sold rental house - wrong depreciation taken

[oceanlovin'ea]

Client purchased rental house in 2002. Prior preparer depreciated the house over 10 years....5,000 per year for 10 years. Client sold rental house in 2015. $50,000.00 of depreciation was allowed on returns through the years. Do I just put that down as the depreciation? or do I have to refigure what the depreciation should have been and go from there? If I do have to refigure, where do I go from there???

Linda, EA

[TaxGuyBill]

Wow, that's a sticky mess.


The "proper" way would probably to recommend filing Form 3115 to correct that past depreciation.

If that doesn't happen, report the full amount of depreciation that was actually taken.

[mactoolsix]

Sounds like the allowed part of "allowed or allowable."

Since the early years were closed without change, it was allowed.

[taxea]

what is the difference in the allowable (if done correctly) and the depreciation taken? I would make an adjustment in the year sold with a detailed calculation Statement of Facts attached to the return and kept in the file in case the IRS questions the return.

[S T]

What should the depreciation have been based on 27.5 years - I believe I would calculate for my own records and also to advise the client and record retention.

I agree probably a 3115 if property had not been sold - might still be needed in year of sale not sure - however since the property has been sold, it is allowed or allowable so you would factor the amount of depreciation already stated to date in your calculation on the sale - I do believe

Sandy

[RitaB]

Well, now

Sounds like the allowed part of "allowed or allowable."

Since the early years were closed without change, it was allowed.

You can't argue with that.

[RitaB]

The correct depreciation

what is the difference in the allowable (if done correctly) and the depreciation taken?

The depreciation that should have been taken is about 36% of the cost. 10 years (time it has been used) divided by 27.5 years (class life).

[kathyc2]

Client purchased rental house in 2002. Prior preparer depreciated the house over 10 years....5,000 per year for 10 years. Client sold rental house in 2015. $50,000.00 of depreciation was allowed on returns through the years. Do I just put that down as the depreciation? or do I have to refigure what the depreciation should have been and go from there? If I do have to refigure, where do I go from there???

Linda, EA

Did the house sell for more or less than the original 50K cost?

[oceanlovin'ea]

Kathyc2, house sold for about $6000 more than the purchase price.

Sandy, correct amount of depreciation that should have been taken is around $21,000 as opposed to the amount that was taken. Really about 1/2 of what was taken. I do not want to have to go back and make any adjustments to the original returns. Taking too much depreciation was not the only "miscalculation" on these returns. They are closed years and need to stay that way. Old preparer has already been apprehended by IRS and won't be doing these things any more.

She will have a gain but it is a seller-financed installment sale. The profit will be divided out over 12 years that will take to pay back the loan.

Linda

[kathyc2]

Kathyc2, house sold for about $6000 more than the purchase price.

Sandy, correct amount of depreciation that should have been taken is around $21,000 as opposed to the amount that was taken. Really about 1/2 of what was taken. I do not want to have to go back and make any adjustments to the original returns. Taking too much depreciation was not the only "miscalculation" on these returns. They are closed years and need to stay that way. Old preparer has already been apprehended by IRS and won't be doing these things any more.

She will have a gain but it is a seller-financed installment sale. The profit will be divided out over 12 years that will take to pay back the loan.

Linda

So, they took 29K too much depreciation in prior years but will now need to count that as income through recapture in subsequent years. Sounds to me like it's more of a timing issue than anything else. While not technically correct, I'd just go w/ 0 basis and 50K recapture and move on.

[taxea]

figure the depreciation that was allowed by doing an asset entry worksheet using the year the rental started. Enter prior depreciation taken and make any necessary adjustments on the sales form. F3115 is not needed because their is no change in the cash/accrued issue.