Selling a rental property but never claimed depreciation

Forum|Forum|2 years ago
March 14, 2024
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I sold a condo in 2023 that has been used as a rental property for 15 years (out 20 years of ownership). Unfortunately I never claimed depreciation throughout the years, only to learn now that there will be depreciation recapture tax assessed regardless of me never claiming depreciation. Is there a way for me to minimize losses due to this situation. Thank you.

Best answer by AmyC

The IRS requires you to claim depreciation. Your choice to not claim it does not change the law. When you sell a house, you are required to reduce the basis by the allowed or allowable depreciation. You do have a way out. The Form 3115 can be filed with your taxes so that you can claim credit now for all the lost depreciation. It is a bit complicated so see my post here for help.

taxlady28

You have to pay back depreciation, even if you never claimed it. You can file amendments and get back the last two or three years.

b87larAuthor

Just out of curiosity, what is rationale behind having to pay tax on something I never claimed/deferred? Just want to understand - somehow it does not make sense to me.

AmyCAnswer

Employee

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SharonD007

TurboTax Live or TurboTax Full Service isn't available using TurboTax Desktop. You won't be able to transfer your 2023 tax data file from Desktop to Online but you can transfer your 2022 tax return information into TurboTax Online so you can use TurboTax Live or TurboTax Desktop.

Refer to the TurboTax Help articles How do I switch from TurboTax Desktop to TurboTax Online? and How do I get TurboTax Live? for additional instructions.

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b87larAuthor

Following up on the above. I have added the rental as an asset in TT. I owned it from 01/2004 till 07/2023, when I sold it. It was put in service as a rental in 04/2009 (continuously until the final sale).
Question 1: When I first added it, TT came up with a depreciation amount of about $18k and pre-filled the field shown in the screenshot. I have set it manually to 0 since I never took depreciation. Is this the correct way to proceed in TT?
Question 2: Moving on to the sale of the asset, TT asks for asset sales price but Business Portion only. Is the business portion calculated as the proportion of days the asset was used as a rental to the total days I owned it? (see second screenshot). It's a condo and of course I sold it for one price, how am I to calculate the Land Sales Price?

Thanks!

DavidD66

You do not need to do an allocation between business and personal. Such an allocation would be applicable if you had sold a duplex where you lived in one half and the other was a rental, or if you had been renting out a room in your house. Since the entire condo was a rental, the business portion is 100%.

For the allocation between land and improvements, the best way to come up with that is to use the tax assessment. This allocation should also be done for the original cost basis. Let's say the total assessment for the condo was $100,000 allocated between land and improvements on your tax bill as $5,000 and $95,000. You allocate 95% of your purchase price and sale price to the improvements (which is the part you depreciate) and 5% to land (which you do not depreciate). Since it is a condo, as opposed to a single family house or a townhouse, it is probably not a fee simple property, which would mean you didn't actually own any land - just the condo unit. In which case the allocation between land and improvement would be moot.

For the amount of previous depreciation, that amount should equal the depreciation adjustment on Form 3115, not zero. That amount will be used to determine your cost basis, gain, etc.

As recommended in a previous answer, I recommend you seek some professional help for correcting the depreciation and reporting the sales transaction. TurboTax Live is an option, as is a local tax practitioner (CPA or EA) in your area. If it were me filing the return, I would file an amended return for 2022 with Form 3115 to adjust the depreciation. I would then file 2023 with the correct cost basis and accumulated depreciation to calculate the gain and depreciation recapture in 2023.

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tillieservi

What if the rental property was paid off and never claimed the depreciation on it. I use it as a rental still? Is there a way to claim the depreciation now?