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Subject:  Re: Rental property income Date:  3/15/2001  11:18 AM
Author:  CPAScott Number:  48456 of 127512

The issue here is the Passive Activity rules. In general, a loss from a passive activity can only be offset against income from passive activities. It cannot be offset against ordinary income.

Lets assume that you are not an "material participant" in the rental of this property you mention (I'll explain what that means later). You incurred expenses associated with the property, but received no income. Therefore, for the year 2000, you have a loss. Because the activity is passive, you will only be able to deduct that loss against income from other passive activities. If this is your only passive activity, you will not be able to deduct the loss in 2000. However, you don't lose it -- it is carried over to future years and can offset future income from passive activities. Make sense so far?

So, by falsifying your return to show income, all you would be doing is offsetting your actual losses against that false income -- which would have NO effect on your tax liability. Presumably, your tax preparer is planning on misreporting next year's income (reducing the amount of income claimed next year by the amount of false income claimed this year). Over the two year period, your liability would be the same as if you prepared the form accurately.

Perhaps the preparer is lazy and doesn't want the hassle of carrying over a loss. But, that's the way it works.

Report the truth. Your preparers "assumption" is wrong.

Note, however, that you would be able to take the loss if you "actively or materially participated" in the activity during 2000. If you think this might apply to you, repost and I'll explain further what that means -- or check out the instructions to Form 8582, Passive Activity Loss Limitation.

(who thinks integrity and ethics are worth something)
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