How do I correct basis error when selling rental property? 2006-purchased SFR for $250,000 and put in $55,000 of improvements.
Your cost basis for depreciation is $305,000 minus the value of the land. Period.
2015-put in service as rental and used county figure of $235,000 as basis
That was flat out wrong. You can not use the county tax assessor's basis for depreciation. The county tax assessor only determines the tax value - not the Fair Market Value (FMV). In fact, the county tax assessor never steps one foot inside the house. So it's impossible for them to assess the FMV. Typically, the tax value assessed will be 30% or more below the fair market value. Therefore, you can not use the tax value for depreciation.
I should have used $305,000 as basis in 2015 when putting into service as a rental (or fair market value), but exactly how in TT do I account for a higher basis so I can reduce capital gains as compared to the $350,000 selling price?
Bottom line is, to fix this correctly you can't use TurboTax. You need to file IRS Form 3115 with your return to correct your error, since your error is more than 3 years back. While the TurboTax program does include the IRS Form 3115, this form is *NOT* simple by any stretch of the imagination. So if you are not a qualified professional tax preparer, then you need to seek professional help to report the sale and fix your error. This would be especially true if your state taxes personal income, because you're going to be penalized by your state also, for not having correctly depreciated the property.
A professional tax preparer that has been formally trained and educated in these matters will more than likely be able to reduce the fines and penalties you pay, without "raising eyebrows" at the IRS (as well as the state) that could result in a potential audit.
Please seek professional help and just accept the fact that if you haven't filed an extension by now, you are going to pay late filing fees. (late filing fees do not apply if you are due a refund. But I woule expect potential fines and penalties for your depreciation error to eat up a portion of any refund you may be due, and possibly all of it, plus more.)
