Foreign residential rental property depreciation

Forum|Forum|3 years ago
April 13, 2023
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Hi, I have a residential rental property overseas that was bought in 2006 but put on rent in the beggening of 2017. I never claimed its depreciation until last year taxes. Last year in 2021 my cpa claimed depreciation first time with MACRS 27.5 years MM/SL method. This year I am filing my own taxes with turbotax and turbotax is calculating based on 40 years MM/ALT. Questions are 1) Is it okay to do it turbotax ways as it is changing the calculation method from 27.5 year to 40 year? 2) Can turbotax allow me to depreciate it over 27.5 year the same way as it was. done last year? to avoid any calculation discrepancies. Appreciate any thoughtful advices here.

HelenC12

Prior to 2018, depreciation of foreign residential property was limited to 40-years. The Federal tax law changed in 2017 (effective 1/1/2018) due to the Tax Cuts and Jobs Act to shorten the recovery period for foreign rental properties from 40 years to 30 years,

Per IRS Publication 946, page 32, 40 years for foreign residential rental property placed in service before January 1, 2018.

No, it's not OK to use the 27.5 year depreciation method for foreign residential rentals. Technically, you are not required to claim depreciation expense. But you are required to "recapture" depreciation allowed or allowable when you sell the property, in the future. That is, you will pay tax on the depreciation, when you sell, whether or not you actually claim it while you were renting it out.

You may file amended returns. You have three years from the date you filed your return or two years after you paid the tax due (whichever is later) to file an amendment

You may request a change in accounting method from the IRS. Please see Form 3115, Application for Change in Accounting Method.

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SatishUpadhyayAuthor

Thank you HelenC12 for your answer.

Does that mean I cannot file with 40 years depreciation method as turbotax is calculating without getting my 2021 taxes amended first even though I will be claiming less in depreciation expenses?

AmyC

Employee

You should file your 2022 return and then correct the past.

Your property became a rental in 2017 -the IRS says it must be 40 year depreciation for the property.

Helen is saying you can file Form 3115 for all the years from 2017-2020 and amend 2021 to get back to where you should be. You should contact the preparer and ask them to correct their mistake with an amended return. They should have done the Form 3115 when they learned you had not been depreciating the house. They can also e-file the amended return for you. If you have state tax, this will also need to be amended.

If you want to go back and amend 2020 federal and state you can, Then use Form 3115 for 2017-2019.

It is up to you how you want to correct the past.

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