Rental Depreciation without Rental Income or Expenses?

[CAErinB]

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.

[TaxGuyBill]

How was the title of ownership held? Did she actually own 50% (tenants in common) or was it held in Joint Tenancy?

[Lion]

Was it a partnership or joint venture or did Sarah just loan Steve funds for a downpayment? What does their operating agreement say about Sarah's percentage of income, loss, and capital? Is Steve's story the same as Sarah's? Did Steve report 100% of the sale or 50%? You're saying he depreciated only 50% of the condo, right? But, he reported 100% of the income and expenses and actually PAID 100% of the expenses and RECEIVED 100% of the income without sharing with Sarah? Did Steve share his Schedules E and depreciation schedules with Sarah? I would want to get the facts covering all the ownership years in writing from Sarah. Maybe, signed by Steve as agreeing that they were his understanding also. Do you really need this client? Will she return or just needs you for this sale year? I might send her to Steve's preparer!

[taxmom34]

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?

[spanel]

Did sara get 1/2 the rental income? Did she ever have to pay for any expenses? RE taxes, Insurance, Etc?

Chris

[CAErinB]

I have a new client this year (we’ll call her Sarah) who has always prepared her own return. I realized that Sarah was 50% owner of a condo that was purchased in 2006 and sold in 2016. Neither Sarah nor the other owner (we’ll call him Steve) ever personally used the residence, it has been rented for their entire period of ownership.

Sarah has never filed a Schedule E. Sarah says that Steve “always handled everything” and that Steve had reported the rental proceeds and expenses on his personal return.

But now the condo has been sold, and I believe Sarah is subject to depreciation recapture despite never having claimed depreciation.

Steve did depreciate his share of the condo.

Sarah’s cost basis is ~$50K; the accumulated depreciation after 10 years is almost $20K.

The obvious solution would be to file a Form 3115 with Sarah’s return, for the automatic change of accounting method from an impermissible method to a permissible one, and shield Sarah from the $20K in capital gain.

But, can Sarah file a Form 3115? The tax definition of depreciable property is “an asset used in a trade or business,” which the condo technically is, but one of the factors which disqualify an asset for depreciation is not currently making use of it to produce income.

Sarah has never declared any income or expenses associated with the rental.

So, my question is: Is Sarah’s half of the condo even depreciable property despite not being associated with any income or expenses on her return? Can a co-owned rental be depreciable for Steve but not for Sarah?