Rental Property - no depreciation claimed

[nkustura]

I have a client who had been preparing his own return for the past few years. In 2013 he sold rental property and wanted to have a professional to his taxes. I noticed that depreciation on rental property wasn't claimed in prior years. Do I need to do form 3115, or should I just not adjust the basis for allowable depreciation on form 4797? In other words do I leave Depreciation Allowed or Allowable blank on the 4797 Sale of Assets form?
Any help will be greatly appreciated.
Thanks.

[JON]

Your not

giving a lot of information, but I think the 3115 is what is needed - allowed or allowable has to be the reason and nthe 1250 recaputure ahsa to be done non the sale...

[nkustura]

I have a client who had been preparing his own return for the past few years. In 2013 he sold rental property and wanted to have a professional to his taxes. I noticed that depreciation on rental property wasn't claimed in prior years. Do I need to do form 3115, or should I just not adjust the basis for allowable depreciation on form 4797? In other words do I leave Depreciation Allowed or Allowable blank on the 4797 Sale of Assets form?
Any help will be greatly appreciated.
Thanks.

The more I read on this, it seems like I we should file form 3115. In addition to depreciation issue, client spend approximately $11k on fixing up the rental property before the sale. This includes new carpet, paint, heating unit, appliances, tiles, cabinets, etc. All of this was done in 2013 (the same year the property was sold). How will this $11k be classified on tax return? I am thinking it could possibly be cost of sale, since there can't be any depreciation as these items hadn't been in-service for more than a year (same year purchase as the sale). Any thoughts?

[nkustura]

Form 3115

Does anyone know if the form 3115 can be filed to include missed depreciation if the year of change is the same year the property was sold?

[mastertaxguy]

To be form 3315 or not to be: Is it an Amended Return or just 4797 Recapture?

1. TTB 9-20, right column, heading "Correcting Depreciation" indicates that an amended return can be used to pick up incorrect or missing depreciation. the "Did You Know" box suggests that an incorret method of depreciation for more than 2 years requires form 3115. Nor taking depreciation is NOT an incorrect method of depreciation.
2. Perhaps what one could do is compute the amount of depreciation to recapture on the 4797 (think this is the right form), and then amend the 3 opens years to recoup some overpayments.
3. At the end of the day, the result is going to be pretty much the same: depreciation recapture for allowable depreciation over the life of the property.
4. Sounds like the addition costs might be treated as repairs, or added to basis: I would take them as repairs.
5. Others I am sure have different views.
6. I have had to do this at least once a year (for clients not me) since 2000 (pick up missing depreciation). When I have had to use (for my clients of course, only a few since 2000) form 3115 more often than not it is due to either incorrect tax basis and secondly, an incorrect depreciation method (39.5 years vs. 27.5, etc).

[taxea]

1st determine when the rental was put into service and the actual depreciation at that time. To do this properly I would amend the returns up to 10 years back including any other errors he made have made each year. This way you will have properly corrected all returns and the 2013 return with the sale will be accurate. He will not receive any refund for prior to 3 years but if you don't amend all the way back (up to 10 years) the IRS is likely to question those returns. Get a retainer before preparation.
I also recommend a POA so you can contact the IRS and ask them to put a note on each return that summarizes what action you are taking.

[Burke]

I thought that was why the 3115 was invented. To avoid going back all those years. Can you imagine the IRS having to deal with those old returns which only generate refunds, now out of the statutory period, and which won't be sent?

[mastertaxguy]

I thought that was why the 3115 was invented. To avoid going back all those years. Can you imagine the IRS having to deal with those old returns which only generate refunds, now out of the statutory period, and which won't be sent?

TP does not file old returns for unopened years. Only the last three in most cases (depending on state depreciation rules) are filed and that to get a refund based on some of the allowable depreciation for the 3 past years (one return at a time). In the year of sale, which I gather from the original question was 2013, all depreciation which could have been taken (allowable) is recovered according the usual rules.

A properly entered/computed depreciation schedule on your software should compute cummulative depreciation for the prior years to put on the 4797.

The Section 481 adjustment, when Form 3115 is used, as noted P 9-20 of TTB is taken in the year the 3115 is submitted if negative, or over 4 years if positive.

Full Disclosure: I see the CCH MTG, Para. 1223 (p. 453, lower half of page) suggests a different approach which is to file 3115 and claim all of allowable depreciation (last 3 years). I have not done that, preferring the amended return route (usually because of other overlooked deductions, incorrect basis to begin with or basis adjustments along the way). See also REv. Proc 2007-16. I suppose that if there are no other changes for the open years' returns, the 3115 approach will suffice.

[TaxGuyBill]

TP does not file old returns for unopened years. Only the last three in most cases (depending on state depreciation rules) are filed and that to get a refund based on some of the allowable depreciation for the 3 past years (one return at a time). In the year of sale, which I gather from the original question was 2013, all depreciation which could have been taken (allowable) is recovered according the usual rules.

I think I am misunderstanding what you are saying, but DON'T amend open prior years AND file Form 3115 for closed years.

Form 3115 only applies if the previous two years were incorrect (your first point from TTB in your first post). If you amend them, that MIGHT mess things up.

"(i) for which the taxpayer used the impermissible method of accounting in at least two taxable years immediately preceding the year of change (but see section 6.01(1)(b) of this APPENDIX for property placed in service in the taxable year immediately preceding the year of change);"

http://www.irs.gov/irb/2011-04_IRB/ar08.html#d0e2804

For disposed property, I think you use change #107 on Line 1 of Form 3115.



Some of the other expenses (heating unit, tile, cabinets, etc.) could be improvements, which could be added to the basis.

[Gary2]

1. TTB 9-20, right column, heading "Correcting Depreciation" indicates that an amended return can be used to pick up incorrect or missing depreciation. the "Did You Know" box suggests that an incorret method of depreciation for more than 2 years requires form 3115. Nor taking depreciation is NOT an incorrect method of depreciation.

That page of the TTB does not say that "Not taking depreciation is not an incorrect method of depreciation." In fact, the very first entry on the right side of the little table (the "use 3115" side) says "Change in treatment of an asset from depreciable to non-depreciable or vice versa."