Why Real Estate Has Higher Audit Risk
1. Complex Tax Rules
Real estate has unique tax benefits (like depreciation, 1031 exchanges, and passive loss rules).
These often reduce taxable income significantly, which invites IRS interest.
2. High Potential for Abuse
Real estate is often used for tax sheltering — legally or aggressively.
Some people stretch the rules, especially around:
- Passive vs. active income
- Real estate professional status
- Overstated deductions
- Undeclared income (especially short-term rentals)
3. Frequent Red Flags
Common red flags in real estate filings:
- Large losses year after year
- High depreciation deductions
- Claiming personal expenses as business costs
- Frequent 1031 exchanges
- Not reporting rental or Airbnb income
| Real Estate Activity | Audit Risk | Why? |
|---|---|---|
| Typical landlord (1–2 long-term rentals) | Low to Moderate | Passive income, simple filings, low scrutiny unless large losses |
| Short-term rental host (e.g. Airbnb) | Low to Moderate | IRS tracks platform payouts; mixed-use of property is common |
| Real estate agents/brokers | Moderate | Self-employment income, potential home office abuse |
| Flippers or wholesalers | High | Often misreport income as capital gains instead of business income |
| Claiming Real Estate Professional status | Very High | IRS often audits to verify time and participation requirements |
| Real estate investors using 1031s or cost segregation | Moderate to High | High dollar amounts, technical rules, higher audit attention |
Tips to Reduce Risk
Document Everything
- Keep time logs (especially if claiming RE professional status)
- Save receipts and contracts
- Record rental income accurately
Avoid Mixing Personal and Business
- No personal vacations labeled as "property visits"
- Don’t over-allocate home office space
Use Qualified Tax Pros
- Especially if using cost segregation, 1031 exchanges, or RE professional deductions
Be Conservative with Deductions
- Don’t overstate travel, meals, or repair expenses
SUMMARY
The real estate industry is not the most audited industry, but specific activities within it — like:
- short-term rentals
- flipping, and
- claiming real estate professional status ALL face elevated audit risk.