Easiest way to be allowed to prepare taxes, especially Sch E?

Question

Hi Tax Pros,

I'm a mortgage lender. We kind of have a love/hate relationship, but I'm probably never going to ask you for any sort of letter "guaranteeing" that Sally's business is "guaranteed" to make $X00k/yr for the next Y years, so that makes me better than most in your eyes, hopefully.

So, anyways...

I'm sick to death of Schedule Es that are inaccurate, and tax professionals unwilling or unable to correct the inaccuracies in a timely manner. I'm certain that if you are reading this, that this does not apply to you. But many of your peers suck, just as the overwhelming majority of my fellow MLOs completely suck too.

"If you want it done right, you've got to do it yourself," right?

What is the lowest level of licensing, etc, needed to simply be able to do it myself? Honestly, my impression is that your profession is just as full of incompetent idiots as mine.

My most common gripe is Schedule E, Box 2. If the client bought the rental property half way through the year, how can "Fair Rental Days" possibly be 365, or even worse left blank? When that grievous error is made, it means a mortgage underwriter is going to default to dividing six months of rental income by 12 months, and effectively only give credit for half of the actual rent - the mortgage underwriter is just reading what you wrote! Screwed even worse if the person bought in Nov or Dec. Number 2 is putting one-time capital expenditures on line 14 "repairs" rather than line 18. You can't depreciate a new roof for someone whose income is trending upwards, so they can save on their net IRS bills long-term? Seriously? The whole point of using a professional is to save on the tax bill! Come on!

In both sets of those example routine errors that >75% of tax professionals (who are mostly idiots, just like my profession) will make 100% of the time (and there are MANY others) it can be solved on a refinance transaction where timing isn't an issue, but our time-sensitive purchase transactions - where it takes the tax professional more than 48 hours to respond to a simple email with clarity when we have a 21 day close of escrow that the client is contractually obligated to (I'm already hearing your common sense objections, and do not disagree, but most tax professionals take days and weeks to respond to simple emails) - are sometimes screwed up. Or, even worse, the tax professional wants to charge the client money because they, as the tax professional, screwed up and can't tell the difference between replacing a roof and replacing a light bulb.

I just want to be able to do 1040s and Schedule E accurately, and have the knowledge needed to do so. Not inflating income or lying or anything else, simple accuracy is the standard that I'd like to meet that many tax professionals (presumably excluding those reading this post), unfortunately, can't seem to meet. What is the minimum amount of government BS required to be able to accurately complete 1040s that include Sch E?

Also, if any tax professional reading this wants to get on the horn and review the most common errors that screw their clients over when it comes time to get a mortgage, I'd be more than happy. I think most of the errors are from cases where the error will not impact the client's tax burden, so the tax professional doesn't worry about it. It might not impact that tax burden, but it very well could be the cause of a mortgage loan denial!

Michael Plaks · Answer

Roofs are 27.5. Water heaters are debatable: some say 27.5, I say 5. Also, under the new tax reform, they can be completely expensed.

In other words, the new tax reform amplifies the problem you're addressing. It gives us tax pros more power to reduce income - which will further complicate underwriting, as we will push harder in the opposite directions.

Michael Plaks · Answer

I hear you. Hear us, too. This is not CPAs being idiots, as you suggest. This field is utterly useless in all situations except mixed personal/business use. I've been in this business for 20 years, and your post is the first time I ever heard about the fact that lenders look at this number and use it for underwriting.

From tax pros' perspective, this is a total misuse of this box by underwriters. It was never meant to convey the information you're extracting from it.

The issue is not us being idiots or you being idiots. The issue is lack of communication between the two sides. We need to know how you guys are using this box. We are all trying to help clients, so let's work together, not point fingers.

Carl Fischer · Answer

@Chris Mason

Good to know but you only allow 75% of the income on schedule E to be counted anyway and your concerns only apply for a property bought in the tax year. That problem doesn’t exist for properties owned more than the tax year. Good point and maybe you should find accountants that do it correctly and send your clients their way. I know I would appreciate that. Thanks for pointing out the issue.

Brandon Hall · Answer

Licensing is not a pre-requisite to prepare a tax return. All you need is a PTIN which is quite easy to get.

Agree with everything but the repairs - if the facts and circumstances allow for repair treatment vs capitalizing and depreciating, repair treatment is generally the best option regardless of income trends. The reason is due to the NPV of future tax savings vs current tax savings.

Let’s assume you have a taxpayer in the 33% tax bracket who installs a $10,000 roof and let’s just assume you can deduct as a repair (you can’t actually on residential property) rather than capitalize and depreciate. We’re talking $3,300 in tax savings today or potentially $3,300-$3,700 (assuming income trends up to the 37% bracket) in tax savings spread over 27.5 years and reduced by annual inflation.

Option #1 seems to be the best bet.

Of course two caveats to consider are passive loss limitations and whether repair treatment will put the taxpayer at a financing disadvantage. For the latter, that’s when the 25% of us call you up ;)

Michael Plaks · Answer

Again, this is not an error in preparing Sch E. It is our job to maximize deductions and reduce taxable income. This is what our clients want from us and pay us for.

You need the opposite for underwriting, obviously. This is a continuous "pick your poison" dilemma that we face. You either push income down to reduce taxes or push income up to improve loan eligibility. Cannot do both.

I had at least 5 clients just this year who informed me up front that they wanted higher income for underwriting. I obliged. Once they saw their IRS bill, you know what they said? Screw the loans, I'm not paying this. Bring back the deductions.

Is there some middle ground? Sure, but it is a compromise. Meaning that our clients will still pay more to the IRS than they could have otherwise.

You suggest that depreciating something rather than deducting can save them long-term? Sometimes, yes. Not every time though, as there're more factors in play.

Either way, your notion that CPAs are idiots and do it "wrong" is misguided. In a lot of cases, your and ours objectives are conflicting, and we simply do our respective best to accomplish our respective jobs. Communication is the key.

Chris Mason · Answer

That is a very fair point, thank you for that feedback.

Chris Mason · Answer

What if doing it that way jams up their ability to buy another rental property, which they would otherwise like to do? Are you discounting the value of that future income? (Also, things like roofs and new water heaters aren't on a 27.5 year depreciation schedule, right? More like 15 or 5?)

Chris Mason · Answer

Agreed for properties owned by client for the entirety of the year. I'm mostly talking about folks who purchased it halfway through the year. It might be available for rent the other six months, but for rent by our client, since they bought it in late June. How can their fair rental days be 365 if they only even owned it for 183?

Michael Plaks · Answer

@Chris Mason

Line 2 serves a purpose very different from what you think it does.

It is intended to enforce the personal use rule for tax purposes, and it has to do with a ratio of personal to rental days. Its true meaning is "days rented or available for rent."

If the house is vacant for 6 months, the correct Schedule E will say 365 rented days, not 183 days.

If your industry uses line 2 to figure out monthly income - it is misinterpreting the concept behind it.

Easiest way to be allowed to prepare taxes, especially Sch E?

Easiest way to be allowed to prepare taxes, especially Sch E?

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