NO rental depreciation - and property sold

[Catherine]

Well.  Mother of an existing client comes to us because she moved, then sold her house.  Duplex; lived in half and rented the other half.  Moved in 2016, wanted to sell while she could still exclude gain as primary residence.  We have dates of residence, date of moving, dates and costs for various renovations (three in all; one for each unit and one overall).  All makes sense so far.

The ONLY depreciation on the prior-year return ("professionally" prepared) is a couple hundred bucks from a small renovation in 2007. 

Whimper.  Form 3115 to claim all the missed depreciation - which then needs to be recaptured on the sale?  I almost think I should split the sale, and do half as sale of primary residence and half as the sale of business property.  Or am I over-thinking this?  Help!

[Lee B]

However, if you don't file the 3115, you still would have to recapture the depreciation that should have been deducted.

[grandmabee]

I didn't think you could do the 3115 in the year of sale.  Maybe I am just remembering wrong.

[michaelmars]

I WOULD split it and do the 3115, they come out ahead assuming max bracket.  depr is deducted at ordinary rates and recaptured at cap gain rates.

[michaelmars]

if not done in advance, i always get a cost seg in year of sale just to gain this rate spread.

[joanmcq]

Could it be that the rental half was already fully depreciated?

If not, then the ONLY thing to do is recap all the depreciation and file the 3115 so you get the corresponding deduction in the same year.  I've done lots of these.  And you have to split it.  One part is personal and qualifies for gain exclusion and part is rental ie. business property.

[Catherine]

Thanks, all. 

I was hoping against hope that SOMEONE had a magic wand that would get me out of the 3115 (which I really do NOT feel like doing for this client).  Sigh; there's no way out of it.  Even if the rental was fully depreciated (not quite; 20 years not 27.5), there were renovations plus the personal unit was rented out for a year and a half.  Blarg.  This is going to be one nasty long slog, but hey - that's why I get the small bucks, right?

  Whimper.

[Max W]

Doesn't 3115 only apply to open years?  The closed years are not entirely without some relief as a de minimus deduction of $50K can be made under section 481(a)

[Lee B]

1 hour ago, Max W said:

Doesn't 3115 only apply to open years?  The closed years are not entirely without some relief as a de minimus deduction of $50K can be made under section 481(a)

Based on the CPE classes that I have attended, a 3115 can reach back as far the incorrect method has been in use.

The classic situation is the correction of a incorrect depreciation method going back for as many years as required.

[joanmcq]

I have a new client that sold a rental house in 2018.  So I'm entering the depreciation schedule and voila! House has 39 year depreciation and the furnishings are 10 years.  It's been a rental since 2012.  Where do people come up with this stuff?  And these were pros preparing.  I got the client because the original preparer sold the practice and client didn't like the new ones.  So that is two groups of tax pros (latter a CPA) that ignored/created this mess.

[Catherine]

On 3/4/2019 at 4:30 AM, joanmcq said:

two groups of tax pros (latter a CPA) that ignored/created this mess

You have my sympathies, Joan!