Incorrect depreciation and basis/ Form 3115??


T

thetaxdon

Client built his home himself and lived in it for a couple of
years. He next rented it for ten years and sold it in 2005.

Problem: He only put the mortgage amount ($200k) on the
depreciation schedule while his actual cost was $200k more.
Therefore, there is $73k allowable depreciation not taken.
I see no problem correcting the basis, but the allowable
depreciation will reduce his basis another $73k.

Will a depreciation correction adjustment (Section 481(a))
using form 3115 work in the year of sale? He is not
changing accounting methods, but is claiming a corrected
cost basis. My initial review of the instructions for
f3115 line 3 give me some pause.

If this would work, why couldn't one not take any
deprecation and take the adjustment on the sale year return?

Don in Colorado
 
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M

mmm

thetaxdon said:
Client built his home himself and lived in it for a couple of
years. He next rented it for ten years and sold it in 2005.

Problem: He only put the mortgage amount ($200k) on the
depreciation schedule while his actual cost was $200k more.
Therefore, there is $73k allowable depreciation not taken.
I see no problem correcting the basis, but the allowable
depreciation will reduce his basis another $73k.
yep. seems like the only mitigating option will be to file
amended returns for the last 3 years to claim the additional
depreciation

Will a depreciation correction adjustment (Section 481(a))
using form 3115 work in the year of sale? He is not
changing accounting methods, but is claiming a corrected
cost basis. My initial review of the instructions for
f3115 line 3 give me some pause.
you're correct, this is not a change in method of accounting
but rather correction of an error. no form 3115 or 481 adj
required or allowed.
If this would work, why couldn't one not take any
deprecation and take the adjustment on the sale year return?
the depreciable "allowable" is that part that would bite you
and works to prevent you from shifting deductions like this
(i.e., shift from the periods that depreciation should have


been taken to another year more to your liking).
 
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T

thetaxdon

I found this on the IRS site FAQs:

http://www.irs.gov/faqs/faq-kw42.html

11.4 Sale or Trade of Business, Depreciation, Rentals:
Sales, Trades, Exchanges

We are selling rental property and have never claimed
depreciation. What do we do about this when we file our
taxes? When reporting the sale of or computing gain or loss
on rental property, you are required to make an adjustment
to your basis for allowable depreciation regardless of
whether the deduction was taken. For more information refer
to Publication 544, Sales or Other Dispositions of Assets,
and the Form 4797 Instructions, Sales of Business Property.

You can claim the depreciation not taken for the rental
property in the years before the year of sale. How to do
this depends on when you placed in service the rental
property. If you placed in service the rental property
before calendar year 2003, you may amend your income tax
returns for the years before the year of the sale by using
Form 1040X (PDF), Amended U.S. Individual Income Tax Return,
to take the depreciation deductions for the rental property
that should have been taken. Or, you may file a Form 3115
(PDF), Application for Change in Accounting Method, to claim
the depreciation for the rental property that should have
been taken for the years before the year of the sale. The
Form 3115 must be timely filed for the same tax year in
which you sell the rental property.

If you placed in service the rental property after calendar
year 2002 and you have unclaimed depreciation for two or
more years before the year of sale, you must use Form 3115
(PDF), Application for Change in Accounting Method, to claim
the depreciation for the rental property that should have
been taken for the years before the year of the sale. The
Form 3115 must be timely filed for the same tax year in
which you sell the rental property.

If you placed in service the rental property after calendar
year 2002 and you have unclaimed depreciation for only the
year immediately preceding the year of sale, you may amend
your income tax return for that prior year by using Form
1040X (PDF), Amended U.S. Individual Income Tax Return, to
take the depreciation deduction for the rental property that
should have been taken. Or, you may file a Form 3115 (PDF),
Application for Change in Accounting Method, to claim the
depreciation for the rental property that should have been
taken for the prior year. The Form 3115 must be timely filed
for the same tax year in which you sell the rental property.
 
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