Unreported Rental

[Brian EA]

Taxpayer has a 10-family Rental property. The last time the rental was reported was in 2016. In January of 2022, taxpayer made a 1031 exchange.
I will need to go back and amend the returns for those years. Is there any other way to correct this situation?
Thanks
Brian

[Beersheba]

If they were all family members, they may have thought (or been told) they couldn't report because of being related taxpayers.

One possible solution is to calculate the "depreciable" amount that should have been reported, and use this for your 1031 exchange calculations.

[Brian EA]

Thanks for your response
Because the statute of limitation expired on the closed years, any overpayment available will not be refunded, however wouldn't it be a better to amend the open years and claim the refunds?
Maybe on the last open year I can recalculate the depreciation and bring it up to date to the 2021 return. (2018 will be closed in a few days)
I figure the IRS may get hiccups trying to figure out what happened.
What are your views?
Very much appreciated
Brian

[ATSMAN]

Start with the 2018 tax return. You only got till Monday! then work forward.

So they can't claim any refund on 2017. If you did the figures for 2017 with the rental income would they still get a refund or would it be a balance due?

[kathyc2]

They knew they were receiving rent and chose to disregard reporting it for several years. Since they effectively lied all these years, I wouldn't believe their truthfulness that they now are giving your the full rent receipt amounts.

[Brian EA]

They moved to a different city and according to the taxpayer, who had a serious health problem with no medical insurance, the new preparer qualified them for the Obamacare Health Insurance. So, the rental portion of the return was omitted. It does not make much sense to me, because if it's a loss they would qualify for the health program based on their income.
In order to bring the depreciation up to date and avoiding filing Form 3115, I will have to amend returns from the closed years whether they indicate a refund or a balance due. This way, all income/expenses will be reported, and I can then prepare for the 1031 exchange next year.
No Family members were involved in the rentals
Any thoughts or suggestions?
Thanks
Brian

[Lion]

Cannot amend to correct depreciation after two years. Form 3115.

[TaxGuyBill]

Assuming depreciation was reported from the start of the rental, amending can also correct the depreciation.

Amending is really the only option to correct the situation. But if the losses were minor, you may want to determine if the cost of amending would outweigh the tax benefits.

If their are Passive Losses that would NOT be allowed in 'closed' years, I would still amend to show that loss so you can prove the Passive Loss carryforward.

[Anarchrist]

At first reading I assumed the rental was profitable. But everyone is talking about losses. If their were passive losses, do as Bill suggests and amend to calculate the passive loss carryforward or just calculate the passive loss carryforward for the closed years and only amend the open.

[Beersheba]

I still believe the "depreciable" doctrine applies to all those years, whether reported or not, or even if it is too late to report.

[Lion]

Yes, allowed or allowable. So, use Form 3115 to catch up on depreciation deductions, because you will use the allowed or allowable depreciation to reduce the basis, increase the profit, increase the tax.

[TaxGuyBill]

So, use Form 3115 to catch up on depreciation deductions, .

Assuming that depreciation was properly taken in the first year, you can't use 3115 now. They already established their correct Accounting Method and their mistakes afterwards does not change that. So amending is the only way to correct the depreciation (and the other omissions).

[Lion]

No kidding? I knew about "using an impermissible method for two years establishing a method." They did use a permissible method for one year, so that established their method, then? Are they then stuck with amending only open years for any benefit? Or, can they amend, creating carry forwards? (I don't have any clients with rentals now, but this sounds common enough with DIY and people changing preparers, that it'll be good to know -- or at least to know that I'll need to look it up when I come across it.)

[TaxGuyBill]

Yes. I had previously thought that doing it wrong for two year would then undo the correct method (and therefore 3115 would be allowed), but a recent discussion pointed to some official guidance that basically said that once an Accounting Method is established, the ONLY way to change it is by 3115 (so therefore doing it wrong for 2+ years AFTER it was already done correctly would NOT change anything .. you are still stuck with the original).

Oddly enough, it would work the other way too. If you started off with not claiming depreciation for two years, then later someone started to claim depreciation, the tax returns that claimed the depreciation would be WRONG because they did not file 3115 to change their method. In that scenario, you technically would need to amend to remove the depreciation, then use 3115 in the current year to claim it.

[Brian EA]

let's say there is a balance due in one of the previous years, the 3115 would not fix that. Amending the return will therefore need to be done. At the same time the depreciation would be corrected.
Any thoughts?