Form 3115, Depreciation Correction

[geekgirldany]

I have a new client that has not taken depreciation on rental property that he purchased back in 2001. So missing 11 years of depreciation. He wants it done this way because he thinks he would owe less tax when it is sold. I explained the allowed or allowable depreciation to him and that this was not true.

Been doing some research and found that will need to file Form 3115. My question is can it be filed this year or is it only in the year the property is sold?

He is older man and is talking like he may be selling it soon. I don't know if that is this year or five years.

Thanks
D

[appelman]

Either.

The rules have been liberalized. It can be filed now, or you can do it in the year of sale. One consideration might be whether he can use the big negative income in the current year.

[geekgirldany]

Thanks so much. I read where some did it the year they found the error and others were doing it the year of the sale so I was not sure.
I have not started his taxes yet but looking over them he might can use it as he did a total distribution on his 401K. Not sure how much is taxable on it.

The Form 3115 looks complicated.... if anyone has a minute please PM what you usually charge to prepare the form. I am sure he will want to know before I even start.

[appelman]

It's fiddly

But not especially difficult.

[Snaggletooth]

"Catch Up" Depreciation?

The rules have been liberalized. It can be filed now, or you can do it in the year of sale. One consideration might be whether he can use the big negative income in the current year.

Appelman, let me understand what you are implying with reference to the "big negative income" in the current year. Does this mean that if you discover depreciation hasn't been taken, you can retroactively take the accumulated expense and charge it to current year income?

If this is true, expect some discussion, probably from several board members. This has never been the case previously and if it is true now, then the rules have indeed been liberalized...

Or maybe you meant something else entirely...if so please accept apologies.

[krav]

good tool to learn 3115

I usually buy a workbook just for my family day care clients. It's by Tom Copeland from Redleaf Press - he has a great example of filling out the 3115 - walks you right through it. I prepared one last year and found it so much simpler with the guideline to follow.

[ruthc]

Use Form 3115

After many hours of checking this out because I have a client in the same situation as you, I did prepare the Form 3115 this year.
You can either file it now or wait until the sale, but it needs to be timely filed with the return. Get the form instructions which did change a little. This will be an "automatic IRS change request" that has to be sent in before the return is filed (copy to the address in instructions and original with original return per instructions) so it needs to be prepared quickly. However, to make a long story as short as I can, this amount will be a "481 adjustment" on the schedule E. Your Schedule E net loss will be capped at the $25K net loss and will be allowed to be carried forward if any left. If the return has the Form 8582 with it because of the large loss, the return will not be able to be e-filed until the IRS allows that form (early March?). If you attach any info to the Form 3115 you will have to send the original form with attachments separatedly.
If you have any questions on this you can call Mr Patrick Clinton at 202-622-4930. He works specifically on this subject at the IRS. He has been extremely helpful and speaks in plain language for you to understand.
Hope the above helps.

[geekgirldany]

Ruth, thanks so much for the information! I very much appreicate it.

Question, so the Form 3115 needs to be filed with and separately from the tax return? So does the automatic change have to be accepted before the tax return can be filed?

I am going to print out the instructions but thought if you knew off the top of your head would appreciate the input.

[joanmcq]

You file a copy with the tax return and another copy is mailed to a special address (it's in the instructions).

[ruthc]

Send Original w/Return

You need to send the copy to the address in the instructions BEFORE your return is accepted by the IRS. The signed original goes with the return. You will need to send the original Form 3115 with the Form 8453 after the return is accepted by the IRS (within 3 business days after acceptance). You should be instructed to do so after it is e-filed.

[Gary2]

Here's a followup question: Will filing the 3115 cause a delay in the normal refund processing? The common 8453 attachments don't hold up the refund, but this seems to require special processing.