How to correct the cost basis of rental depreciation

Forum|Forum|3 years ago
March 23, 2023
3 replies
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I bought a house at 150K and rented it out in 2011. I used TurboTax and mistakenly entered 45K as the cost basis for depreciation (perhaps I entered the "land" amount or something like that). I have not noticed this mistake until now, March 2023. Note that I've used TurboTax all these years.

I have the closing statement in 2011 and the title as evidence of the actual house cost.

I know I have to use Form 3115 to make the change but I was completely overwhelmed with it.

I deeply appreciate it if the experts would please help guide me as how to fill out the critical parts of the form to change the cost basis from 45K to 150K.

And if you would, please tell me the possible consequences of my mistake.

Thanks so much in advance for your help.

Mike9241

Your interests may best be served by using a tax pro. cost 150K - does that include closing costs that become part of the total basis? from that, you have to subtract out the value of the land in 2011 to come up with what the correct basis would be for deprecitaion purposes. then you would have to compute the correct 2011- 2021 depreciation that should have been taken and subtract out the amount you actually taken. that becomes your section 481 adjustment which would probably need to be included on the rental schedule for 2022. an extremely rough estimate is that the adjustment would be about 36% to 40% of the difference in depreciable tax basis. that's a huge deduction that may subject your rental to the passive loss rules. if you treat the rental as a qualified business for the 199A/QBI deduction then there's the issue of proper allocation of this adjustment to the years QBI was in effect. then if you have state income taxes what are its rules - do they follow the federal

Christopher ChuAuthor

Thanks so much for everyone's help. I found out that I entered wrong values into TurboTax for calculating the Depreciation.

Carl11_2

Employee

The 3115 is not simple by any stretch. Therefore you should seek professional help for this. Especially if your state taxes personal income.

AmeliesUncle

Form 3115 does NOT apply if you merely used the wrong Basis. That is a "mathematical or posting error" that can only be corrected by amending.

If the event you were accidently depreciating the land and not depreciating the building, that may qualify for Form 3115. *IF* that is the case, as was mentioned I recommend going to a good tax professional that is familiar with Form 3115.

Christopher ChuAuthor

Dear AmeliesUncle:

I had a wrong basis based on a wrong and extremely low improvement/building value. Would you please explained what you mean by "amending" in this case? Is there a form for this?

Best regards

Chris