Rental Depreciation without Rental Income or Expenses?

[TaxGuyBill]

Pub 527 lists one of the requirements of being able to depreciate rental property as: "You use the property in your business or income-producing activity (such as rental property)."

It doesn't sound like she ever did, so I would say no to allowed or allowable. Since she never used it for income production, why can't she just report on D rather than 4797?

I agree.

...........

[kathyc2]

Would it make a difference on her basis if she was on the mortgage or not? If she was not liable for mortgage, it would seem logical that her basis would be her down payment, rather than 1/2 the house. I don't know if anything in the code would support that position or not, but it seems logical.....

[kathyc2]

Poster substantiates he has closing documents, 1099-S to his client, that she received half the proceeds, and stated in the OP "he depreciated his share of the condo." Not sure how he knows that is what "Steve" did without looking as his tax returns, but she definitely must report the net proceeds, and gain on the sale assuming it is a gain. Since it is reported on 4797, I don't see how she can get past the "allowed or allowable" depreciation question. Steve probably had a net loss every year due to the expenses and depreciation taken. So he came out well by keeping all the income and only taking half of the depreciation, if that is what happened.

Pub 527 lists one of the requirements of being able to depreciate rental property as: "You use the property in your business or income-producing activity (such as rental property)."

It doesn't sound like she ever did, so I would say no to allowed or allowable. Since she never used it for income production, why can't she just report on D rather than 4797?

[Burke]

Poster substantiates he has closing documents, 1099-S to his client, that she received half the proceeds, and stated in the OP "he depreciated his share of the condo." Not sure how he knows that is what "Steve" did without looking as his tax returns, but she definitely must report the net proceeds, and gain on the sale assuming it is a gain. Since it is reported on 4797, I don't see how she can get past the "allowed or allowable" depreciation question. Steve probably had a net loss every year due to the expenses and depreciation taken. So he came out well by keeping all the income and only taking half of the depreciation, if that is what happened.

[Rapid Robert]

The posts you reference are very understandable. The reply posters suggest important information a tax professional may ask a client in doing their "due diligence" to
get the necessary information from the potential client to make an informed position on how to/not to proceed with the engagement.

Please re-read what I wrote. I didn't suggest not interviewing the client, and not performing due diligence. What I said was, don't bother asking Steve anything. He's not your client, there are no married filing status returns involved, what he says is not going to support a position taken on the return, and I think we've read in subsequent postings that taxpayer has no contact with Steve anyway. And even if she did, how is her hear-say info about what Steve may or may not have included in his returns reliable? It's not like Steve is signing the return.

Would you really sign a return with a position based on hear-say from some unrelated taxpayer?

[Kram BergGold]

My approach to this kind of Situation

Years ago a couple, new clients, scammed me into reporting the sale of their house as a single family. I totally believe that it was a multiple family house. After that experience I decided never to take a new client who sold real estate in the year they came to me.
I suggest you do as I do and walk away from this client.

[TAXNJ]

This, and similar from Lion, is the only one of several suggestions made in this thread that I don't understand.

Steve might not be willing, or reliable, as a source of info. How much time and effort will be involved? And for whose benefit? Do you think in an audit that the IRS is going to rely primarily on what the taxpayer says Steve did? Not to mention the need for at least one Sec 7261 consent to be signed.

The taxpayer (and preparer) are going to have to take a position on the return. If a large amount of gain is in question, take the extra precaution of disclosing the position via Form 8275. But I don't see any net gain from dragging Steve into it, unless Steve himself thinks there is a benefit to him (for example, if he thinks he should be amending or filing 3115).

The posts you reference are very understandable. The reply posters suggest important information a tax professional may ask a client in doing their "due diligence" to get the necessary information from the potential client to make an informed position on how to/not to proceed with the engagement.

So to the other reply posters good suggestions.

[Rapid Robert]

you need to know how "Steve" filed his tax returns. Did he claim 100% rental and use 100% rental depreciation. it looks like he claimed all income & expense, why not all depreciation?

This, and similar from Lion, is the only one of several suggestions made in this thread that I don't understand.

Steve might not be willing, or reliable, as a source of info. How much time and effort will be involved? And for whose benefit? Do you think in an audit that the IRS is going to rely primarily on what the taxpayer says Steve did? Not to mention the need for at least one Sec 7261 consent to be signed.

The taxpayer (and preparer) are going to have to take a position on the return. If a large amount of gain is in question, take the extra precaution of disclosing the position via Form 8275. But I don't see any net gain from dragging Steve into it, unless Steve himself thinks there is a benefit to him (for example, if he thinks he should be amending or filing 3115).

[CAErinB]

Get a copy of the purchase and sale HUD-1. The escrow company for the sale could answer several questions. Did Sara sign any papers for the purchase or the sale? Did she get 50% of the sale proceeds? What do the title docs say?

I have a copy of the closing docs. What should I look for?

[taxea]

Get a copy of the purchase and sale HUD-1. The escrow company for the sale could answer several questions. Did Sara sign any papers for the purchase or the sale? Did she get 50% of the sale proceeds? What do the title docs say?

[TAXNJ]

No source. Silent investor, didn't share income expenses.

Sticking with my answer

Chris

Would a ”Silent investor” share in the Income & Expenses ? Or was the ”Silent investor's” share contribution a Loan?

Think the Original Poster has limited information with this scenario and raises some concerns to make an informed decision. Based on that, think reply poster LION’S post is very important to consider.

[spanel]

Ask the reply poster what source the reply poster's suggestion is based on?

No source. Silent investor, didn't share income expenses.

Sticking with my answer

Chris

[TAXNJ]

Yes, Sarah received her portion of the sale proceeds.

So, treat it as an investment property, with no basis reduction for depreciation allowed or allowable?

Ask the reply poster what source the reply poster's suggestion is based on?

[CAErinB]

Yes, Sarah received her portion of the sale proceeds.

So, treat it as an investment property, with no basis reduction for depreciation allowed or allowable?

[spanel]

Sarah has received none of the income from the rental and has paid none of the expenses over the past 10 years.

This rental activity was not a business arrangement, nor was it the original plan. There is no partnership agreement nor any other documentation of the situation. Sarah and Steve were dating, and purchased the condo intending to move in together, but they split up before that ever happened. Sarah and Steve do not communicate at all anymore.

Sarah received a form 1099-S for her share of the sale proceeds, so I believe I can count that as confirmation that she was, in fact, listed on the title.

Did she receive the money shown on the 1099s?

If yes, I would treat it as an investment property and her cost is what she paid for it originally.

Chris