Get practical advice how real estate owners — working closely with their tax advisors — can manage risk and prepare for an audit.
It usually begins on an otherwise uneventful morning.
For David, a real estate professional with a portfolio of commercial properties, the day was set to be a standard mix of reviewing leasing reports and planning capital projects. That is, until an envelope arrived. It was from a tax agency. Suddenly, the day took a sharp turn. The casual confidence he felt evaporated, replaced by a cold wave of concern.
Did we make a mistake? Is this a random audit? How much time and money will this cost?
This sense of dread is a familiar feeling for many real estate owners. Audit notices can feel intimidating. The good news — a tax audit is not necessarily a sign of wrongdoing. And with thoughtful, proactive preparation, the process can be fast, smooth, and even valuable.
Get a practical, grounded look at how real estate owners — working closely with their tax advisors — can manage risk and prepare for an audit long before a tax notice ever arrives.
Reasons real estate owners might get audited
While some audits are purely random, real estate tax returns often contain items naturally drawing attention, such as:
- Significant repairs that were expensed rather than capitalized
- Partial asset dispositions when a building was being renovated
- Large deductions for abandoned projects
These positions are often perfectly valid, but they require clear support. Federal and state tax authorities want to understand how the deduction was calculated, why it was claimed, and whether it aligns with published tax rules.
How real estate owners can reduce audit risk
Real estate owners who have been through tax audits know a good defense is a strong offense — starting with how the tax return is prepared.
Here are some practical steps to take with your tax advisor to proactively manage risk:
Support repair vs. improvement decisions
For major repair expenses, retain detailed invoices and internal explanations why the work was expensed rather than capitalized in accordance with your capitalization policy and/or IRS tangible property regulations.
Maintain detailed schedules
Keep clean, reconciled fixed asset and depreciation schedules aligning with your tax return. Clearly show new additions, retirements, and adjustments.
Document transactions rigorously
When assets are abandoned or partially disposed of, create internal memos explaining what was removed, why it had remaining tax basis, and why the deduction is appropriate.
Be transparent in your reporting
Don't hide large deductions within broad expense categories. Clearly reflecting these positions on your tax return demonstrates confidence and could reduce suspicion.
Document related-party transactions
If your business involves loans, leasebacks, or shared costs with related entities, keep contemporaneous documentation to support the transactions’ market-based terms.
Proactively identify high-risk areas
Collaborate with your tax advisor to flag positions that may attract attention. Prepare explanations in advance and consider attaching disclosure statements when appropriate.
While these steps won’t guarantee you won’t be audited, they demonstrate good faith and a commitment to regulatory compliance. This professionalism can make a tax audit faster, smoother, and less costly.
What real estate owners should do if they get audited anyway
When an audit notice arrives, the first step is to understand what triggered it. Is the agency asking about large repair deductions, a recent abandonment, or a swing in rental income? Knowing the scope helps your team focus on gathering the right documents and explanations.
With your tax advisor, organize and prepare key documents, including:
- Asset and depreciation schedules
- Purchase agreements, settlement statements, and lease abstracts
- Invoices and contracts for work performed
- Internal memos supporting deductions or dispositions
- Relevant correspondence and legal documents
Involving your tax advisors early is crucial. They know how to communicate effectively with the taxing authority, anticipate follow-up questions, and prepare your responses to be complete, consistent, and professional.
How CLA can help real estate owners with audits
Audits may be complex, but they don’t have to be confrontational. When handled with professionalism and preparation, they become opportunities to reinforce sound practices and build trust.
For many real estate owners, the audit process can reveal improvement areas, whether in documentation, asset tracking, or the treatment of repairs and capital projects. These insights often lead to stronger systems and more confident reporting.
CLA works with real estate owners and operators to turn audit readiness into a strategic advantage. From preparing documentation and supporting tax positions to guiding teams through active audits and post-audit improvements, our professionals help transform uncertainty into clarity, and compliance into confidence.