About Depreciation on overseas rental property

[tina160]

Dears, 

I use TT Premier 2019. I'm calculating the depreciable basis for my overseas rental property. The purchased price includes land, but I don't know what's the portion of the building. I tried to use the property tax bill to figure out. For example, the purchased prices are 500,000. And the property tax bill shows taxable house value is 5,000. and the taxable land value is 65,000. (Somehow the total is way less than 500,000.) How do I put the depreciable basis?

a. Just put 5,000. (But this is incredibly low)

b. I use a portion. House value is around 7% of the total value. So I put 35,000 for the depreciable basis?

Another question, I started to rent out the property since 01/01/2016. But I forgot about the depreciation. (I used TT for the past few years) So I plan to start to put depreciation this year and put "Amount of Depreciation Taken in Prior Years" to be "0". It seems TT will calculate the depreciation divide by "37 years" instead of "40 years". Does that imply the depreciation has been smoothly distributed evenly to the following 37 years?
So I don't need to do any corrections for the past 3 years? 

Please help~

Thanks a lot!!

[Carl]

A property tax bill is for acertaining and determining property taxes ony, and nothing else.

TurboTax utilizes the property tax bill only to determine what percentage of your purchase price is allocated to the land, and that's it.

So if the property tax bill values the entire property at $100,000 and values the land only at $25,000, then 25% is allocated to the land with 75% to the structure.

So if you paid $500,000 for the property, 25% of that ($125,000) is allocated to the land.

Foreign *RESIDENTIAL* rental property is depreciated over 40 years if it was place in service in 2017 or earlier. It's depreciated over 30 years if placed in service in 2018 or after. So you're making some wrong selections somewhere in the program if you're getting 37 years  for anything on residential rental property.

If you've been using TurboTax since you purchased the property, more than likely you have been depreciating it, and more than likely it's been done correctly over 40 years since you purchased it in 2016.  Simply look for the IRS Form 4562 on your 2018 return that prints in landscape format and is titled "Depreciation and Amortization Report". You should see an amount in the "Current year depr" column and the first two years of depreciation in the "prior year depr" column.

However, if you have not been depreciating the property or have been depreciating it incorrectly, you can't simply take 3 plus years of depreciation in 2019. Doesn't work that way. You have to amend your past tax returns starting with the 2016 return and work your way forward to 2019.

Your 3 year time to amend your 2016 tax return ends on July 15th, 2019. After that date, amending will not be an option. You'll have to just include IRS Form 3115 with your 2019 tax return to correctly "fix" this. Now the TurboTax program does include the IRS Form 3115. But I can tell you right now that this form is *NOT* simple by any stretch of the imagination. I would *HIGHLY* recommend you seek professional help for this. Doing the 3115 wrong will just put you in a never ending nightmare with the IRS from which you will never awaken. The fines, penalties and late fees you'll be assessed will make the cost of professional help seem like a pittance in comparison. On top of that, if your state taxes personal income you can expect to double those fines and penalties.

[tina160]

Thanks for your reply. 

About the house value, I'd like to give you more information to make sure. 

The foreign county has separate property tax bills. One for the tax of land in November, another for the tax of the house in May. 

In 2016, the house tax bill shows the taxable house value is 5,000. The land tax bill shows the taxable land value is 65,000. There are no total values for the property. That's why I use 5,000/(5,000+65,000)=7% to get the house value is around 7% of the property, which is 35,000.

I have not been depreciating the property before. 

In 2019 TT premier, 

If I put the cost: 35,000. Date purchased: 03/14/2013

(I used this item for personal purposes before I started using it in this business)

Date I started using it in this business: 01/01/2016

Amount of Depreciation Taken in Prior Years: 0

Then I get "Your 2019 estimated expense for this asset is $945"

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Details show Years to full depreciate  40.0 years

MACRS Convention MM

Deprecation Method ALT

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and I use 35,000/945=37.03

That's why I think TT distributes the depreciation to 37 years. 

[Anonymous_]

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@Carl wrote:

Your 3 year time to amend your 2016 tax return ends on July 15th, 2019. After that date, amending will not be an option. You'll have to just include IRS Form 3115 with your 2019 tax return to correctly "fix" this. 

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The taxpayer actually has to file Form 3115 to rectify this situation because the taxpayer used the same impermissible method of determining depreciation in two or more consecutively filed tax returns.

See https://www.irs.gov/publications/p946#en_US_2019_publink1000107385

In short, amending is not an option.

[tina160]

Hi Carl,

    Thanks for your reply.

    Could you please read my post today?

    How do you explain the TT distribute my depreciation to 37 years?

    I understand I couldn't do the amending now. But it's too late to find a CPA to help me file Form 3115 for this year. What should I do now?

    1. File depreciation in 2019 tax return. Then put "Amount of Depreciation Taken in Prior Years: 0"

        That will distribute the depreciation to the following 37 years.

    or 

    2. Don't file depreciation in 2019 tax return. 

        File Form3115 to rectify this situation next year (2020 tax return).

[AmeliesUncle]

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@tina160 wrote:

Hi Carl,

    Thanks for your reply.

    Could you please read my post today?

    How do you explain the TT distribute my depreciation to 37 years?

    I understand I couldn't do the amending now. But it's too late to find a CPA to help me file Form 3115 for this year. What should I do now?

    1. File depreciation in 2019 tax return. Then put "Amount of Depreciation Taken in Prior Years: 0"

        That will distribute the depreciation to the following 37 years.

    or 

    2. Don't file depreciation in 2019 tax return. 

        File Form3115 to rectify this situation next year (2020 tax return).

---

File an extension and have a tax professional file Form 3115 this year.

And no, you can't enter $0 for prior depreciation.  You would enter what you SHOULD have taken.

[Carl]

I understand I couldn't do the amending now. But it's too late to find a CPA to help me file Form 3115 for this year. What should I do now?

At this point, being "to late" is a moot point. Get professional help. Even if your appointment is after the filing deadline, so what? Filing wrong this year will just increase your costs next year. Besides, in the process of fixing this I'd be surprised if the "repair" increased your tax liability as it is. If you got refunds in years past, you'll probably still get a refund, albeit a reduced amount for 2019.  What I would expect to be reducing your 2019 refund, would be the fines/penalties for the incorrect reporting in years past. But I wouldn't see you having an increased tax liability. Besides, a well versed CPA can most likely reduce the fines/penalties you'd pay if you tried doing this yourself. So I suggest you stop looking for excuses and start looking for a CPA. (That last comment sounds ferocious, but I honestly don't intend it that way.)

Now since you say the property is showing a 37 year MACRS schedule, most likely you can't just arbitrarily change that since 2019 is not your first year depreciating the property. The CPA will need to take care of that too. But I still can't see how it's possible to get a 37 year MACRS deprecation schedule unless you intentionally elected the OTHER option on the depreciation screen and manually entered the digits "37" yourself in the first year you started renting this property. But that's a moot point now.

You "need" professional help and you need it yesterday if not sooner. The sooner you get on that, the less money you'll be spending in the long run.

[tina160]

Hi Carl, 

    Thanks for your reply. 

    I'll try to get a CPA. 

    I didn't do the depreciation for the past 3 years, actually, I pay more tax for that. 

    So if I correct it now, I'll get more refund, right? Will I get "penalty" cause I pay more tax than what I need to?

    I read from other posts said, if we didn't claim the depreciation, that's our "lost". You need to pay the recapture depreciation tax anyway when you sell the house. That's why I think I can do it next year to fix it. (I read this from other posts, too)

    About the 37 years, I didn' manually input "37". Please see the attached the pictures.  

    BTW, I tried to figure out how TT get "37", so I do some experiment. If I change Date I started using it in this business to "01/01/2015", TT will distribute the depreciation to the following "36 years".

---------------------------------

    Besides, do you have any comments about how to get the depreciation basis?

        About the house value, I'd like to give you more information to make sure. 

        The foreign county has separate property tax bills. One for the tax of land in November, another for the

        tax of the house in May. 

        In 2016, the house tax bill shows the taxable house value is 5,000. The land tax bill shows the taxable

        land value is 65,000. There are no total values for the property. That's why I use

        5,000/(5,000+65,000)=7% to get the house value is around 7% of the property, which is 35,000.