Depreciation - Rental Real Estate Expenses?

[Arundel66]

Hello, I am trying to understand what Alternative Minimum Tax Depreciation and ACE Depreciation mean.

On the tax return forms for an apartment building my family might inherit, under "Real Estate Expenses," the current owners listed typical costs (taxes, repairs, insurance, etc) as well as a separate large sum under "Other" referring you to a separate statement.

That statement is subtitled 2013 Alternative Minimum Tax Depreciation and 2013 ACE Depreciation. I hope to understand whether the sums on these documents represent costs that the apartment build actually paid out, or whether they just represent a loss in property value that the owners were able to write off?

Many thanks.

 

[ColinCPA]

Nope, it has nothing to do with that.

On an individual return, Alternative Minimum Tax (AMT) can be assessed to certain taxpayers over a certain alternative minimum taxable income threshold if your AMT liability exceeds your regular tax liability. Your AMT income is composed of your regular taxable income plus or minus certain adjustments required by AMT provisions.

One of these common adjustments results from depreciation differences between AMT and regular tax. For instance, under regular tax rules, depreciable assets in your property can typically be depreciated under 200 declining balance MACRS, whereas under AMT, the depreciation is a slower 150 declining balance MACRS life. This requires an adjustment to increase your alternative minimum taxable income. It will only result in an actual AMT liability under certain conditions based on your AGI level and if your AMT liability exceeds your regular tax liability.

No idea why there is ACE depreciation in there. This only applies to C-corporations, and I don't recall situations where you'd ever have that in a rental property.

 

[Arundel66]

Thank you so much for your reply. I'm delighted to have feedback, although I'm afraid my lack of accountancy knowledge has still left me a little unclear after several readings of it!
To simplify it, does the total amount the filers wrote off as "expenses" on the AMT Depreciation and ACE Depreciation forms represent funds/cash/taxes that they had to pay out of pocket? I don't know whether they are a C-corporation. They own the apartment buildings as well as the company that manages the apartments. My family owns the land they sit on, and might come to own the apartments due to breach of contract. We are just trying to understand how profitable the apartments might be based on the tax forms the owners provided us. These funds represent nearly half the total revenue, so we want to understand whether they are a true out-of-pocket cost.
Sorry to have to ask you to simplify it. Does this make sense?

 

[ColinCPA]

Sorry, didn't mean to confuse you with tax terminology, just wanted to attempt to give the overall concept of what AMT is and why it's there. The AMT is a tax concept, not an accounting one. It doesn't have any bearing on the cash expenses, other than affecting what you might pay in taxes on the income.

What tax forms are you referring to? Are we talking about Form 1120, 1120S, or 1065? Where are the expenses reported, on page 1 of the return or on a Form 8825? Do you see an amount for "Post-1986 depreciation adjustment" on Schedule K?

Any depreciation that was taken by the entity is reported on Form 4562, filed with the return. Depreciation isn't a cash expense, but a write off of the cost of assets that could have been either purchased and wrote off in this period or previously purchased with a gradual write off (depreciated). I don't have enough details to know that here.

That's weird that they reported it that way in the "Other" expenses section. Depreciation doesn't really go there, and I've never seen any reference to AMT appear on a statement like that. But I wouldn't focus on the AMT/ACE part of it, since as I said it has nothing to do with the cash expenses or profit.

 

[Arundel66]

Hi Colin, no, I appreciate the explanation! I was sort of following until MACRS came into it.

It's Form 1065. The expenses are reported on 8825. Under "Real Estate Expenses,15. Other" they wrote "SEE STATEMENT" 560,000. That aligns with the total sums on the AMT Depreciation and ACE Depreciation Forms. Next to "Post-1986 depreciation adjustment" on Schedule K it says "SEE STATEMENT 1" and says 406.

Sorry, I'm sure this is tricky without looking at the forms!

 

[ColinCPA]

So it's a partnership. The ACE is irrelevant, it was probably just put there by the tax software or something.

Wow, that's a high sounding number for depreciation. Kinda weird, as it makes me think they took Section 179 on the property, which usually isn't allowed for rentals. Out of curiousity, if you look on Schedule K of the return, do you see $500,000 on Line 12?

Is there any amount on Line 14 of Form 8825? That's where depreciation should go, but it sounds like it was just plugged into "Other" expenses for some reason. Bu this is just the amount that was deducted against income. On the forms you are talking about, do they give you a number for acquisitions? This might tell you what they actually spent in cash on fixed assets.

If your goal is to see how profitable this is, look at Schedule L/M-1/M-2. Is there postive capital for the partners? Is there a lot of debt? That should help answer some questions.

 

[Arundel66]

Hmm no there's nothing on line 12 on statement K. Yeah the $560,000 seems like a huge sum. Its only 100K less than the entire rest of the extenses listed. As a result, the annual profit appears to be very low. The tax forms were sent to us as a warning that we shouldn't pursue their contact breach as we might end up with the apartments and they would be a "financial drain." We've learned that was a bluff and they're now looking to negotiate to avoid a suit. I wondered whether they filed a certain way that would hide their true profit (to the untrained eye).

 

[Arundel66]

Sorry I didn't mean to send so soon. Line 14 only says 5,655. I don't see acquisitions mentioned anywhere on those forms.

On L and M1 the profit is positive but low for what the revenue is. 60K. M2 accounts have a healthy positive sum. I'll see if I can send a picture of one of the forms to show an example of an item.

Also, thank you again for taking the time to help me with these. Don't feel like you have to keep responding if it's dragging on! It's very kind of you to help.

 

[Arundel66]

The image attachment might not work. Here's something itemized:

Roof , 12/01/87, (AMT Basis for deprec.) *17,979 (AMT accumulated depreciation) *2,245 S/L, MM, (AMT life) 40.000 (AMT depreciation deduction) 449 (regular depreciation) 654, (post 86) 205

The figures I've places asterisks by when risked throughout the itemized list add up to equate the $565,000 expense write off.

 

[Arundel66]

Risked meant to say totaled

 

[ColinCPA]

Hmm, couldn't see the image but there must be something else going on. That kind of number reported under the "Other" expenses section is unusual. If that number represents the depreciable basis of the property, and not the depreciation allowance, I'm thinking maybe the assets were disposed in a loss. But a loss on sale wouldn't be reported as an expense on the 8825, so nothing about this makes sense to me unfortunately, at least without looking at the actual return and getting more information about what happened. It's a big write off though and likely is distorting your picture of how profitable the entity is.

 

[Arundel66]

Okay. Thank you so much for processing it with me. I'm not sure how things will play out here but it's helpful to hear that it might be skewing the picture of how profitable it is. If I learn, I'll let you know! Thanks again, very kind of you to offer your time.