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Rental Property Catch Up Depreciation - Paging Poodlebrain and other Tax Pros
Posted on 4/28/15 at 10:06 am
Posted on 4/28/15 at 10:06 am
Long story short - I was gifted some rental property and didn't claim depreciation for a few years. I need to file catch up depreciation.
It took me a little while, but I've read a good bit about it, and I finally feel fairly comfortable about our basis in the property and the ratio of land to improvements.
The rest of my taxes are pretty simple (no house, no kids, standard deduction, and a couple of stock transactions, etc.). I've always used TurboTax or HRBlock online because everything has been so easy, but I can't figure out how to do catch up depreciation in HRBlock online.
Is this too complicated of a matter for me to handle on my own? Should I find a good CPA for now? I would probably go back to doing my own for a few more years until I have a house, kids, etc.
It took me a little while, but I've read a good bit about it, and I finally feel fairly comfortable about our basis in the property and the ratio of land to improvements.
The rest of my taxes are pretty simple (no house, no kids, standard deduction, and a couple of stock transactions, etc.). I've always used TurboTax or HRBlock online because everything has been so easy, but I can't figure out how to do catch up depreciation in HRBlock online.
Is this too complicated of a matter for me to handle on my own? Should I find a good CPA for now? I would probably go back to doing my own for a few more years until I have a house, kids, etc.
1
Posted on 4/28/15 at 10:54 am to kennypowers816
You will need to do a Form 3115 as this is a change in accounting method. Using this form you also calculate what is called a Section 481a adjustment - i.e. the amount of depreciation you should have taken but did not. You then report the additional expense on your Schedule E.
The 3115 is not for the faint of heart, but it's not impossible.
Do you have an idea of how much missed depreciation there is? If it's $2,000, I'd maybe try it on my own. If it's $75,000, I'd hire a professional.
The 3115 is not for the faint of heart, but it's not impossible.
Do you have an idea of how much missed depreciation there is? If it's $2,000, I'd maybe try it on my own. If it's $75,000, I'd hire a professional.
Posted on 4/29/15 at 9:02 am to LSUFanHouston
quote:
The 3115 is not for the faint of heart,
That's what I've heard.
quote:
Do you have an idea of how much missed depreciation there is?
I'm pretty sure its going to be somewhere around $6k.
Posted on 5/12/15 at 1:42 pm to kennypowers816
Bumping this. Filed an extension so that I can spend some more time researching. Quick question though...
Last year, I owed ~$70 to LA for rental income taxes since the rental is in LA, but I live in TX (and my job is in TX).
Should I make a payment to LA this year with the extension? Or does the depreciation get factored into the LA return and reduce any income to $0 for 2014?
I did a pretty rough calculation and the catch-up depreciation expense will be pretty close to my 2014 rental income for my federal return. I guess maybe I should just send in $75 to be on the safe side?
ETA - TIA and thanks LSUFanHouston for your help a few weeks ago.
Last year, I owed ~$70 to LA for rental income taxes since the rental is in LA, but I live in TX (and my job is in TX).
Should I make a payment to LA this year with the extension? Or does the depreciation get factored into the LA return and reduce any income to $0 for 2014?
I did a pretty rough calculation and the catch-up depreciation expense will be pretty close to my 2014 rental income for my federal return. I guess maybe I should just send in $75 to be on the safe side?
ETA - TIA and thanks LSUFanHouston for your help a few weeks ago.
This post was edited on 5/12/15 at 1:43 pm
Posted on 5/12/15 at 2:14 pm to kennypowers816
You owed $70 last year to the state of LA?
As a non-resident, LA takes your federal AGI and allocates it between LA and non-LA income. the depreciation would get factored in because of this. Unlike some other states, LA uses the same depreciation rules that the feds use.
So if you are thinking you will have no rental income from that one property, and that's the only LA income you have, then you should be fine not paying anything in with the extension.
You could always make a minimal payment and get it refunded or applied to a future year.
You could also not pay anything, and then if you do owe a few bucks, just pay the interest and penalties. If your total tax for example was $75, depending on when you eventually file LA, your interest and penalties will just be a couple of dollars.
As a non-resident, LA takes your federal AGI and allocates it between LA and non-LA income. the depreciation would get factored in because of this. Unlike some other states, LA uses the same depreciation rules that the feds use.
So if you are thinking you will have no rental income from that one property, and that's the only LA income you have, then you should be fine not paying anything in with the extension.
You could always make a minimal payment and get it refunded or applied to a future year.
You could also not pay anything, and then if you do owe a few bucks, just pay the interest and penalties. If your total tax for example was $75, depending on when you eventually file LA, your interest and penalties will just be a couple of dollars.
Posted on 5/13/15 at 9:57 am to kennypowers816
I just now saw this thread, but I'd like to share my opinion on the subject. Was the property used as a rental by the donor? The answer to this question is critical to the resolution of your issues.
If it was used as a rental, the recipient of a gift essentially steps into the shoes of the donor with respect to the tax attributes of the gifted property. Thus, your basis in the property is the same as the donor's adjusted basis at the moment of the gift adjusted for any gift tax paid on the gift. Your holding period and placed in service date are the same as the donor's. So you should just carry forward any depreciation schedules inherited from the donor.
If you received the gift within the allowable time to amend your prior year tax returns I would amend the prior returns to reflect the proper depreciation on the principle that you did not make an accounting method change since you inherited the accounting method with the property. You just neglected to report omit the depreciation allowable.
If you received the gift farther in the past I'd consider just amending the open years and forgetting about the depreciation allowable that you will lose out on if it makes more economic sense than going the 3115 route. For example, if you miss out on $1,000 of depreciation from a year you were in the 25% tax bracket, then your economic loss would be $250 of overpaid tax plus any capital gains tax you might owe in the future on that $1,000. Is that worth more than the time and effort to prepare and file the Form 3115?
If the property was not used as a rental before you received it as a gift, then you would have other issues to consider that would take too long to cover. The allocation of basis among the components of the gift is just one issue that would need to be resolved. What if the fair market value of the land at the time of the gift was greater than your inherited basis?
If it was used as a rental, the recipient of a gift essentially steps into the shoes of the donor with respect to the tax attributes of the gifted property. Thus, your basis in the property is the same as the donor's adjusted basis at the moment of the gift adjusted for any gift tax paid on the gift. Your holding period and placed in service date are the same as the donor's. So you should just carry forward any depreciation schedules inherited from the donor.
If you received the gift within the allowable time to amend your prior year tax returns I would amend the prior returns to reflect the proper depreciation on the principle that you did not make an accounting method change since you inherited the accounting method with the property. You just neglected to report omit the depreciation allowable.
If you received the gift farther in the past I'd consider just amending the open years and forgetting about the depreciation allowable that you will lose out on if it makes more economic sense than going the 3115 route. For example, if you miss out on $1,000 of depreciation from a year you were in the 25% tax bracket, then your economic loss would be $250 of overpaid tax plus any capital gains tax you might owe in the future on that $1,000. Is that worth more than the time and effort to prepare and file the Form 3115?
If the property was not used as a rental before you received it as a gift, then you would have other issues to consider that would take too long to cover. The allocation of basis among the components of the gift is just one issue that would need to be resolved. What if the fair market value of the land at the time of the gift was greater than your inherited basis?
Posted on 5/13/15 at 10:31 am to LSUFanHouston
Thanks again for the help.
Just decided to go ahead and do this. Paid $75 to be on the safe side, but should get it all back. I figured it was easier to go ahead and pay now and take the refund later than calculate any interest or penalties on such a small amount.
quote:Yeah, I think $68 to be exact.
You owed $70 last year to the state of LA?
quote:
You could always make a minimal payment and get it refunded or applied to a future year.
Just decided to go ahead and do this. Paid $75 to be on the safe side, but should get it all back. I figured it was easier to go ahead and pay now and take the refund later than calculate any interest or penalties on such a small amount.
Posted on 5/13/15 at 10:40 am to Poodlebrain
quote:
Was the property used as a rental by the donor?
No, it was not depreciated as a rental property by the donor.
quote:
If the property was not used as a rental before you received it as a gift, then you would have other issues to consider that would take too long to cover. The allocation of basis among the components of the gift is just one issue that would need to be resolved. What if the fair market value of the land at the time of the gift was greater than your inherited basis?
Yeah, this is what I've been trying to figure out. Any ideas on how much it would cost to engage a CPA just to help figure all of that out? (ahem, any takers? haha) I think I have a fairly decent understanding of all of the inputs/concepts (I've researched this for hours at this point), but I'm not sure I have the most correct values and definitely not sure about the execution of the necessary forms.
As I mentioned, my taxes are pretty straight-forward for everything else so I don't think I would really need help with much else. Not to mention, we aren't talking about a massive amount of money here in the first place, as you pointed out.
Posted on 5/13/15 at 1:18 pm to kennypowers816
When did you receive the gift? When did you place the property in service? The answers to these questions will impact the how you can resolve this matter. In order to strictly comply with the tax laws you would have to allocate basis between land and depreciable assets based on their values when the donor acquired the property, and any improvements made to the property by the donor. I doubt this is practical, or economically justifiable, at this point in time. So you realistically are shooting for substantial compliance with the law. Substantial compliance will allow you to make certain decisions based on the facts and circumstances that may be of more benefit to you.
I don't know how you can get out of this mess cheaply, whether in professional fees paid or personal time and effort. It's a complicated situation. I'd talk to several CPA's and see which one offers a practical solution that makes the most economic sense. You don't want to be paying someone to have to research a solution. They should be able to tell you the approach they recommend you take.
I don't know how you can get out of this mess cheaply, whether in professional fees paid or personal time and effort. It's a complicated situation. I'd talk to several CPA's and see which one offers a practical solution that makes the most economic sense. You don't want to be paying someone to have to research a solution. They should be able to tell you the approach they recommend you take.
Posted on 5/13/15 at 5:29 pm to Poodlebrain
quote:
When did you receive the gift?
That's complicated, but we'll say Jan 2011 for now
quote:
When did you place the property in service?
Jan 2011
quote:
you would have to allocate basis between land and depreciable assets based on their values when the donor acquired the property
From what I've read, that we could determine that based on the property tax assessment
quote:
and any improvements made to the property by the donor
Minimal improvements were made, but I'm fairly certain we could estimate those costs
quote:
I'd talk to several CPA's and see which one offers a practical solution that makes the most economic sense. You don't want to be paying someone to have to research a solution. They should be able to tell you the approach they recommend you take.
Any specific recommendations in LA (yourself included if you fit your own criteria)? I assume LA would be advantageous since the property is in LA and the income is subject to those state taxes.
<--@gmail.com if you don't want to broadcast any recommendations on the board.
Most importantly, thank you very much for the help thus far. I still don't know what I'm going to do, but I certainly appreciate the time/effort/advice.
Posted on 5/13/15 at 11:13 pm to kennypowers816
If you filed an extension for 2011 you could still file amended returns for 2011, 2012 and 2013 to claim the proper amounts of depreciation for those years. If you are too late to amend the 2011, I'd recommend just letting it go and start depreciating the property on Jan. 1, 2012. Worse comes to worst, you will lose out one 11.5 months worth of depreciation out of 330 months of depreciable life, or less than 3.5% of the total depreciation possible. The tax cost is 3.5% X basis allocated to building X your marginal tax rate. Is the tax cost worth the effort?
The IRS isn't likely to pull your amended returns for audit, and even if they do you can probably get them to agree to an informal Sec. 481(a) adjustment since you would be legally entitled to that result if you filed the Form 3115. They will want to close out your case completely rather than just kicking it down the road to the accounting method changes people.
The IRS isn't likely to pull your amended returns for audit, and even if they do you can probably get them to agree to an informal Sec. 481(a) adjustment since you would be legally entitled to that result if you filed the Form 3115. They will want to close out your case completely rather than just kicking it down the road to the accounting method changes people.
Posted on 5/14/15 at 4:18 pm to Poodlebrain
quote:
If you filed an extension for 2011 you could still file amended returns for 2011, 2012 and 2013 to claim the proper amounts of depreciation for those years. If you are too late to amend the 2011, I'd recommend just letting it go and start depreciating the property on Jan. 1, 2012. Worse comes to worst, you will lose out one 11.5 months worth of depreciation out of 330 months of depreciable life, or less than 3.5% of the total depreciation possible. The tax cost is 3.5% X basis allocated to building X your marginal tax rate. Is the tax cost worth the effort?
Good idea. Basically just forego the depreciation for 2011 and file amended returns for the other years. Lose a little money but save some headache from avoiding the 3115, I assume.
quote:
The IRS isn't likely to pull your amended returns for audit, and even if they do you can probably get them to agree to an informal Sec. 481(a) adjustment since you would be legally entitled to that result if you filed the Form 3115. They will want to close out your case completely rather than just kicking it down the road to the accounting method changes people.
This was a little over my head, but I'm guessing I don't have much likelihood to get audited in the first place, given the simplicity of everything else related to my taxes. That may be naive though.
-----
Overall, thanks a bunch for the help. I'm still not 100% confident on my basis quite yet, but I am going to work with the donor and maybe consult some others. This has been super helpful though. Thanks again.
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