Rental sold, dep'n not taken

[Possi]

I'm just going to lay this out and see if anyone can help me unravel this new client's rat's nest.

Lived in home until August 2000 when they moved to another state and began renting it.
Paid 106,000 and began depreciation with a basis of 58,520. (I guess the balance was land, I don't know. Wait, it gets better.)

In '01, '02, '03 and '04 they took no depreciation. Except for 660 basis in gutters which were dep'd in 02 and 03 for a total of $47. (But I really don't care about that one!)

'05 a new dep'n schedule was begun with a basis of $107,000. They took 3891 in depreciation. (It gets better.)

'06 dep'n of $3891 was taken, but no loss was realized, form 8582 was used as passive loss. (They actively participated and should have taken the loss.)

In June of '06 the tenant moved out and the owners decided not to rent anymore, but to sell the property. It stayed on the market over a year and they sold it in Sept '07.

Since it was not rental property at the time of the sale, and had not been rental property for over a year, the sale will go on a Sch D as sale of residence.

Recapture of depreciation ALLOWED must be entered as gain. I can re-create the depreciation schedule using the original basis, no problem there.

Is there any way other than amending returns, to get that depreciation not taken, from prior years?

Could I amend just the 2006 return and capture the depreciation not taken in prior years, on that return? (It was only rented for 5 months that year.) If so, do I force the depreciation amount?

I'm glad "I've got people!" See, I read the board... a lot...

Thanks for any help.

~1 tired possi

[Gretel]

File form 3115 for depreciation catch up (automatic approval).

I think sale of house is as rental. They haven't occupied house since 2000, have they? So why would you want to treat as personal residence?

[veritas]

Form 3115

Is used to effect an accounting method change.

At first blush it would seem the method chosen originally was correct. From then on I would think you are dealing with math posting errors. I would amend the open years.

At the time of disposition I would use Rev. proc. 2004-11 to pickup the omitted depreciation.

The eventual sale will go on form 4797.

[Possi]

omitted depreciation

Is used to effect an accounting method change.

At first blush it would seem the method chosen originally was correct. From then on I would think you are dealing with math posting errors. I would amend the open years.

At the time of disposition I would use Rev. proc. 2004-11 to pickup the omitted depreciation.

The eventual sale will go on form 4797.

I'll amend the open years.

Even though the house was not available for rent from 06-2000 to the time of sale, would I still use the Sch E rental property for expenses like interest, taxes and insurance, and link to the 4797 from there?

I went to the IRS website and read the Rev. proc 204-11 but do not know how to implement this. Where exactly will the omitted dep'n go?

Thanks, I feel like I'm almost "there" on this one.

[solomon]

Also check the more recent Rev. Proc. 2007-16.

[veritas]

I'll amend the open years.

Even though the house was not available for rent from 06-2000 to the time of sale, would I still use the Sch E rental property for expenses like interest, taxes and insurance, and link to the 4797 from there?

I went to the IRS website and read the Rev. proc 204-11 but do not know how to implement this. Where exactly will the omitted dep'n go?

Thanks, I feel like I'm almost "there" on this one.

"Lived in home until August 2000 when they moved to another state and began renting it.
Paid 106,000 and began depreciation with a basis of 58,520"

I'm confused now. You originally said it was rented starting in August 2000 and then you said it was not available for rent until sold?

[Burke]

File form 3115 for depreciation catch up (automatic approval).

I think sale of house is as rental. They haven't occupied house since 2000, have they? So why would you want to treat as personal residence?

Gabrielle is right on this one. You don't need to amend the open years, you can get the undeducted depr on 3115 now, and treat it all in the year of sale. It is not a sale of a residence. It is a sale of rental property, regardless of whether it was empty when it was sold.

[veritas]

It looks to me

that you can use form 3115 in the year of disposition.

Rev. Proc. 2007-16 (Thank you Solomon for the update)

This may be better in the long run. It gives you the advantage of taking the depreciation in the year of sale where presumably there is more income.

[Possi]

It's nice to have people!

Sometimes I feel like my questions are not good ones. Then I think someone else out there might have the same problem, so I post it.
Thank you for the "chatter" and most of all for solutions!
I've got people!

~possi