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Old 11-09-2014, 07:45 PM
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Unhappy Incorrect Basis Used for Rental Depreciation

I fear we may have used the wrong amount for the basis when figuring depreciation on our rental. We switched our home to a rental back in 1992. We have been fortunate to have the same renters for 22 years. They just moved, so we are considering selling the rental and have been researching how we will be affected by capital gains.

The house was built and financed back in 1982 for $61,566. When we started using it for a rental in 1992, the FMV was $98,500. ($90,000 for the house and $8,500 for the land). We thought this was the correct amount to use, and so depreciated $1600 the first partial year and $3273 each year since.

It has just come to my attention that we should have used the lesser of FMV or the original purchase price for depreciation, which would have been the $61,566 amount.

Is there any way to correct his besides doing 22 years worth of amended taxes? The house in in another state, so we would have to amend 22 years worth of state taxes as well! Arrrrrghhhh!! Thank you.



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Old 11-10-2014, 08:35 AM
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Originally Posted by Golddust1957 View Post

#1:The house was built and financed back in 1982 for $61,566. When we started using it for a rental in 1992, the FMV was $98,500. ($90,000 for the house and $8,500 for the land). We thought this was the correct amount to use, and so depreciated $1600 the first partial year and $3273 each year since.

#2;It has just come to my attention that we should have used the lesser of FMV or the original purchase price for depreciation, which would have been the $61,566 amount.

#3;Is there any way to correct his besides doing 22 years worth of amended taxes? The house in in another state, so we would have to amend 22 years worth of state taxes as well! Arrrrrghhhh!! Thank you.
#1 The basis of a rental property is the value of the property that is used to calculate your depreciation deduction on your federal income taxes. The IRS defines the tax basis of a rental property as the LOWER of FMV, $90K(excl land value) or the adjusted basis of the property, $61,566(excl land value).Rental pty placed in service after 1986 is depreciated using a straight line method over 27.5 years. You need to apply mid month convention for depr; so in the first year when you applied it , you had to depreciate $1213 if you applied it in service in june 1992. Then in the next year, 1993, its annual depreciation was $2239;$61566*3.636%

#2;correct;as mentioned above



#3; I guess this is not a change in method of accounting but rather correction of an error. no form 3115 or 481 adj required or allowed.So, No; you can file an amended return to correct the amount of depreciation claimed for any property as you have not adopted a method of accounting for the property. You have adopted a method of accounting for the rental property since you deducted an incorrect amount of depreciation for it on two or more consecutively filed tax returns for reasons other than a mathematical or posting error.
You need to file amended returns as the basis of the rental pty on form 4797 on its disposition was incorrect(the Adj basis is understated) and the amount of sec 1250 depre recapture amount is also incorrect(overstated). Some taxpayers find they've made a mistake that means they owe additional tax. The IRS will correct your tax return if it has the information supporting a change in your tax liability. If it does not have that information, you are well advised to file an amended return as soon as possible and pay the additional tax before the due date (normally April 15 following the tax year, for individuals). If you don't get the additional tax payment in on time, the IRS might levy penalties and interest on the outstanding balancePlease contact the IRS for more info in detail



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Old 11-10-2014, 04:27 PM
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Unhappy

Thanks for your help...guess I'd better call the IRS. Wish me luck.



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Old 11-10-2014, 06:02 PM
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Originally Posted by Golddust1957 View Post
Thanks for your help...guess I'd better call the IRS. Wish me luck.
i will goodluck~~



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