Need Help with Rental

[B. Jani]

New client, referral. Line 7 income is 150k+. Previous preparer placed primary residence in rental in 2014 return onwards and finally sold in 11/2017 (which I am preparing). Customer lived there from 2003 to 2014 and bought & moved to another house as principal. Looking at last 4 years of previous Schedule E, lot of expenses and losses but no depreciation taken. Line 17 on 1040 is blank for all previous years as 8582 shows loss carry forward due to higher income.

When I go to worksheet sell of residence Form 8949 (it is asking for depreciation but none exist on previous schedule E for all 4 years.

How do I fix this? I already place client in extension but this is the only thing holding up. Just end of the season blue.

Any advise is appreciated. TIA.

[easytax]

Amend 2014 NOW (few days, minutes left) to get refund from dep for 2014 (if any) // taken or not, if entitled you should now take on amend). Amend 2015. 2016 for dep. and tfinalize 2017.

[Catherine]

My first thought was the huge PITA of Form 3115 - but easytax is right.  If depreciation was not taken, no incorrect depreciation method was chosen.  Amend 2014 NOW.  Put the 2017 on extension.  Amend, amend, complete (15, 16, 17).  And don't forget to take all the suspended losses in the year of sale (which I came *this* close to forgetting once - had to re-print the return less than half an hour before the client was gonna show up - ugh).

[Lee B]

I totally 100 % disagree,  Form 3115 was designed to specifically to take care of situations like this.

Not taking depreciation more than once is the choosing of an incorrect method.

Do not amend  File the 3115 and deduct all of the depreciation in the current year.

 

[SaraEA]

What everyone is recommending is of course the "right" way to handle this.  In this case I might just take a shortcut because the bottom line will be exactly the same.  On the 4797 there is a line for "depreciation allowed or allowable."  Calculate the depreciation that should have been taken and deduct it from basis.  There is no recapture because the house was depreciated under MACRS.  The depreciation not taken in 2014, 15, and 16 is going to lower basis on the 4797 anyway, leaving you with exactly the same amount of gain/loss.  The prior year unallowed losses should have been larger with depreciation, which may or may not affect gain/loss taken in the year of sale depending on how the math works out because they are allowable in the year of sale.  Thoughts?

[mircpa]

Prior year unallowed losses (which might be prior year depreciation + rental losses) will show up on Sch E in the year of sale & prior years deprecation will knock of cost basis on 4797, it could square off but necessarily same unless prior year unallowed losses were only depreciation amount.

[DANRVAN]

13 hours ago, SaraEA said:

What everyone is recommending is of course the "right" way to handle this.  In this case I might just take a shortcut because the bottom line will be exactly the same.  On the 4797 there is a line for "depreciation allowed or allowable."  Calculate the depreciation that should have been taken and deduct it from basis.  There is no recapture because the house was depreciated under MACRS.  The depreciation not taken in 2014, 15, and 16 is going to lower basis on the 4797 anyway, leaving you with exactly the same amount of gain/loss.  The prior year unallowed losses should have been larger with depreciation, which may or may not affect gain/loss taken in the year of sale depending on how the math works out because they are allowable in the year of sale.  Thoughts?

I don't follow what you are saying Sara. As I see it, he will not get the benefit of the depreciation which lowered his basis and increased gain unless he takes the 481(a) adjustment.  The suspended losses recognized  In the year of sale will not reflect the allowed depreciation.  So how will he offset the increased gain from the allowable depreciation?

[Catherine]

If you go the Form 3115 route, remember that the section 481a corrections do NOT automatically flow through - you have to put the numbers in as over-rides.  

[michaelmars]

the 481 is an ordinary deduction and the lower basis adds the same amount to capital gain income.  the client comes out ahead on the rate difference.