Discussion:Rental Real Estate - Depreciation allowed or allowable
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Discussion Forum Index --> Tax Questions --> Rental Real Estate - Depreciation allowed or allowable
Terrihilliard (talk|edits) said: | 4 February 2006 |
| I have a new client who has a rental property and has never depreciated the property. When he sells the property, won't he have to adjust his basis by the depreciation allowable, even though he never took the expense on Schedule E? | |
| 4 February 2006 | |
| Yes - so I would go back and amend all open years. You have until April 15th to amend 2002 for federal purposes. | |
| 4 February 2006 | |
| However, it is now possible to take the unclaimed depreciation in the year of the sale. New rulings over the course of the last few years have basically taken the sting out of the allowed or allowable rules. | |
| 6 February 2006 | |
| See Rev. Proc 2002-9 and Rev. Proc 2004-11. Also, see Form 3115. | |
Terrihilliard (talk|edits) said: | 6 February 2006 |
| Thank you so much for your help. I truly appreciate it. | |
| 30 August 2006 | |
| Taking on a client with a rental property who has failed to take depreciation expense seems to be a common issue. However, the suggestions for remedying the problem seem to vary. In an effort to bring clarity to the situation, please comment on this example: Rental property was placed in service in 2001 and no depreciation expense has been taken on any return filed (2001 thru 2005). The client does not intend to sell the property any time soon.
Remedy: Amend as far back as you can (2003 to 2005 in this case) to capture depreciation expense for those years and continue depreciating as normal in future years. Then, in the year of sale, file form 3115 to pick up depreciation for 2001 and 2002. By doing so, you pick up the offset to the recapture that you’re required to report in the year of sale. Is this correct? Does amending prior returns and continuing to depreciate in future years preclude the client from filing form 3115 in the year of sale (via 2004-11) to pick up 2001 and 2002 depreciation? Are there other options to remedy the situation and get the client on the right track? | |
Taxstudent (talk|edits) said: | 30 August 2006 |
| Rasf, you wouldn't amend. Even if it was just a mistake, you would treat it as an accounting method change and file a Form 3115 in the current year and take the 2001-2005 depreciation as a section 481(a) adjustment.
Amending only the open years raises the possibility that the Service would treat the amended returns as an unauthorized accounting method change on audit, which would preclude using 2004-11 to take the allowable depreciation in the year of sale if the sale is within five years. | |
Taxea@hawaii.rr.com (talk|edits) said: | 31 August 2006 |
| Isn't there also a rule that allows for a one-time depreciation adjustment which would then allow him to make the adjustment in the current year return and not have to file 1040X's???taxeataxea 19:33, 30 August 2006 (CDT) | |
Taxstudent (talk|edits) said: | 31 August 2006 |
| Yes, that's called an accounting method change effected by filing a Form 3115 and taking the adjustment via Code section 481(a). | |
| 31 August 2006 | |
| Taxstudent (or anyone else) - Using your remedy, the client's 481(a) adjustment would be ~$40K in 2006. I believe it would be reported as an "other expense" on Sche E with a reference to 481(a) and the expense is taken all in one year (not sure on that though). Any thoughts?
Also, would your approach change if the client intended to sell the property next year. Meaning, continue with the established depreciation method (i.e. zero)for 2006. Then in 2007 (the year of sale) take care of the problem under 2004-11. Assume that the client's 2006 AGI exceeds $150,000 so any loss from the rental property would be suspended anyway. | |
| 20 September 2006 | |
| Just wanted to ask if anyone else has comments on this discussion and Taxstudent's remedy at Aug 30. Again, I hope to bring clarity to an issue that seems to be fairly common. Thanks! | |
| September 20, 2006 | |
| Call me practical. Call me wrong. Just call me. Oh, sorry...practically speaking, all I do is go into ProSeries, enter the date acquired, cost, previous depreciation of zero, and let it recompute for the remaining life. I'm going to do a 3115 for that? Are you serious??? And charge the client? C'mon...that's not right. Well, it may be right, but it's not right, if you know what I mean. | |
| 21 September 2006 | |
| JRE - what happened to just bill more not work more???
I don't see the problem. To do a proper Form 3115 takes time and time is $. Looking at the alternative of making an erroneous method change, which could then be disallowed upon audit (and subject to interest and penalties) seems a bit wrong to me. I just finished a 3115 for depreciation with a $150k taxpayer favorable 481(a) adjustment, and I think the fee of $2,500 provided excellent value. | |
| 20 July 2007 | |
| I'm curious what other professionals have in mind as the best alternative in the following situation: Client purchases a CA property in 1976 for $200,000 and starts renting in 1978. He depreciates $390/year for 4 years and then depreciation jumps around from $0 to $390 from 1982 to 2005 (I think they were calculating depreciation on how many months rented). Some years the property isn't rented. In 2006, he does a 1031 exchange with the property into three others.
The person who did his taxes in 2006 does the form 8824, but lists $0 as the adjusted basis of like-kind property given up. If I was to calculate $390 for 27.5 years (what IS the depreciable life of RRE in 1978 anyway? I was still in grade school!), this would result in $10,725 of depreciation allowed or allowable, meaning the land would seem to be worth $189,275, which would result in depreciation recapture in 2006 of $10,725 and adjusted basis of like-kind property given up of $189,725, right? I'm planning on amending the return to get the basis right, but I wonder whether I should show anything for a 481(a) adjustment or a form 3115. | |
| 2007-07-20 | |
| Ah, 1978. Alas, I wasn't a CPA then, but ACRS showed up in 1981. After 1971, useful lives were apparently determined on a facts and circumstances basis -- that is, the taxpayer chose a reasonable useful life for the asset. Your client apparently chose 513 years.... Seriously, though, did you ask him why he used $390? It is entirely possible that he has only been depreciating whatever improvements he made to put the property in service, and none of the original basis. That would make sense of both the depreciation amount and the zero basis on the 8824 -- well, it would be orderly, not sensible. Or, maybe your client thought the land was worth 92% of the purchase price and the building 8%. That would work, too, with a 40-year life and no improvements. $200,000 is a big chunk of change for a house in 1978, even in California. And I've run into software all too often that tracks only the depreciable assets, and loses the land.
I think you have the right idea, overall. You just need some idea of what the client thought he was depreciating (does he have any of the oolldd returns? -- he should!) and for how long, then back into the necessary answer. | |
| 17 April 2008 | |
| to amend or adjust in 2007 that is the question. Client has 2 rental properties Both were purchased in 2005 - 1 was not in service until 2006. He overdepreciated them both using an appraised amount (yes did his own return in turbo tax). Would you amend 2005 & 2006 or adjust 2007 to correct for the accumulated error? Of course to amend is most proper, but is is required? Any shortcut?
-m | |
