Q: I'm filing a Schedule D and Form 8949 for an inherited property held as an investment. The property was sold in 2012 and there is a net loss after deducting the real estate commission and expenses incurred to improve the value of the house, such as new kitchen floor, refinishing the wood floors, painting exterior and interior, and the cost of staging the house. Is there a way to itemized these expenses on either Sch D or form 8949 so the IRS can understand why I am claiming a net loss? Or should I not bother to itemized the expenses? Thanks
A: Technically, you do not need to submit detailed information regarding the cost of sale or tax basis information with your return. If the IRS or FTB want to know more about these items, they will send you an inquiry, otherwise known as an audit notice. On the other hand, if you submit sufficient detail with your return, you may avoid an audit.
Explanatory information can be incorporated into your return by preparing a statement referencing the IRS Form 8949 and line reporting the sale and containing the detailed information supporting the amounts on the official form. For example, the Form 8949 would show "Sale of investment property - see attached." Prepare a supporting schedule referring to the Form 8949 and the line on which the sale is reported with the information that you want submitted with the official forms.
Most tax preparation software allows you to prepare and submit supporting schedules with your electronically filed tax return. Professional tax software allows pdf files to be transmitted with individual tax returns for the first time this year. I'm not sure if consumer versions of these programs have the same capability. If they do, this may also be an option. If you file a paper return, attach the supporting schedule behind the Form 8949 to which is pertains.
I like to err on the side of providing more information with a return containing an unusual item of loss or deduction hoping to avoid the cost of responding to an inquiry that might have been prevented.