How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lev Your Own Question
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29965
Experience:  Taxes, Immigration, Labor Relations
Type Your Tax Question Here...
Lev is online now
A new question is answered every 9 seconds

My parents purchased a home but decided not to live there after

Customer Question

my parents purchased a home but decided not to live there after a short time, so i moved into the house and made mortgage payments (without purchasing it from them). last year when i moved out of the state i rented the place out for a year, and claimed a $7k loss (repair, etc) on my tax return, which my tax preparer said was ok. -my parents had always claimed mortgage interest, and this was the first time I claimed the rental income.
Now i'm buying a house of my own for the first time and the lender is asking why i claimed rental income/loss on my tax return if i wasn't the owner of the property.
Was my tax preparer wrong to advise me to claim this loss??
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
If you run rental activity and received rental income - you and your tax prepare are correct by claiming that on your tax return.However - you need to verify that you correctly reported YOUR rental expenses - that must be actual expenses you paid.For instance - as you do not own the property - you may not deduct depreciation.As you are not responsible for real estate tax - you may not claim deduction for taxes.Mortgage payment you made for your parents must be reported as their income - in this case you may deduct such payments.However - if you made such payment as a gift - you woudl not be able to deduct them.Etc.But otherwise - you correctly reported rental activity on your tax return.
Customer: replied 2 years ago.
It shows a claim for depreciation and taxes as well. I wasn't sure about that part but the tax preparer said I could, since I pay for all costs incurred on this property and contributed to their initial down payment. Her justification was that since my parents did not claim these, i was able to do so. But based on your answer, sounds like she was incorrect?
Expert:  Lev replied 2 years ago.
That is very common mistake for similar situations - so if your tax return woudl be audited - and the auditor becomes aware that you do not own the property - they woudl verify if the depreciation was claimed.See here - In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the following requirements:The taxpayer must own the property. Taxpayers may also depreciate any capital improvements for property the taxpayer leases.A taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based only on the business use of that property.The property must have a determinable useful life of more than one year.So - that deduction looks as mistake.Sorry for bad news.
Customer: replied 2 years ago.
Ouch. that's not good. At least I know my preparer wasn't totally wrong to claim the rental gain/loss.
Is this going to be a factor in finalizing my mortgage loan process?
I figured they were wondering how I claimed rental income/loss, since I applied for the loan as a first time home buyer, OR are they looking into this deeper than that, as in "why is there a mistake/false deduction on the tax return?"
Expert:  Lev replied 2 years ago.
That might be a factor...As they want to verify your INCOME for eligibility purposes.So your actual income is larger than reported - and while that might be an issue with the IRS - it should not be an issue for mortgage qualification.Another point is about deducting real estate tax payment - as you do not own the property - you are not responsible for taxes related to that property - so you payment is classified as made FOR your parent - so you may deduct that payment as made to them (not as tax payment) and they MUST include that payment as their income.Actually - you reported incorrect deductions and provided incorrect tax return - so they may refuse to accept that tax return unless you are willing to make corrections. So that is a matter of discussion with the mortgage broker.
Customer: replied 2 years ago.
If the lender's main concern is my finance It wouldn't be a problem since my salary is much higher this year compared to last year, however I am trying to figure out what it is that they consider important- my ability to afford the mortgage payment or a mistake made by a tax professional on the last year's tax return.
If i were to make a correction how do i go about doing that?
Expert:  Lev replied 2 years ago.
First of all - I would start with discussion with the mortgage broker - and if they do not require any correction and accept your information for mortgage qualification - that part woudl be resolved.
Regarding your tax reporting - in this case woudl be separate issue and not directly related to your mortgage application.
In this case - you would have some time to discuss with your tax preparer all possible circumstances.
But generally - to make corrections - you would need to file an amended tax return - using form 1040X and attach all other forms and schedules that are affected by that correction.
It is possible that you will owe additional taxes - which woudl be paid after the due date - and that may result additional penalty and interest charges.
Depending in which state you live - that might result additional state income tax liability as well.
Sorry for bad news...
Please do not shoot the messenger...
Expert:  Lev replied 2 years ago.
Here is a reference to form 1040X
here are instructions
When filing an amended or corrected return:
•Include copies of any schedules that are changing and/or any Form(s) W-2 you did not include with your original return. To avoid delays, file Form 1040X only after you have filed your original return. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you timely filed your original return or within 2 years after the date you paid the tax, whichever is later.
•Please allow the IRS up to 16 weeks to process an amended return.
I appreciate if take a moment to rate my answer.
Experts are ONLY credited when answers are rated positively.
If you still have any doubts, need clarification - please be sure to ask.
I am here to help you will all tax related issues.
You may come back later if needed.
I personally might be not immediately available - but surely will reply.