What capital expenses? Was this a rental property? You cannot enter capital expenses for a house that has been your primary residence, EXCEPT for when you sell the house. Please explain what the house has been used for? Has it been your primary residence, or a rental property of which you have been the landlord?
No. You must amend the prior return. It doesn't matter if this was personal or business, your return must be correct and complete for a given year, containing all income and adjustments that pertain to that year.
In this case, I think you probably mean that you didn't include some prior improvements in the cost basis of your home when you calculated the capital gains. If you need to adjust the cost basis, you have to amend the return that includes the sale.
If you did mean that you forgot to include capital improvements on commercial or rental property, you still have to report the sale correctly in the year it happened, but you may also need to account for depreciation and recapture, especially if the improvements happened in a prior year.
It was rental property sold this year.
But in previous years, I think we missed putting down all the capital expenses we made
@aandonian1 wrote:
It was rental property sold this year.
But in previous years, I think we missed putting down all the capital expenses we made
That's a mess, you may need to see an accountant.
When you make an improvement, you need to list that improvement as an asset, with a depreciation time based on its expected lifespan. In some cases, and for some types of improvements, they can actually be expensed rather than depreciated (there are a couple of different Safe Harbor rules that come into play.)
Then, when you sell the property, you must recapture (pay tax on) all the depreciation you took or could have taken. Taking the depreciation deduction is usually beneficial because it reduces your taxes in the past, even though it needs to be repaid with the sale, because past money is worth more than present or future money due to inflation.
Let me make up an example.
You have a 4 unit apartment building that cost $500,000 in 2003. You would depreciate that at $18,000 per year. In 2013 you replace the HVAC on all 4 units for $50,000. That asset is placed in service separately at $3000 per year (assuming a 15 year life span). So now, you are deducting $21,000 per year of depreciation instead of $18,000. In 2023 you sell for $1M. You should have reported that your adjusted cost basis was $110,000 (after subtracting your accumulated depreciation). Your capital gain is $890,000. The first $390,000 is depreciation recapture, which is specially taxed, and the top $500,000 is a long term capital gains, which has a lower tax rate.
If you ignored the HVAC upgrade completely, then you would have lost a $3000 tax deduction over 10 years since it was installed. You would report a cost basis of $140,000 (using just the depreciation for the building), gains of $860,000, with $360,000 of depreciation recapture and $500,000 as long term capital gains.
But that's not right, because you have to recapture depreciation you took or could have taken. So even though you missed depreciating the HVAC upgrade for 10 years, you have to report the sale as if you had. So you report an adjusted basis of $110,000, and pay recapture on $390,000, not $360,000. Essentially, you pay tax on the sale to repay a deduction you could have, but did not take.
It is likely impossible to truly fix at this point, because you have to report the sale as if you had taken depreciation when you did not, and you can't go back 10 years to claim depreciation that you forgot to claim. (There is a form 3115 to claim an adjustment for depreciation problems, but I don't think you can use it if you just forgot to report your assets.) I think you should talk to an accountant, about what taxes you will owe if you fix your tax return, whether there is any way to mitigate the depreciation problem, and the risk of standing pat and forgetting about it and hoping you aren't audited
@tagteam wrote:
@Opus 17 wrote:
....There is a form 3115 to claim an adjustment for depreciation problems, but I don't think you can use it if you just forgot to report your assets....That is actually one reason to use Form 3115 and one reason why it exists.
Failure to take depreciation deductions on depreciable assets is an impermissible method of accounting (hence, Form 3115 to correct that error).
Thanks.