what is a depreciation preference?

Forum|Forum|1 year ago
March 18, 2025
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Why would form 4562 "Alternative Minimum Tax Depreciation Report" include an amount in the column called "Adjustments Preferences" and how is it calculated?

DavidD66

A preference item is something that gets preferential tax treatment for regular tax and must be added back to income for the calculation of Alternative Minimum Income to determine Alternative Minimum Tax (AMT). This income is excluded when calculating one's ordinary tax liability but is included when calculating one's liability for the alternative minimum tax. One tax preference item is accelerated depreciation. If you take accelerated depreciation expense it has to be added back on Form 6251.

Adjustment items can be either additions or subtractions from AMT income. For depreciation unless a taxpayer elects to use the same method of calculating depreciation for regular tax and AMT on post-1986 assets, depreciation is calculated differently for regular tax and for AMT on those assets.

Usually, the differences in depreciation rules for regular tax and AMT results in a greater depreciation deduction for an asset for regular tax in the earlier years of the asset’s recovery period and a lower deduction for regular tax in the later years.

The calculation of Adjustments and Preferences is the sum of the cumulative differences between depreciation for regular tax and AMT tax.

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Chuck-NistlerAuthor

The 4562 "regular tax" form (without AMT) with depreciation that goes to schedule E is adding the depreciation preference to regular tax MM/SL depreciation. It does this when I override the prior total depreciation because filed depreciation for only 3 of the last 7 tax years of rentals thus entering the actual prior used being less than what TT calculates for 7 years. Is the software correct in calculating the regular tax depreciation to include the depreciation preference amount like it does for AMT?

DianeW777

Yes, also, the tax law is clear for depreciation. It's basically a 'use it or lose it' scenario. It's not clear why you didn't use the depreciation for all 7 years. However if it was rented or available for rent all of those years, then depreciation is required.

If you did not rent the property all seven years, then you basically placed it in and out of service. In that instance you would need to manually track the actual depreciation during the periods of rental use. The depreciation for AMT would be the same since it uses straight liine.

If the rental property was active all 7 years and for some reason depreciation was not used:

Next, for the prior depreciation you have not used. At the point of sale, you will recapture any depreciation that was allowed or allowable.

You can use the following form to correct the depreciation for your rental property. Take any amount not previously expensed on prior returns, as an expense on the current year tax return as 'Other Expenses'.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2024 tax return.

Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
- Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
This form is available in both TurboTax Online and TurboTax Desktop. TurboTax doesn't help you with this form. And your return must be mailed because this form is not supported through e-file.
What should I do if I didn’t take depreciation on my rental property?

@Chuck-Nistler

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