Schedule E instructions, Separating out rentals

[AZ-Tax]

TP's previous preparer never separated out two individual residential rentals going back 15 years on Schedule E. Now TP would like separate them out. Do I need to amend Sch E going back to the first tax return the rentals were reported or do I begin in TY 2014?

[ATSMAN]

When you say two individual units, is it the same building and apartment A and B or separate building and address?

What is the reason for separating them now?

If you have to separate them for some reason, I think you can use form 3115 and go forward separate.

[AZ-Tax]

Answers

When you say two individual units, is it the same building and apartment A and B or separate building and address?

What is the reason for separating them now?

If you have to separate them for some reason, I think you can use form 3115 and go forward separate.

Two separated addresses about 2 miles from each other.

Reason for separating them now, common reason, TP was not aware previous preparer was not following Sch E instructions.

Other then not following Sch E instructions, what are some of the drawbacks for not separating these two rentals out? One that comes to mind is if the TP sells one of the rentals. What is that rentals cost basis for recapture purposes.

[Kram BergGold]

My first thought

Passive Loss grouping. Intentionally or unintentionally the two rentals have been grouped as one. See page 7-11 in TTB.

[Bees Knees]

Do I need to amend Sch E going back to the first tax return the rentals were reported or do I begin in TY 2014?

An amended return is filed when the tax liability changes. If all that happened was two units were combined into one, but income and expenses were otherwise correct, then there is no need to amend the returns.

If you want to separate the two units on Schedule E because that is what the instructions tell you, then simply just start doing it on the current year you are preparing. If IRS audits, and the correct tax liability has always been calculated, then no harm no foul. IRS can give you a lecture, but who cares. There is no penalty for calculating the correct tax liability.

And that is the way it is.

[Bees Knees]

If you have to separate them for some reason, I think you can use form 3115 and go forward separate.

Form 3115 is for a change in accounting method. I don't think providing greater detail on a tax return counts as a change in accounting method, assuming the correct tax liability has always been calculated and doesn't change with the separating of the two units.

[ATSMAN]

An amended return is filed when the tax liability changes. If all that happened was two units were combined into one, but income and expenses were otherwise correct, then there is no need to amend the returns.

If you want to separate the two units on Schedule E because that is what the instructions tell you, then simply just start doing it on the current year you are preparing. If IRS audits, and the correct tax liability has always been calculated, then no harm no foul. IRS can give you a lecture, but who cares. There is no penalty for calculating the correct tax liability.

And that is the way it is.

A timely filed 3115 may prevent you from being lectured by the IRS??

[Lion]

Do you need IRS permission to ungroup? That's probably a 3115 request. Did your client benefit by the grouping, such as qualifying as a RE professional?

[AZ-Tax]

No benefit to regrouping

No benefit to regrouping but what if TP sells one of the rentals?

[ATSMAN]

No benefit to regrouping but what if TP sells one of the rentals?

They need to separate them out going forward for the purpose you just stated, otherwise it will be a real mess to sort out.

I guess there is some disagreement between professionals if a 3115 is required. Even if not required legally, what harm comes if one is filed? In my opinion it shows that the taxpayer realized there was an error, raised their hand, and corrected it prospectively. Self correction is always better than IRS forcing you to correct it!

[Bees Knees]

I guess there is some disagreement between professionals if a 3115 is required. Even if not required legally, what harm comes if one is filed?

I believe the 3115 is required to change an accounting method. An accounting method determines the timing and recognition of income and expenses. If the only issue here is combining income and expenses on Schedule E but not changing when and how income and expenses are recognized, then you don't have an accounting method change.

Its kind of like dumping all expenses on a Schedule C into the supplies category, when some of the expenses should be separated out and treated as repairs, advertising, membership fees, etc. As long as all of those expenses are currently deductible when incurred, you are not going to change the tax liability for any particular tax period by separating them out into separate categories.

IRS might tell you to separate out all the different categories of expenses on the tax return, but when push comes to shove in an audit, it isn't going to change the tax liability. Its not an accounting method change.

[Lion]

If the client made the election to group his rental activities, then when he can release suspended losses is determined by the entire group. If he now ungroups his rentals, when he can use a suspended loss is determined by the sale of that one individual property. Sounds like a timing issue to me. Other benefits of grouping and of ungrouping can occur based on his facts and circumstances. Don't you need IRS permission to ungroup? If so, don't you do that on 3115?

Does he qualify as a real estate professional with his properties and his time spent grouped?

Make your recommendations to your client on his whole situation. Not on what's easiest for your return preparation. And, do charge him for more complex return preparation! Charge him for researching this issue for him, also.

[AZ-Tax]

Not real estate professionl

Does he qualify as a real estate professional with his properties and his time spent grouped?.

Not real estate professional