no depreciation ever taken on rental

[oceanlovin'ea]

New client(same as other post).. have a rental house that they have been renting for probably 8 years. No depreciation was ever taken on the property. Not a self-prepared return either.

I know this discussion was on another thread about filing form 3115. but this isn't a change in accounting. It is a correction of the depreciation amount that should be taken. I could amend the previous years, 2010 & 2011. But I don't think the client will like the extra charges. Well, guess they might get a little more money back.

Do I just start taking the correct depreciation amount for this year? The rule is allowed or allowable. But you have to take it in the year it was supposed to be taken. You can't just say "Oh, we missed all this depreciation and I am going to take it this year."

Just not clear on what to do. Appreciate your help.

Linda, EA

[appelman]

Form 3115

It is a bit tedious to fill out, but this case falls into the category of automatically approved changes, specifically a change from an inadmissible method (no depreciation) to an admissible one. In general, you claim all the missed depreciation in the year you file the form, which can cause the taxpayer some problems. In some cases, the IRS will require you to spread it out. Alternatively, if the taxpayer plans to sell the property in the not-too-distant future, you may just want to wait and file the 3115 in the year of sale.

[ruthc]

Appleman is Correct

The Form 3115 is the proper way to capture all the prior depreciation not taken. If you wait until they sell the property you might be said not have done your "due diligence" in future years because you know the depreciation has not been taken and you are waiting to take it. Especially if, for some reason, someone else does their returns in the future instead of you.

[taxea]

In the past I have made the adjustment on the current return with no problem from the IRS. I agree that this is not a change in accounting and have read all the posts justifying 3115 as being the proper way to do it. I include a statement that explains what I have done, why and includes the calculations made on the return.

[WhiteOleander]

In the past I have made the adjustment on the current return with no problem from the IRS. I agree that this is not a change in accounting and have read all the posts justifying 3115 as being the proper way to do it. I include a statement that explains what I have done, why and includes the calculations made on the return.

Pub 538 page 21 states that this is a change in accounting:

********changes in accounting method that require IRS approval.
A change from the cash method to an accrual method
or vice versa.
A change in the method or basis used to value inventory.
A change in the depreciation or amortization method
(except for certain permitted changes to the
straight-line method).*************

I looked it up.

[dodgedipduck]

TTB page 9-20.

"Did You Know? A taxpayer who uses an incorrect method of depreciation for only one year is not consdiered to have adopted a method of accounting and, therefore, the error can be corrected on an amended return.

If an incorrect method of depreciation is used on two or more consecutive returns, the taxpayer is consdiered to have adopted a method of accounting, and IRS approval is required to change the method."

This requires Form 3115.

[taxea]

Pub 538 page 21 states that this is a change in accounting:

********changes in accounting method that require IRS approval.
A change from the cash method to an accrual method
or vice versa.
A change in the method or basis used to value inventory.
A change in the depreciation or amortization method
(except for certain permitted changes to the
straight-line method).*************

I looked it up.

Like I said in the other post...I have yet to have the IRS ask for 3115 and I have done many of these. Also like I said "to each his own"

[Gary2]

Like I said in the other post...I have yet to have the IRS ask for 3115 and I have done many of these. Also like I said "to each his own"

No matter how often you win the audit lottery, it's not an excuse for doing it wrong. Pub. 946 identifies the very limited circumstances in which an amendment is allowed. It also makes it clear that using an impermissible method for two years in a row establishes an accounting method that can only be fixed by 3115. Not taking depreciation for a depreciable property is an impermissible method.

[ruthc]

Gary2 CORRECT!

Gary2 is absolutely correct in stating that in this case the Form 3115 is required. I would ask Taxea if the amount of the adjustments were so insignificant that it didn't start a "red flag" for those returns. I think you may do a disservice to any clients if you know that it is not the proper way to do it. This subject of either amending or using Form 3115 (or even doing what Taxea does) has been coming up more often. As I stated in prior threads.......I would encourage anyone having any questions on this to call Mr. Patrick Clinton at 202-622-4930 at the IRS accounting dept. for his answer to this. He is the pro on this subject and knows everything inside and out on depreciation taken or not taken. I called him when I got conflicting answers and he was so helpful, accommodating, and spent as much time as I needed to understand what to do and why. He would return my calls within a day which was great. His answer is exactly what Gary2 stated. It is an automatic approval and no big deal as long as you follow the instructions.

[oceanlovin'ea]

Ruthc

Thank you so much for the contact information. I called Patrick and had to leave a voicemail for him. He called me back last week while I was on vacation. So I called him this morning. He answered the phone. I was shocked! He walked me through the form and was very pleasant and helpful.

This is a contact person that we should keep track of. Of course, this is his specialty. So he probably couldn't help in other areas.

But I really appreciate this board. We all help each other so much.

Linda, EA

[ruthc]

Oceanlovin'ea - You're Welcome

Linda, EA......you are very welcome. I am so happy to hear that someone finally took my advice to call Patrick on this issue. I am glad to hear that you had a favorable response as I did. It is hard to believe that someone from the IRS will respond so quickly with an answer that we feel comfortable with and can understand fully. Hopefully, others will take advantage of calling him whenever they have a similar question. Have a great weekend!!!