missed depreciation/Form 3115 - maybe?

[Catherine]

New client with a duplex. He has done his own taxes for years (first mistake) and doesn't think he ever took depreciation on the rental portion of the building. He made extensive renovations to the rental property in 2022 and those will be depreciated properly. 

The proper thing to do, maybe I think, is to file Form 3115 and claim the missed depreciation for the rental all in 2022.  The issue of how to do that now gets tricky.

• The town does not have any useful information on the online assessor's database about split between land value and building value. 
• The client may have a bill from the last year or so showing the current land/bldg value split. 
• But he bought the property in the mid-70's, and there is no way to know if that % value split is roughly the same or wildly different.
• And all of this for a whopping $45,000 purchase price back in the 70's, for a duplex.

Opinions?  Figure half-and-half land/bldg value on the half of the duplex? That would mean a one-time correction of $11,250 for depreciation plus something trackable for the future instead of papers from a half-century ago gone for good.

Or just ignore the whole thing under the heading of not inadvertently double-dipping on depreciation expense?

[BulldogTom]

Any "reasonable" split between land and building will work.   I don't think you can "ignore the whole thing".

Why are you taking on new clients?   I thought you were moving to retirement?

Tom
Longview, TX

[Lee B]

I would do 30% land and 70% building. First I would want to look at his tax returns as far back as he has copies.

[Catherine]

11 minutes ago, BulldogTom said:

Why are you taking on new clients?   I thought you were moving to retirement?

Supposed to be a one-time help because of the major upgrades to the rental unit. Of course any time you're dealing with someone who's done their own returns for years there is a quagmire somewhere! I've also found sale of units of partnership interests and the basis worksheet is missing. Probably doesn't know what it is so he didn't think it was important.

[Catherine]

6 minutes ago, cbslee said:

I would do 30% land and 70% building. First I would want to look at his tax returns as far back as he has copies.

He doesn't have the returns from the 70s, for sure. Even the tail end of the depreciation would be in the mid-90s so those are probably gone as well. 

Around here, it's more likely to be 70% land value and 30% building. Location location location.

[Lion EA]

I was going to mention the land vs building value being higher for land here in the northeast.

Does he have an insurance contract from his first full year of ownership, because only the building would burn and not the land. You might be able to infer the ratio from that plus his purchase price.

[Catherine]

Good idea @Lion EA but probably not. 1976 was a LONG time ago, for paperwork. 

[Lion EA]

Has he had the same insurance company the whole time?

I had to look in the bound books at the town clerk's office for information about my house built in 1961, but amazing detail was there!

There's the microfiche at the library for local newspaper reports of real estate transactions about his duplex or similar buildings at a similar time. He just needs to get close enough for government work with a $45,000 purchase price.

[Slippery Pencil]

What was real estate asset life in the 70s?  15 years?  Maybe it was fully depreciated by the late 80s and now 45 years later, not only is he not able to remember what he did about depreciating his rental, he most likely can't remember anything from the 70s.

[Lee B]

Good point, I think I would assume the depreciation has already been taken.  In order to file the 3115, how do you substantiate it wasn't taken?

[Lee B]

It's the taxpayer's responsibility to keep documents. 

Perhaps the question should be, "What do we do when there are no documents?"

[Slippery Pencil]

9 hours ago, cbslee said:

"What do we do when there are no documents?"

I believe the irs says if you can't prove any basis, basis is zero.