Will reducing the cost basis significantly from that which has been used previously for calculating depreciation of the rental property be a flag for the IRS?
It could be, because changing the cost basis on your 2020 tax return will also reduce the amount of depreciation taken in 2020 up to the closing on the sale. More than likely no depreciation will be shown because it totally screws up the depreciation history, and the program *will* take that into account - thus resulting in incorrect figures.
Will older tax forms need to be amended if we now change the real estate cost basis? Will depreciation need to be recalculated going back to the date placed in service?
We will seek CPA advice in the matter. Thanks for your reply. Much appreciated.
Basically, the only way to change the cost basis of an asset is by including IRS Form 3115 - Change In Accounting Method form with your return. This form is "NOT" as simple as it may seem either. Besides, your situation does not call for a change in cost basis in any way, shape or form.
One thing you may be able to do so the program will do things correctly, (I'm assuming it will) is to report the actual sale of the rental in the "Sale of Business Property" section. This would allow you to make adjustments as needed, but also has the same possibility of raising flags. It might raise flags if you use a lower cost basis in the Sale of Rental Property section, than you used for depreciation in the SCH E section of the program.
It might work out fine though, if you report the sale of a percentage of the property (thus, using a percentage of the cost basis) equal to the amount paid for the property. Then show the unsold percentage as a gift - which as you aleady know would require the IRS Form 709 to be filed.
It would be great if during the TT interview, the question is asked, "Was the sale of this rental property to a family member?" If "Yes," then the software manages the appropriate reporting.
If I recall correctly (and I may not) I do think that question is asked. If not asked in the SCH E section, then in the "Sale of Business Property" section. However, since we know for a fact the program is not yet complete, it's more likely they've not got that option ready yet.
