Basis/Depreciation Adjustment for rental property without override?

[Delbert]

Is there a way within Turbotax to adjust the basis (and consequently the subsequent depreciation) of a 27.5 year property without doing an override? Basis adjustment is needed because of excess insurance proceeds for casualty repair.  Proceeds exceeded cost of repair.

If I override I can not file electronically and would like to find a way within the program.

[Carl]

You don't change or adjust anything on your taxes that already exists with an established cost basis. I can make a wild guess on your situation. But that's all it will be is a wild guess based on no facts what-so-ever - which means it'll probably be wrong and totally useless to you. So give me some facts. What happened?  Property placed in service in 2010 and in 2019 it burned to the ground and you did a rebuild with the insurance payout? Maybe you lost the roof due to a hurricane and had to replace it? This can be dealt with in TurboTax *IF* you have at least a little bit of a clue of what you're doing. No overrides are necessary and would probably be wrong anyway.

Give me dates, facts and numbers so I'm not guessing here. Then I can help here.

[Delbert]

- Residential rental property. Purchased 8/3/98. Purchase basis (bldg. only) $80,900
- Depreciation-adjusted basis through 2018 is $20,958
- Had storm damage in 2019, repair cost was $4,100. Insurance reimbursement for damage was $7,100. Reimbursement exceeds repair cost by $3,000
- IRS Pub. 551, p. 5, requires that the asset basis be adjusted (reduced) by the excess reimbursement. The excess reimbursement is not income in 2019.
- IRS Pub. 946, pp. 35 and 36, disallow using the depreciation percentage tables after this adjustment. Depreciation must be manually calculated in this situation. Example on p. 36 shows how to manually figure depreciation in 2019 and subsequent years.

If you believe I am incorrect about the IRS requirements in Pubs. 551 and 946 please explain your reasoning. I would be most grateful to learn I am wrong. But if I am correct, then how to handle?

[DianeC958]

No, you are correct on your information that the cost basis needs to be reduced by the amount you received in reimbursement over the cost of the repairs.

This may be an easier situation to deal with in the TurboTax desktop version since you can change into the forms mode and make changes directly on the forms. 

[Carl]

- Had storm damage in 2019, repair cost was $4,100.

At that price, it doesn't sound like any kind of a property improvement at all. It sounds to me like a straight up deductible rental repair expense, when the insurance payout treated as ordinary rental income.  So what exactly was "repaired". There is a definable difference between a repair, and a property improvement. Definitions below.

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Repair

Those expenses incurred to return the property or it's assets to the same usable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

[Delbert]

Thank you DianeC958!! If, in the desktop software, I override the adjusted basis and the depreciation will I still be able to efile?

[Delbert]

Thank you Carl.  Yes, I am aware of the difference between repair and improvement. If I expense the repairs I think I will need to reduce the basis by the entire amount of the insurance reimbursement, not just the excess part.  Do you and/or DianeC958 agree with me about that?

Also, I don't believe it is proper to report the reimbursement as income (instead of using it as basis reduction). Do either of you agree with me about that?

[AmeliesUncle]

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@Delbert wrote:

Is there a way within Turbotax to adjust the basis

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Just go into the "asset" for depreciation and change the Basis.  And keep the "prior depreciation" the same as it was before.

TurboTax does not use the depreciation 'tables' so you don't need to worry about that.

[Delbert]

AmeliesUncle, I don't think that is the proper way. IRS Pub. 946 says to:

1. Reduce the current adjusted basis, in my case $$20,958 by the $3,000 excess reimbursement. Year 2019 then starts with an adjusted basis of $17,958. Then,

2. Depreciate the remaining $17,985 evenly over the remaining life of the asset using the manual method in Pub. 946.

[AmeliesUncle]

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@Delbert wrote:

AmeliesUncle, I don't think that is the proper way. IRS Pub. 946 says to:

1. Reduce the current adjusted basis, in my case $$20,958 by the $3,000 excess reimbursement. Year 2019 then starts with an adjusted basis of $17,958. Then,

2. Depreciate the remaining $17,985 evenly over the remaining life of the asset using the manual method in Pub. 946.

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Hmmm.  I think you are right.

I think you should be able to add a new "asset" (and delete the old asset) and get the program to do it correctly.

1. Use the Adjusted Basis after the casualty ($17,958).
2. Use the ORIGINAL "placed in service" date.
3. When it asks for "Prior Depreciation", enter ZERO.
4. Make sure you are using Straight-Line depreciation and elected out of Bonus Depreciation and Section 179.

That should hypothetically make the program "Depreciate the remaining $17,985 evenly over the remaining life of the asset".

[Delbert]

AmeliesUncle Thanks. That makes sense as far as correctly calculating this year's depreciation and adjusted basis. Very clever of you. 

What are the odds that a manipulation like this will trigger interest in the return at the IRS? Their computer may be smart enough to compare the prior depreciation on this return to last year's accumulated depreciation. Any thoughts?

[AmeliesUncle]

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@Delbert wrote:

What are the odds that a manipulation like this will trigger interest in the return at the IRS? Their computer may be smart enough to compare the prior depreciation on this return to last year's accumulated depreciation. Any thoughts?

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The IRS does not get that information at all.  They just see the actual amount of depreciation that you claim.  It is common for that amount to vary, so it should not "trigger" anything.

[Delbert]

AmeliesUncle, Thanks again.  I really appreciate your insights. One other question: Would it be possible to somehow handle this as a partial asset disposition?

Edited to add: If so, that would create a "paper trail" of what I did.

[AmeliesUncle]

It depends on the circumstances.  You said "repairs" which implies nothing was "disposed".

You are getting tangled in two complex areas of tax law (casualties and dispositions), which is difficult or impossible to properly navigate through via an online forum.  You may consider a tax professional.