Hello,
I had entered an incorrect purchase price for a rental home (converted from primary residence, 355k instead of 365k). Last year, I sold the price and now I see that having 355k as cost basis increases my tax. Turbo tax allows me to change the price I paid for the home, does IRS accept the cost basis to be changed now? What is the correct procedure to deal with this mistake? Any insights greatly appreciated.
Thanks,
If only two or three years are in error, you may amend the tax returns for each year, reporting the reduction in depreciation expense. Then the current year’s tax return would be reporting the correct cost basis.
But tax returns more than three years old may not be amended and refunds will not be honored.
IRS form 3115 Application for change in accounting method can report the change but this form is not supported by the TurboTax software. See the instructions here.
Yes, you can just change it to the correct amount.
However, with the higher Basis, when it asks for "prior depreciation" you need to be sure you enter the amount that you SHOULD have claimed (based on $365,000).
When you converted it from personal use to a rental, you should have entered the LOWER of (1) your Adjusted Cost Basis at that time or (2) the Fair Market Value on the date it was converted to a rental. Which of those two was lower, and is that the amount that you used?
You can file Form 3115, Application for Change in Accounting Method. This will allow you to make a retroactive change to your depreciation expense on your 2019 tax return due to the incorrect cost basis. Otherwise, you will be paying depreciation recapture tax on the depreciation you were entitled to take, which will be greater than actual depreciation claimed. Form 3115 is not available in TurboTax.
No, Form 3115 does not apply. Using an incorrect Basis is a "mathematical or posting error", which does NOT qualify for Form 3115.
If the OP wants to get the slightly higher depreciation for the last 3 years, they can amend those returns. But Form 3115 can not be used.
@tester74 all of the responses given thus far are wrong. Here's what you do in "YOUR" specific case and "ONLY" in "YOUR" specific case.
Basically, you will report the sale in the "Sale of Business Property" section.
First, work through the Rental & Royalty Income (SCH E) section of the program. for this property select the option for "I sold or otherwise disposed of this property in 2019" and then continue working it through.
Enter any and all rental income and expenses as normal.
Now in the "Sale of Assets/Depreciation" section you *MUST* work through each individual asset listed, one at a time. As you work it through, write down the prior years depreciation and current year's depreciation on each individual asset.
- Select the option for "I stopped using this asset in 2019"
- On the "Special Handling Require?" screen select YES (If you select NO you will be *FORCED* to enter sales information, and we're not reporting the sale here.)
- You must do the above for each individual asset listed, one asset at a time.
When done with everything in the "Sale of Assets/Depreciation" section, continue working through the rest of the SCH E.
If you have claimed *ANY* vehicle use at *ANY* time during your ownership of this property, then work through the Vehicle Expenses section to show that you stopped using the vehicle in 2019 and removed it for personal use. (I seriously doubt you sold the vehicle as a part of the rental property sale.)
Once you've worked through the SCH E in it's entirety, you're done with that section. Now to report the sale.
Elect to start/update "Sale of Business Property"
Select "Sale of business or rental property you haven't already reported" and continue.
Since you sold the property at a gain, select YES.
Now you can enter a description of the rental property you sold, date you purchased/acquired it, date you closed on the sale, the sale price, the "correct" cost, and then total up all of your depreciation numbers you wrote down earlier and enter that total in the last box.
Now press on with life and finish working it through. Easy-Peasy.
@Carl The OP still needs to claim the correct depreciation this year. In order to do that, the amount needs to be changed in the "asset" section. Because that is corrected, it can correctly be reported in the "asset" section rather than the "Sale of Business Property" section. While it could be claimed in the "Sale of Business Property" section, there is no indication that it would need to be done that way.
But the OP NEEDS to calculate and use the "prior depreciation" that SHOULD have been claimed using the correct higher Basis (if you leave that entry BLANK, the program will automatically use the proper amount). That is need in order to claim the correct current year depreciation, as well as to calculate the correct amount of gain.
This is absolutely no different than if the FMV of the property at the time it was placed in service, was less than the original purchase price. It's how you can significantly reduce your chances of an audit while still reporting the sale with the correct information and only paying taxes on what you should be taxed on.
Besides, the other way (that may increase chances of an audit) is to add the $10K difference to the value of the land and leave the value of the structure alone. That makes all prior as well as the current year's depreciation alone.
You go changing the structure value on the SCH E and that's basically screaming for an audit, whereas increasing the land value only is yelling softly for an audit. Reporting it my way in "Sale of Business Property" doesn't even so much as raise an eyebrow. But "if" audited (and I doubt that would happen) they have the paperwork to prove their cost basis.
Claiming the proper amount of depreciation on Schedule E certainly won't attract an audit. It is simply reporting it correctly. By knowingly continuing to claim the incorrect amount of depreciation, you are filing an incorrect tax return.
righto and the Taxpayer has to use the depreciation that would have been allowed.
How can I correct my cost basis for a rental property I have sold in 2019? I built the home in 2008 and I never caught this until now. The cost was 200K for land and $249K for building. I have $79K in loss carryforwards because my income was higher than $150K each year.
My cost basis is $100k too low - yikes
@CarlI am having a similar issue wherein I have a rental property that I sold in 2019. This was a personal property that I converted to business/investment in 2013 when it was worth less than when I purchased it in 2005. At that time I calculated a FMV, allocated to Land & Building, and depreciated accordingly, all in Turbo Tax. Now, I am trying to record the sale. In my case, I have neither a gain (calculated based on my original cost basis + improvements less depreciation) nor a loss (calculated based on my FMV at time of conversion less depreciation).
In the Rentals section, the FMV is shown and used to calculate a sales "gain". When I follow the instructions for special handling under "Sale of Business Property" and update the cost basis to my regular basis from the original purchase, TurboTax gives me an error that I "do not have a gain" and removes/deletes my entry. It then maintains the "gain" based on the calculation using the FMV that it carry's over from the Rental Income section. I have read all the IRS rules for calculating loss/gain, and I believe that in my circumstances, I have neither a loss nor a gain. But, how do I correctly, enter this info into Turbo Tax?
As I understand it, using the original purchase price you have a loss
Using the lower FMV at time of conversion you have a gain.
Therefore
I have seen this before and always recommended professional help. The bottom line is, the TurboTax program *can* *not* *correctly* handle this situation no matter what you do. I've tried different scenarios myself last year with TTX 2018 and could not get a correct result. But if someone figures it out, it sure would be helpful to let folks in this forum (such as myself) know.
One thing I've never gotten clarity on is for someone with your specific scenario, where you have a gain with one cost basis, and a loss with another. The best information I can find on which cost basis to use is in IRS Publication 551 page 11 at https://www.irs.gov/pub/irs-pdf/p551.pdf. But it doesn't cover what we need it to cover. So the best information I can give you, is "seek professional help". You've got two days before the filing deadline. If you will be getting a refund, there will be no penalties for filing late. But if you owe the IRS, you "will" pay interest on what you owe if you pay after July 15th.
@Carl Thank you for taking the time to respond and validate my conclusion that TurboTax isn't addressing my situation accurately. I will file an extension and look for help.
Hi All-
I have a similar situation and appreciate support. I placed my residence into rental service in 2011, at the time the preparer recorded the value of the structure too low by 80k. Is it worth it to correct this year? I do notice with the higher value i get a larger depreciation ...just not sure if i need to fill a form out. From reading this thread i'm under the impression i can change it this year, but did not understand the consideration of adjusting the depreciation for prior years. Any help is appreciated.
@mishelk wrote:I placed my residence into rental service in 2011, at the time the preparer recorded the value of the structure too low by 80k.
It may not be the "value" of the structure. In most cases, it should be the "cost" of the structure.
Was it your personal residence? If so, the depreciation the LOWER of (a) your Adjusted Basis (usually your original cost, plus cost of improvements, minus any prior depreciation) or (b) the Fair Market Value when it was converted.
And did you factor in the land? The land is not depreciable, so the amount used for depreciation is the total cost, minus the land (you enter both the total cost and the land into the program).
With all of that in mind, did the preparer use the wrong amount? If so, yes, you can start using the correct amount now and amend any 'open' prior tax returns to correct it.
Wow you just saved me a ton of time.....so in the "Cost of Property Plus Expenses of Sale" box do I enter how much my property cost plus my commission fees as expenses of sale? Thank you thank you thank you......my house's FMV was different than my purchase price and you solved my issue. I bought it in 2008 at the peak of the bubble and when I rented it in 2014 it was still lower than my purchase price. I used FMV so this year I finally sold for more than I bought it for finally but then it messes up turbo tax. And you my sir figured it out.
@Carl hey one more thing thank you for your input my purchase price was different than my FMV when I changed it from my residence to a rental. So in the sale of a rental property portion of TT the "cost of property plus sale expenses" box is that the cost of the property with all my sale fees (i.e. realtor commissions and title fees)?
my purchase price was different than my FMV when I changed it from my residence to a rental.
I have no doubts about that. But your sale is reported using the original purchase price, and not the FMV at the time of conversion. It's depreciation that is based on the "Lower" of the purchase price, or the FMV at the time of conversion to rental. For most, the lower cost will be the original purchase price. If that's your case, you report the sale in the SCH E section of the program. If that's not your case, you report the sale in the Sale of Business Property section of the program.
So in the sale of a rental property portion of TT the "cost of property plus sale expenses" box is that the cost of the property with all my sale fees (i.e. realtor commissions and title fees)?
Where precisely are you reporting the sale? Sch E section or the Sale of Business Property section?
If in the SCH E section, you will have a physically separate box for sales expenses. Also, "you" the seller don't pay title fees. The buyer does. Your sales expenses are basically the sales commission paid to the realtor out of any gain realized by you, and are deductible by you.
Otherwise, if in the Sale of Business Property section, the screen in the desktop version of TTX (which is what I use) does clearly state "cost of property plus sales expenses". So in the SCH E section you enter the cost and sales expenses separately, while in the Sale of Business Property section you do the math yourself, and enter the total of cost plus sales expenses.
@Carl my FMV is 205,000 150,500 house and 54,500 land.......my original purchase price is $280,000 so 74,200 land and 205,800 house. I was going to do it your way and put it under the sale of business or rental property. However after reading the internet you have to make sure that section 1250 of form 4797 is filled out for depreciation recapture. When I put it under the sale of business or rental property it does not fill out section 1250.
@Carl ok Carl here is what I am finding out.......form 4797 has to have land and the structure separated out.....when selling a rental that has a structure and land associated with it. The prorated land portion which in my case I used 26.5% for land and 73.5% for the structure. Part I of 4797 needs to have the land amounts placed on it and Part III of 4797 needs to have the section 1250 filled out for the recapture portion of the gains which is the depreciation. So TT is not doing it correctly when your FMV is less than the purchase price even though IRS Publication specifically tells you to do this in PUB 527 here is the quote on page 15 of 2020 Pub 527
Figuring the basis. The basis for depreciation
is the lesser of:
• The fair market value of the property on the
date you changed it to rental use; or
• Your adjusted basis on the date of the
change—that is, your original cost or other
basis of the property, plus the cost of permanent additions or improvements since
you acquired it, minus deductions for any
casualty or theft losses claimed on earlier
years' income tax returns and other decreases to basis. For other increases and
decreases to basis, see Adjusted Basis in
chapter 2.
For me I used my tax appraisal of that year.....someone may say that is low but I did not have an appraisal so I went with that number which at the time was probably not far off because the Albuquerque Real Estate Market was terrible one of the worst in the country. Anyway back to form 4797 when I do it your way it fills out lines 20-24 in Part 3 but does not place the depreciation in Section 1250 for recapture. But if I try to force it through the schedule E sale in TT and force the original purchase price to match what I paid in 2007 is recalculates my depreciation basis and increases that which is a wrong number. I have some capital loss carry over that is lower the capital gains anyway. So here is my numbers.....
Original Cost: $280,000
Land: $74,200
Structure: $205,800
Sale Price: $289000
Land: $76,585
Structure: $212,415
FMV in 2014 when entered into service: $205,000
FMV of land: $54,500
FMV Structure: $150,500 (Depreciation Basis)
Method 1: When I use $280,000 in schedule E input area of TT it increases my depreciation for 2020 (because it uses $205,800 as a basis and not $150,500) for 6 months which is about $1,100 too high but it fills out for 4797 correctly (Part I land and Part III structure with section 1250 filled out). This also calculates my capital gains correctly.
Method 2: Use the sale of business or rental property portal in TT using the correct purchase price of $280,000 plus the settlement statement realtor commission fees and the sale price of $289,000. I also place my depreciation in this area too.....which based on my FMV $150,500 for 6.5 years is $31,914. This calculates my gain correctly and provides the correct depreciation in schedule E for calculating those costs. However, either way TT is messing this up. I guess I go with Method 1 to high of a depreciation and correct form 4797 or Method 2 correct schedule E with correct depreciation and incorrect form 4797. But based on my capital loss carryover if I do use Method 2 I think that the actual tax amount is pretty close and it appears I am getting a refund. Method 1 my refund is approximately $200 higher than Method 2 mainly due to my schedule E being $1,100 more than it should be.
You need to use Method 2 (report in the "Sale of Business Property" section).
Why do you think doing it that way is showing up wrong?
@AmeliesUncle I checked the form after using method 2 in form 4797 part III it populates line 20-24. Which calculates my cap gains but it does not place anything in section 1250 in Part III which I think is for depreciation recapture. I think section 1250 ensures that recapture is taxed at 25% instead of long term tax gain at 15%. Plus it is taking the 4797 cap gains amount transferring it to schedule D where it is being lowered due carryover capital losses. I hope this is correct I see no other way. I was up until 1 am last night. Now I’m losing more time today.
It would be very rare for anything to be on Line 26. The rental property itself rarely has depreciation "recapture". It has "Unrecaptured Section 1250 Gain", which as you pointed out, is taxed at your regular tax bracket, up to 25%.
Line 19 of Schedule D will show your "Unrecaptured Section 1250 Gain".
Ok let me make another run at this with TT. I will see if line 19 on schedule D gets populated with “unrecaptured capital gain.” I had to delete my TurboTax file and start over it does not like it when you go into the schedule E and other modules and force changes. I’m starting with a clean slate. I will report back.