Incorrect and inconsistent depreciation -- What would you do?

[appelman]

A client owns rental property dating back at least to 1986. Originally it was community property, but her husband died in 1992. Previous preparer never stepped up basis. Worse, he was incredibly inconsistent in taking depreciation. Amount varied all over the place, and some years it was omitted altogether. Taxpayer is 79 years old and has no intention of selling property during her lifetime, so depreciation recovery is not likely to be a concern. Returns for 1995-2004 are missing, but a worksheet giving cumulated depreciation allows me to approximate at least the maximum amount that could have been taken in the missing years.

I can amend the three open years; my question is whether I should also try to prepare a Form 3115. I'm not even quite sure that failure to step up basis constitutes an "impermissible" accounting method. We would be talking an average of some 7K per year or more from 1992 through 2009. If she took the whole adjustment in 2013, she'd probably end up carrying an NOL for the next decade or more.

Suggestions, anyone?

[ChEAr$]

A client owns rental property dating back at least to 1986. Originally it was community property, but her husband died in 1992. Previous preparer never stepped up basis. Worse, he was incredibly inconsistent in taking depreciation. Amount varied all over the place, and some years it was omitted altogether. Taxpayer is 79 years old and has no intention of selling property during her lifetime, so depreciation recovery is not likely to be a concern. Returns for 1995-2004 are missing, but a worksheet giving cumulated depreciation allows me to approximate at least the maximum amount that could have been taken in the missing years.

I can amend the three open years; my question is whether I should also try to prepare a Form 3115. I'm not even quite sure that failure to step up basis constitutes an "impermissible" accounting method. We would be talking an average of some 7K per year or more from 1992 through 2009. If she took the whole adjustment in 2013, she'd probably end up carrying an NOL for the next decade or more.

Suggestions, anyone?

rental property dating back to 1986? Hmm, remember acrs depreciation? 19 year property? Does this apply to client's rental property? If so, there may not be any depreciation to be taken on some property.
See publication 534 for how we used to do it.

[appelman]

Maybe.

But the clock starts over with the death in 1992, using the new basis.

[ChEAr$]

Oic

But the clock starts over with the death in 1992, using the new basis.

So how did previous preparer treat that event? Continue half depreciation under acrs method but then begin using
macrs for the stepped up portion?

[appelman]

He ignored it!

As far as I can determine, he just continued as before, though with a lot of inconsistency. As community property, half of which was included in the estate, the whole thing should have been stepped up.

[taxea]

I would amend starting with the third year back and make the depreciation adjustments on that year with a detailed statement showing your calculations. Then I would amend forward using corrected amounts. I don't see a need for 3115 as you are not changing the accounting method

[appelman]

The only problem is...

That throws away 18 years of depreciation!

[mactoolsix]

From Pub 946

Changing Your Accounting Method

Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns.

http://www.irs.gov/publications/p946/ch01.html#en_US_2012_publink1000107388

Seems pretty clear that a form 3115 is in order - of course the problem is you'll most likely end up with a huge depreciation amount for the current year - more than the T/P can use - guess it will just increase the suspended losses.

Mike

[DexEA]

That throws away 18 years of depreciation!

And when/if sells the property depreciation allowed or allowable comes into play - so that could add up. As Mactoolsix stated, seems pretty clear that a form 3115 is in order.

[Gary2]

Changing Your Accounting Method

Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

A change from an impermissible method of determining depreciation for depreciable property, if the impermissible method was used in two or more consecutively filed tax returns.

http://www.irs.gov/publications/p946/ch01.html#en_US_2012_publink1000107388

Seems pretty clear that a form 3115 is in order - of course the problem is you'll most likely end up with a huge depreciation amount for the current year - more than the T/P can use - guess it will just increase the suspended losses.

Once a permissible method is established, it's not clear that subsequent errors create an impermissible method, as opposed to a math or posting error. Merely using the wrong basis after the husband passed away in 1992 is not an impermissible method, as far as I know. Nor have I seen any place where the IRS addresses something that might seem to be an unapproved change from a permissible to impermissible method (e.g., the predictably common case of someone who gets their rental done correctly by a professional for a few years, then does it themselves omitting depreciation entirely).

What I do see, also in Pub. 946, a few paragraphs above the link you provided, is "You can file an amended return to correct the amount of depreciation claimed ... mathematical error ... posting error ... You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003." This would seem to apply in this case, and lean towards an amendment rather than a 3115.

However, I've never seen anything that says this case (for doing an amendment) is mutually exclusive with doing the 3115, so it's possible that there's a choice.

Finally, there's the question of whether this comes under one of the automatic change request rules or advance consent rules, with the latter requiring a user fee.

PS: In case it's not clear, I don't know for sure what the correct answer is. I just think the issues are more complicated than the simple "clearly 3115" conclusion.