource<\/p>\n<p style=\"font-size:15px; color:#2c4a6e; margin:0 0 14px 0;\">Whether you are evaluating your first deal or managing an active portfolio, <strong>PropertyOnion.com<\/strong> has the tools you need. Access all Florida county auctions and download our free investor eBooks covering every stage of the process.<\/p>\n<a href=\"https:\/\/propertyonion.com\/?&#038;reference_member_id=wpposts45&#038;ref2=wpposts45\" target=\"_blank\" rel=\"noopener\" style=\"display:inline-block; background-color:#1a73b8; color:#ffffff; font-family:Arial, sans-serif; font-size:15px; font-weight:bold; padding:12px 24px; border-radius:4px; text-decoration:none;\">Get My Free Membership Now<\/a>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Knowing how to avoid IRS audit real estate investors fear starts with understanding which deductions, transaction structures, and reporting patterns draw the most scrutiny from the IRS when it comes to investment activity. Knowing how&hellip;<\/p>\n","protected":false},"author":36,"featured_media":4022,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[388,389,162,386,387,54,13],"class_list":["post-3998","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-articles","tag-1031-exchange","tag-documentation","tag-fix-and-flip","tag-irs","tag-tax-audit","tag-taxes","tag-tips"],"_links":{"self":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/3998","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/users\/36"}],"replies":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/comments?post=3998"}],"version-history":[{"count":7,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/3998\/revisions"}],"predecessor-version":[{"id":13400,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/3998\/revisions\/13400"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media\/4022"}],"wp:attachment":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media?parent=3998"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/categories?post=3998"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/tags?post=3998"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}