March 23, 2005 – My Annual IRS Check-up

March 23, 2005 – My Annual IRS Check-up

I spent Friday and all of last weekend preparing for my meeting this week with my tax accounting KS. He has been my counsel on all matters IRS a score of years or more. He knows more about my financial wellbeing than I do. He sees the world in figures, whereas I’ve always pictured it with words. He’s teaching me the tax benefits of real estate investment—something I ventured into after the stock market lost its luster. My father stored his wealth in real estate, rental properties in El Paso and land in Mississippi that had been in the family since the Emancipation Proclamation. He sold it recently to his cousin so it’s still in the family.

Owning real estate is a legal term that grew up around civilization. As soon as you die, the property is dispersed either at your discretion through a will or by edict of the court. Regardless, you no longer possess the piece of earth, the physical structure built on the land, nor the artifacts contained therein. Everything you built can be torn down and rebuilt by the new owner. All the belongings you collected over the years dispersed into collections of others—their collections will suffer a similar fate: order giving way to disorder only to find a new order.

California is a place where the precariousness of real estate ownership really becomes apparent. Those poor souls living beneath the hillside of mud that buried their homes, suddenly confronted by how ineffectual the law was in conferring possession to them. Those poor souls living along the earthquake faults seeing their earthly possessions moving, suffer a similar realization that nature has little respect for manmade laws. The legal system provides a clear meaning of who has the right to occupy a piece of earth some length and width in size and how that right can be conveyed from one owner to another time after time.

When you purchase real estate, there are volumes of forms that must be signed, notarized, and recorded in government offices. The volumes confer legal force to your claim of ownership, but only the most informed expert in real estate law can fathom the exact legal meaning of these documents. There are environmental rules that must be observed, truth in lending disclosures that must be adhered to, and in some cases homeowner associations to contend with. As land speculators, what my wife “I” and I have been for the past couple of years, we have special tax forms that must be completed and filed with the IRS. That’s where KS comes in.

I learned about depreciation the great godsend of land speculators: determining how much of your property’s value has been eroded by time and wear and tear. I learned that claiming depreciation is like ordering Fugu fish (blow fish) at a Japanese restaurant. You can have the chef give you a piece that contains none of the poisons that can kill the unsuspecting diner. You can ask for the chef to provide just enough to give you a sense of numbness, or you can ask for a cut that can give you a euphoric high while administering slight paralysis in the process. The amount of depreciation you declare on your tax return kind of fits these same levels: conservative—well within the IRS guidelines, a more profitable amount that could raise the eyebrows at the IRS but not warrant an audit, or the maximum amount that will have the IRS considering hauling you in for an audit. Each represents successfully higher amounts of income to the taxpayer’s pocket at an increasing risk of being audited by the IRS. I tell KS to slice me a piece with none of the poisons. I’ll sleep easier at night.