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    #1

    Residential Rental.

    This one is definitely a nightmare.
    In 2016 Tax preparer combined the self-employed income with the rental income and put it all on Schedule C. The 2015 return was done correctly. There was no depreciation in 2016 because the building was fully depreciated in 2015.
    In 2017 the original preparer referred his client to one of his buddies claiming that the return was beyond the scope of his knowledge. The new preparer completely left out Schedule E from 2017 to 2020.
    At the end of 2021, Taxpayer did a 1031 exchange- 10 family commercial building for 2 rental buildings. The transactions were completed in January of 2022.
    Would it be a good idea to amend all the years even though 2016 to 2018 are closed years?
    Because of no depreciation the bottom line shows a profit which means that the taxpayer would have a tax lability for all the years.
    Any suggestions and or advice would be welcome
    Thanks
    Brian.
    Everybody should pay his income tax with a smile. I tried it, but they wanted cash
    Tags: None
    #2
    Form 3115.

    Comment

      #3
      Originally posted by Brian EA View Post
      The 2015 return was done correctly. There was no depreciation in 2016 because the building was fully depreciated in 2015.

      Would it be a good idea to amend all the years even though 2016 to 2018 are closed years?
      Because of no depreciation the bottom line shows a profit which means that the taxpayer would have a tax liability for all the years.

      No improvements that are being depreciated? Or did they just deduct the full cost in prior years?

      I don't see any reason to amend closed years.

      Comment

        #4
        Full cost was depreciated in prior years. 2015 was the last year.
        Everybody should pay his income tax with a smile. I tried it, but they wanted cash

        Comment

          #5
          Wait a minute. You said "Because of no depreciation the bottom line shows a profit which means that the taxpayer would have a tax lability for all the years." Do you really mean that there was no depreciation because there was no depreciation, with the building depreciated down to zero on the books and return and no other depreciable assets with any depreciation left? Is that your point, your question?

          Or, are you asking about not reporting rental income from 2017 to 2020 and maybe 2021? If your client didn't report a rental activity for all those years, I'd amend any years he was my client. If he wasn't your client for some/all of those years, your obligation is to explain to him what is wrong and the consequences of not fixing it.

          Not to mention if you want a client who failed to report a rental activity for years! What else did he, will he do to NOT report income to you?

          Comment

            #6
            Makes me wonder how much of this mess is because the client had a terrible tax preparer for a few years and how much of it is because the client was not able to properly communicate with the preparer regarding what income was rental and what income was self-employed from other sources.

            I am also very confused about the depreciation. The building was fully depreciated in 2015 meaning it had been 27.5 years? I do have clients who have owned the same rental for decades, since the 80s, so there is no more depreciation.

            Comment

              #7
              Originally posted by Lion View Post
              Wait a minute. You said "Because of no depreciation the bottom line shows a profit which means that the taxpayer would have a tax lability for all the years." Do you really mean that there was no depreciation because there was no depreciation, with the building depreciated down to zero on the books and return and no other depreciable assets with any depreciation left? Is that your point, your question?

              Or, are you asking about not reporting rental income from 2017 to 2020 and maybe 2021? If your client didn't report a rental activity for all those years, I'd amend any years he was my client. If he wasn't your client for some/all of those years, your obligation is to explain to him what is wrong and the consequences of not fixing it.

              Not to mention if you want a client who failed to report a rental activity for years! What else did he, will he do to NOT report income to you?
              No rental income was reported from 2016 to 2020. The tax preparer combined the self employed income and the rental income in 2016 and omitted the depreciation schedule.
              In 2017 he had a new tax preparer who had no idea of the rental. He just reported the self-employed income.
              The building was purchased in 1988 and fully depreciated in 2015.
              I was working on the amendment for 2016. Taxpayer will definitely have tax liabilities for all the years and to top it off he had Obamacare where the premiums are based on income. This will definitely increase the tax liability
              There is nothing to depreciate.
              As of this morning, I am waiting on the taxpayer for the rental income and expenses for 2017. I told him he can take a week to work on one year then we move on to the next year. This way, hopefully he would not feel the pressure.
              Now the big question; what is my best option?. Form 3115 is not applicable because there is no depreciation. I just need to carry forward the depreciation schedule until 2021 when the building is sold -- 1031 exchange that was completed in 2022..
              Everybody should pay his income tax with a smile. I tried it, but they wanted cash

              Comment

                #8
                I am giving it a final shot and I would appreciate if the great folks on this Forum will give me some good advice.
                2015 tax return was done perfectly. Rental income and expenses were reported, and it was the final year of depreciation for the rental building.
                The tax preparer who prepared the 2015 return also prepared the 2016 return, however he combined the rental income with self-employed income and did not carry forward the depreciation schedule.
                The taxpayer moved at the end of 2016. His previous preparer referred one of his buddies who was closer to the taxpayer. Although the taxpayer claimed that he provided all necessary information to file the 2017 return the rental was still omitted. I would like to believe that because no rental was reported on the 2016 return, he figured there was no need to include it on the 2017 return.
                I have known the taxpayer for years, however because he lived very far from me, we never discussed taxes. He is an honest guy and he believed everything that his tax preparer told him.
                At the end of 2021 he sold the rental building; a 1031 exchange that was completed in 2022. He went back to his preparer to file the 2021 return. The tax preparer said that he is not qualified to prepare a 1031 exchange return. It was then that he contacted me.
                The only solution I can come up with is to amend all the returns from 2016 to 2020. Taxpayer knows that he will have a large tax liability including additional Obamacare premiums.
                Is there any other solution?
                Thanks for your advice
                Brian

                Everybody should pay his income tax with a smile. I tried it, but they wanted cash

                Comment

                  #9
                  What solution are you looking for?

                  You can prepare the 2021 return without doing anything to the prior years.

                  If the taxpayer wants to be honest and pay the tax he should have paid, yes, you can amend.

                  Personally, I would not bother to amend the 'closed' years. However, be aware that the older years may not necessary be 'closed' yet. If at least 25% of Gross Income (which includes rental income BEFORE deductions) was omitted, the Statute of Limitations for audit is 6 years, not 3 years.

                  Comment

                    #10
                    Was the rental income lumped in with sch C income for all the years from 2016-2020? If so the client paid SE tax on all that rental income, and amending would remove that tax liability, at least for 2018-2020. Did rental expenses also go on sch C? Insurance, property taxes, etc?

                    Comment

                      #11
                      Originally posted by TaxGuyBill View Post
                      What solution are you looking for?

                      You can prepare the 2021 return without doing anything to the prior years.

                      If the taxpayer wants to be honest and pay the tax he should have paid, yes, you can amend.

                      Personally, I would not bother to amend the 'closed' years. However, be aware that the older years may not necessary be 'closed' yet. If at least 25% of Gross Income (which includes rental income BEFORE deductions) was omitted, the Statute of Limitations for audit is 6 years, not 3 years.
                      Fully agree with what you are saying, however here is the problem. How can he sell a property that was previously rented and not on the previous tax return? Although the property was fully depreciated it had to be shown. It just cannot appear out of the blues. It would be great if I just have to file 2021 return but its not correct.
                      I use Drake software. Whenever a property is disposed it is done on the depreciation form, but there is nothing there.
                      That is the solution I am looking for.
                      Thanks TaxGuyBill
                      Brian
                      Everybody should pay his income tax with a smile. I tried it, but they wanted cash

                      Comment

                        #12
                        Just because previous tax returns erroneously did not show the rental does not change the fact that you can properly report the rental and sale on the 2021 tax return. As I said before, nothing requires you to amend previous returns in order to file a correct 2021 tax return. But you do need to advise the client of the error and potential penalties for not amending.

                        As for the depreciation worksheet in your software, you can still add it to the 2021 software so you can report the sale, but just show that it was fully depreciated by entering the prior depreciation.

                        Comment

                          #13
                          Originally posted by TaxGuyBill View Post
                          Just because previous tax returns erroneously did not show the rental does not change the fact that you can properly report the rental and sale on the 2021 tax return. As I said before, nothing requires you to amend previous returns in order to file a correct 2021 tax return. But you do need to advise the client of the error and potential penalties for not amending.

                          As for the depreciation worksheet in your software, you can still add it to the 2021 software so you can report the sale, but just show that it was fully depreciated by entering the prior depreciation.
                          Thanks TaxGuyBill

                          I think I will do just that. If and when they come after him, we will cross that bridge.

                          All the best
                          Brian.
                          Everybody should pay his income tax with a smile. I tried it, but they wanted cash

                          Comment

                            #14
                            I just wanted to comment because you mentioned the Obamacare Affordable Care Act credits. If he was under the 400% FPL without the rental income but over it with the rental income the consequences can be significant because all waived premiums must be repaid. If the rental income was truly combined in full with schedule C income it should be fine but based on the data you have it is not clear if the rent was fully accounted for and assuming the 20% QBI deduction was taken he would have to justify by proving 250 hours of service provide by him or the agent. After 2019 this must be documented.
                            "Dude, you are correct" Rapid Robert

                            Comment

                              #15
                              Originally posted by Dude View Post
                              I just wanted to comment because you mentioned the Obamacare Affordable Care Act credits. If he was under the 400% FPL without the rental income but over it with the rental income the consequences can be significant because all waived premiums must be repaid. If the rental income was truly combined in full with schedule C income it should be fine but based on the data you have it is not clear if the rent was fully accounted for and assuming the 20% QBI deduction was taken he would have to justify by proving 250 hours of service provide by him or the agent. After 2019 this must be documented.
                              2016 was the only year when the self-employed and rental incomes were combined. In 2017 to 2020 the rental income was not reported.
                              He will definitely have to repay some of the premiums
                              Thanks Brian
                              Everybody should pay his income tax with a smile. I tried it, but they wanted cash

                              Comment

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