Allowable Depreciation Adjustment

[Nashville]

This is an outgrowth of another discussion which is going in several different directions. I would like this thread to focus on "allowable" depreciation never taken in the past.

This usually is the product of ignorance. Someone typically sells property, most commonly long-lived real estate, and has never taken depreciation on the property as an expense. Didn't know they had to - thought they could pick and choose - previous tax preparer didn't do it - the reasons are many and varied. Doesn't matter, most of us on this forum know they are required to recapture "allowable" depreciation whether taken on not.

My question: Is there a way to take an accumulated effect of all such "missed" depreciation as a current year expense? This means "all" such depreciation, as several have suggested ways to partially recover the amounts.

Some ideas already offered on Geekgirl's thread:
An amended return can go back and re-elect, spreading the effect of the last three years. The filing of Form 3115 can give rise to a §481 adjustment whereby as many as four years can be lumped into the current year. Both of these are subject to the $25,000 loss limit and $150,000 loss phaseout for any and all years affected.

But none of the suggestions/discussions address the possibility of reclaiming ALL of the lost depreciation since inception. Is there a way to do it??

[Lion]

I thought Form 3115 did that. Haven't had to use it myself, though. Are you saying it does only four years?

[Nashville]

Lion, I believe so

Lion, this is what I believe after reading §481. The four years are three prior years plus the one current year. And piling on this expense in the current year increases the possibility that the taxpayer will run into a passive loss situation.

However, I am perhaps the world's worst and reading and interpreting the code. I could easily be wrong. Also there is some mention in the discussion of disclosing §481 amounts which exceed $3000, and for the life of me I don't know what this does (or doesn't) do.

[Nashville]

Lava Lamp Effect

Going to bump this onto the top one more time - Roland Slugg might give it a whirl.

Board really moves fast during tax season. This morning's post might be on page 3 by nightfall.
Topics move up and down like the stuff in a lava lamp.

[Roland Slugg]

This has always been a troublesome issue, and I will admit up front that my knowledge and understanding of the rules are fuzzy at best. But I've done a little reading, and this is what I now believe ... as it relates to the main question in the OP, namely: "What do you do when depreciable property is sold, but no depreciation was ever taken?"

Based on the reading I've done ... and believe me, it's tough sledding ... the taxpayer should complete and file F-3115 for the year of change, which is the year the property is sold. All depreciation that should have been taken but was not is reported as a negative §481(a) adjustment that year. The calculation of the gain on sale should then take into account the §481(a) amount. The net effect is that the §481(a) adjustment and the increased gain on sale will cancel each other out. This may not seem right, and I'm not absolutely sure that it is, but at least it does yield a fairly equitable result. On the other hand it also seems to render meaningless the concept of "allowed or allowable" ... which as I have always understood it was meant to compel taxpayers to take a depreciation deduction for all depreciable property every year, using one of the permissible methods.

I recommend that you (and others who may be interested in this) read what I have read. Start with IRS Pub 946 and read from the middle of page 14 to the bottom of page 15. Then read the applicable portions of Rev Procs 2008-52 and 2011-14. Links are provided on page 15 of Pub 946. (There is also a link to another Rev Proc, 2009-39, but it goes to the wrong IRB. I don't believe it matters, though.) When you get to those Rev Procs, just finding the relevant parts will be a challenge if you aren't experienced in reading Rev Procs. These are massive documents. The index alone for Rev Proc 2008-52 is 20 pages long! It's a good exercise, though, and I believe it's worthwhile to learn how to navigate, read and understand the IRS's Rev Procs. Believe me, a Rev Proc is a whole different animal from a Rev Rul. Rev Procs do follow a uniform structure, though, and once you understand it and become familiar with it, they don't seem so intimidating.

[Snaggletooth]

Wow! Thank You

This has always been a troublesome issue, and I will admit up front that my knowledge and understanding of the rules are fuzzy at best. But I've done a little reading, and this is what I now believe ... as it relates to the main question in the OP, namely: "What do you do when depreciable property is sold, but no depreciation was ever taken?"

Based on the reading I've done ... and believe me, it's tough sledding ... the taxpayer should complete and file F-3115 for the year of change, which is the year the property is sold. All depreciation that should have been taken but was not is reported as a negative §481(a) adjustment that year. The calculation of the gain on sale should then take into account the §481(a) amount. The net effect is that the §481(a) adjustment and the increased gain on sale will cancel each other out. This may not seem right, and I'm not absolutely sure that it is, but at least it does yield a fairly equitable result. On the other hand it also seems to render meaningless the concept of "allowed or allowable" ... which as I have always understood it was meant to compel taxpayers to take a depreciation deduction for all depreciable property every year, using one of the permissible methods.

I recommend that you (and others who may be interested in this) read what I have read. Start with IRS Pub 946 and read from the middle of page 14 to the bottom of page 15. Then read the applicable portions of Rev Procs 2008-52 and 2011-14. Links are provided on page 15 of Pub 946. (There is also a link to another Rev Proc, 2009-39, but it goes to the wrong IRB. I don't believe it matters, though.) When you get to those Rev Procs, just finding the relevant parts will be a challenge if you aren't experienced in reading Rev Procs. These are massive documents. The index alone for Rev Proc 2008-52 is 20 pages long! It's a good exercise, though, and I believe it's worthwhile to learn how to navigate, read and understand the IRS's Rev Procs. Believe me, a Rev Proc is a whole different animal from a Rev Rul. Rev Procs do follow a uniform structure, though, and once you understand it and become familiar with it, they don't seem so intimidating.

Thank you Mr. Slugg. This is almost scary. But we do run into it quite often - people who have never depreciated property and it can be devastating.

[ruthc]

Correct!

As stated in a prior thread, I prepared this Form 3115 this year and included depreciation from 2003 onward. The rental property is not sold and is still being used as a rental. I had spoken several times to Patrick Clinton at the IRS who is a person listed in one of the Rev Proc's to call with questions. He is very knowledgeable and has returned my calls within a day (unbelievable!). After this issue was again created with a new thread, I called him again to make sure it was not allowed just for 3 prior years and the present year. He assured me I could include the depreciation from the beginning in 2003. There really was not a depreciation method used from the start and now one is being established.

I feel confident all prior years can be used in my client's situation. However, because so many different situations do arise, I think each preparer that utilizes this Form 3115 should make sure that their particular issue is checked to see if they can use all years or if they are limited. I found these rev's can be very confusing. I recommend if anyone is not sure they should call Mr Clinton.

I will let everyone know if any problems arise from the return I filed. That way we can know if it worked.

[Gretel]

I will let everyone know if any problems arise from the return I filed. That way we can know if it worked.

I filed such a return with catching up depreciation for more than 3 years some years ago. I never heard anything back.

I was pondering if changing from taken no depreciation to taking depreciation is a change in accounting methods or just an omission. Form 3115 seems to indicate that it is a change in accounting methods, or maybe it's just the form the IRS wants to see. If not taking depreciation was just an omission one could file 3 amended tax returns (if it is for 3 years only).

[Golden Rocket]

Thanks. Amazing

This is "Nashville" posting as "Golden Rocket" because I am at a different computer/browser. I wish to thank all who have participated in this discussion and it is also good to know that you don't have to wait until the year of sale (although this is when the issue usually surfaces). §481 like all sections, is difficult to read and understand for people like me...

[ruthc]

Amended return

I was told by the IRS that I could not amend the previous returns because it was not done for more than 2 years. Of course, the way things are going, anything goes!

[ruthc]

Return Accepted and Refund Received - Form 3115

Just wanted to let everyone concerned about filing Form 3115 for several prior years of unclaimed depreciation that the IRS approved the return and the refund has been received. As stated before, I completed the Form 3115 for 2009 through 2011 as a 481 adjustment on the rental property. This made me very pleased that it was approved and made the client even happier.

[Burke]

Good information. And on the FLIP side, for the TP (or should I say his former preparer) that kept on keeping on and took depreciation - SALY - way past the point of no return, in excess of basis? And this was more than just the last 3 yrs. When the preparer died, he showed up on my doorstep.