another 3115 question

[krav]

New client is a widow whose husband passed away in January last year. He had always prepared their taxes. They had a rental property on which he had never taken the depreciation for the home. The rental has gone from active to passive this year (she hired a management company now that her husband is gone). I want to catch up on all the missed depreciation, but does it make sense to do the 3115 now when it is just going to be a passive loss carried forward? Or should I just wait until the sells it? And if you wait until she sells it, do I still take the current year depreciation for 2012?

[DaveinTexas]

You should use the 3115

New client is a widow whose husband passed away in January last year. He had always prepared their taxes. They had a rental property on which he had never taken the depreciation for the home. The rental has gone from active to passive this year (she hired a management company now that her husband is gone). I want to catch up on all the missed depreciation, but does it make sense to do the 3115 now when it is just going to be a passive loss carried forward? Or should I just wait until the sells it? And if you wait until she sells it, do I still take the current year depreciation for 2012?

To catch up the depreciation, you take all of the depreciation that was missed in one shot, on this year's return. This will create a passive loss, as you indicated, that will just carryover until used up by passive gains or until the property is disposed of.

The 3115 is a bit of a pain if you have never filed one so read the instructions very carefully, especially the filing instructions (where you have to mail a copy to the appropriate service center) in addition to attaching the form to the return. If I recall the one that is mailed goes to Ogden. And the form must be submitted by the due date, no extra time for extensions so do not delay.

I wouldn't wait until the property is sold, these passive losses from the caught up depreciation could be used to offset any future passive gains (especially if the property is has no mortgage and is beginning to cash flow).

Good luck!

[WhiteOleander]

New client is a widow whose husband passed away in January last year. He had always prepared their taxes. They had a rental property on which he had never taken the depreciation for the home. The rental has gone from active to passive this year (she hired a management company now that her husband is gone). I want to catch up on all the missed depreciation, but does it make sense to do the 3115 now when it is just going to be a passive loss carried forward? Or should I just wait until the sells it? And if you wait until she sells it, do I still take the current year depreciation for 2012?

Don't forget, there is stepped-up basis on the property. If it is a community property state, there is full step-up and what happened in years past makes no difference now. If it is not community property, then usually, one half receives the stepped-up basis.

[krav]

stepped up basis...

thank you so much for the reminder - I had completely forgotten about that!

[Gary2]

Also, note that merely hiring a management company doesn't mean that there's no more active participation. Pub. 527 is somewhat vague, saying "Management decisions that may count as active
participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions." I've never seen a more detailed discussion of this, nor any litigation of grey areas, but I'd expect that the typical management company arrangement would have an upper limit on expenditures that could be made without the approval of the owner, would require the owner to approve new tenants and new rent increases, etc.

The sort of situation where there's clearly no active participation might be with multiple owners, where a subset having a majority interest make all the decisions, giving the minority stakeholders nothing to do but report their share of rent and expenses. Or if someone actually assigns a management company control over decisions within limited constraints.

[mactoolsix]

Active Participation can be minimal

We have lots of client's with property managers that meet the active participation rule:

Active participation. You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.

Mke

[krav]

active participation...

Unfortunately, I don't think my client would qualify - it's a condominium vacation rental in which the management company makes all the arrangements for rentals. Honestly, I doubt that I would have qualified it as active when the husband was alive, but he at least went down to the condo every once in a while to fix something or to paint. Now, the wife won't even be doing that. She gave the mgmt company permission to hire out for any repairs as needed.