Depreciation on rental property

Forum|Forum|3 years ago
March 3, 2023
1 reply
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Like few others, I am embarrassed to state I either did not pay attention to all questions Turbo Tax asked me, or it actually never asked me.

I have owned a home since 2008, lived there until mid 2019, when I rented it. Its a shame that I never claimed depreciation, but do intend to claim it for 2022 when I file my returns. I read on a google search link that I could also claim 2021 depreciation in the 2022 returns. However in TT, I could not figure out how to claim it for 2021. All I could do is for 2022. Is TT not asking me appropriate question? How do I get to claim 2021 depreciation. OR are those google links incorrect and that I have to pay hundreds of dollars to get a tax consultant to help me claim all prior years loss? If I can do it through TT for 2022 and 2021, I am willing to forgo 2020 and 2019 depreciation (which might be only partial anyway)

leeloo

There seems to be a conflict of opinion. Normally, you can go back three years and amend. However, depreciation is special in that if you go too long without reporting it, you need to file Form 3115 a change in accounting method to rectify the situation. How long seems to be the sticking point.

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/i-did-not-claim-depreciation-on-my-rental-home-since-it-was-converted-from-personal-use-several/00/453003

After entering your rental information, you would scroll down to the asset/depreciation section. When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.

You would enter that you converted your home and the date of conversion. The program will walk you through each step.

easychairwandererAuthor

Thank you for the answer. Follow up question(s) -

1. As I put the property into rental mid 2019, will I get only half the depreciation?

2. Is it okay to skip taking 2019 and 2020 depreciation? I understand that if I do so I will still have to do depreciation recapture when I sell or (if I do) convert back to primary home.

3. As you have mentioned, after entering rental information, when I scroll down, will it allow me to take 2021 depreciation also? I assume I can certainly take 2022 depreciation.

4. Via the link you provided, other posts seem to indicate I MUST file 3115, and do it in the order of the year, that is 2019 first, then 2020 and so on, further advising to not even think about filing 2022 return until I do this. I will do this if answers only if mandatory and depending on answers to 2 and 3, above. Does this make sense?

5. How can I find out the FMV on the date of the conversion?

Thanks you!

Carl11_2

Employee

For starters, you can't amend. You have to file the 3115. But I'll answer your questions anyway.

1. As I put the property into rental mid 2019, will I get only half the depreciation?

Depreciation doesn't work that way. Long term residential rental real estate is depreciated over 27.5 years using the mid-month convention. That means depreciation starts on the 15th day of whatever month the property is placed in service.

2. Is it okay to skip taking 2019 and 2020 depreciation? I understand that if I do so I will still have to do depreciation recapture when I sell or (if I do) convert back to primary home.

Not really, as the TurboTax program doesn't work that way. The program isn't designed or intended to (for lack of a better phrase) "figure things incorrectly."

3. As you have mentioned, after entering rental information, when I scroll down, will it allow me to take 2021 depreciation also? I assume I can certainly take 2022 depreciation.

The program won't work that way for the reason mentioned above.

You only file "ONE" Form 3115. For you, you would file it with your 2022 tax return. You will not amend any prior year tax return.

5. How can I find out the FMV on the date of the conversion?

For depreciation purposes, you use the "LOWER" of

a. The price you paid for it when you originally purchased it, plus the cost of any property improvements you paid for, or

b. The FMV of the property on the date you placed it in service.

When it comes to rental property, I seriously doubt it was worth less than you paid for it, on the date you placed it in service. So unless you can prove otherwise (to the IRS) you'll use your original purchase price plus the cost of any property improvements you paid for while you owned it.

Now for that 3115:

IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf has instructions for how to depreciate property. On page 14 of that document it states when you are required to file the 3115. One of the things mentioned in the first column that require you to file form 3115 is:

A change from an impermissible method of determining depreciation for depreciable property if the impermissible method was used in two or more consecutively filed tax returns.

Since you have not depreciated the property in two or more consecutively filed tax returns, you have used an "impermissible method". So the 3115 is required to be filed with your 2022 tax return to fix this.

While the TurboTax program does include the 3115, it is not simple by any stretch of the imagination. I would highly advise you seek professional help. Especially if your state taxes personal income, as this could be a double-whammy. Doing it wrong will just make thing worse, and the potential for fines, penalties and back-taxes can make the cost of professional help seem like a pittance in comparison. Please seek professional help.