Over Depreciated Rental

[Kram BergGold]

I was reviewing a new clients 2011 return. I noticed he sold a rental that was prviously his residence. He did not report the sale. The house cost $350k and was appraised at $300k at the time of conversion. It sold for $250k. I also noticed that he used $350k as the depreciable basis. I would like to amend to claim the loss on the sale. I don't believe that
Form 3115 can be used at this late date to adjust the depreciation. So my two choices are to amend 2009 by 4/15/13 and then tackle the rest later or since depreciation is allowed or allowable and he claimed too much, I would like to skip fixing the depreciaiton and just have a smaller loss as the adjusted basis will be lower due to more depreciation. Is there any problem with option 2?

[Snaggletooth]

Critical Number

How much accumulated depreciation had been taken at the time of the sale?

I don't think your question can be addressed without knowing that, as it will have to be recaptured. The tax bracket of
the taxpayer should also play a factor.

[Koss]

Overdepreciated?

Overdepreciated?

Is that, like, the opposite of a person who is underappreciated?



BMK

[Roland Slugg]

Based on the values ... $350k/$300k/$250k ... stated in the OP, along with your reference to a "loss on the sale," I am assuming the property was not used as a rental for very long. I'm guessing three or four years ... maybe five. If this is true, then the excess depreciation is not a huge amount ... less than $2,000 per year and a total excess of less than $10,000. If this were a new client of mine, I would review the situation with him, explaining that there was too much depreciation taken during the rental years, and also that there was a reportable loss on the sale in 2011. I would ask him to allow me to prepare an amended 2011 return to report the correct loss. In doing so I would use the actual depreciation taken ... i.e. "allowed" ... but also use the $300k value as the starting rental basis. I hope that $300k appraisal will pass IRS scrutiny, because this particular amended return is far more likely than most, IMO, to trigger an audit, at least regarding the loss.

If the client won't consent to the amended return ... and he may not, fearing an IRS audit and/or the legitimacy of the $300k appraisal ... then I would simply write a memo to the client, explaining all this, and put the matter to rest. Since this issue doesn't affect his 2012 return, I would have no other ethical concerns.

Finally, if the property was first used as a rental in 2009, the option does exist to prepare amended returns for 2009, 2010 and 2011, correcting the depreciation in those three years and also reporting the correct loss on the property's 2011 sale. I would not consider filing F-3115 in this case. By correcting everything in an amended 2011 return, the same result will be achieved.

[Kram BergGold]

Thanks roland

It seems, great minds think alike.