@ZWu1 wrote:
Thanks both Champs for your answers.
1. For this property, the return preparer said the amount is unrecoverable via Form 3115 since I already converted it to self use last year. (For the other one, yes he is doing 3115 for me).
2. Suing him / going thru court is no fun. Is it ok or legit that he gives me the money back, and then I report it as some taxable income on my this year return?
Thanks a bunch!
If the preparer makes a voluntary settlement, then I have two thoughts, and I welcome the thoughts of other experts.
1. On the one hand, settlements are only taxable to the extent they exceed your actual loss. If you can show you lost (let's say) $10,000, and the accountant negotiates a payment of $5000, then under this theory, it is not taxable.
2. The other thought is that, your problem is that you did not take enough depreciation, and paid more tax. If you sell the property, you must pay depreciation recapture on the depreciation you took or should have taken. If you figure your recapture on the depreciation you actually took, then you will pay less recapture tax when you sell, which balances out the lower deduction (you got less deduction before, and you pay less tax when you sell), so it's kind of a wash, which means the settlement would be taxable. However, if you calculate your recapture on the depreciation that should have been taken, then you will pay more depreciation recapture, than the amount you deducted, which means you have a loss, so the settlement is non-taxable.
But it's a bit complicated, so other suggestions would be appreciated.
