can I report depreciation carryover in a later year

[toborac]

I didn't know to report rental property depreciation expense until when I'm preparing 2019 return with help of a tax advisor. Then I need to 1040X my 2017 and 2018 return. I prepared with TurboTax Home & Business.

(Edit 6/1: I was using Turbo Tax to file my returns up to 2018. In 2019 I have a third party tax prep company file tax return for me.)

In 2017, only part of the depreciation reported on Sch E because the total expense after adding depreciation is more than the income. The remaining amount was recorded under Vacation Home Loss Limitation in the Sch E worksheet and also shown in item M "Vacation home depreciation" of "Carryforward to 2018 Smart worksheet".

In 2018, it's a little different. The whole depreciation amount is counted in expense, and the total expense is more than the rental income again. This time the exceeding amount is recorded in "Carryforward to 2019 Smart worksheet" as item G "Schedule E suspended loss", and last year's vacation home depreciation continue shown in "Carryforward to 2019 smart worksheet" as item M "Vacation home depreciation".

My tax preparer is waiting for me to file 2017 & 2018 1040X and can update 2019 return with the "Prior depreciation" number. I don't want to delay the 2019 return while waiting for 2017 & 2018's 1040X results.

My question is, can I hold the carryover losses to report in a later year, or until when I sold my rental property?

Or ask in another way, can I keep the unreported previous year's depreciation (either as suspended loss or vacation home depreciation) and freely to report in a later year?

[Carl]

First, how did you complete your taxes in 2017 and 2018? It seems apparent to me that you did not use TurboTax.

You are required by law to depreciate rental property. No, you can't play "catch up" on your 2019 return. Generally, that first year depreciation amount will not be anywhere close to a full year's depreciation, because it's prorated based on the date placed in service.

I get the impression you placed the property in service sometime in 2017. If so, and you did not take depreciation then you *MUST* amend the 2017 tax return. Same for the 2018 tax return also.

Understand that you "MUST" amend your tax returns in chronological order starting with the oldest one first. That would be the 2017 tax return in your case if my above assumption is correct.

Understand also that it is *EXTREMELY* *RARE* for residential rental real estate to *EVER* have a taxable gain *on paper* when you do your taxes. Especially if you have a mortgage on the property. When in add up your rental expenses, property taxes, mortgage interest and the depreciation you are required to take by law, it will most likely exceed the amount of rental income received for the tax year.

So rental property will almost always operate at ever increasing losses that will get carried over and grow with each passing year.

Lets start with your 2017 tax return. First, confirm beyond any doubt that you did "NOT" depreciate the property on your 2017 tax return. To do that, look for IRS Form 4562. There will be a total of three 4562's for that specific rental property. Each will have a different title.

One prints in portrait format and is titled "Depreciation and Amortization" This is the one (and only one) that actually gets filed and sent to the IRS with your tax return every single year.

Two of them print in landscape format. Of those two, one is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Depreciation" The *PRIMARY* one you need from your 2017 tax return is the one that prints in landscape format that is titled "Depreciation and Amortization Report".

[toborac]

Thank you so much Carl!

You are right on most assumptions except that I was always using Turbo Tax filing my returns. I missed the depreciation in 2017 and 2018 and now I'm X-ing the both.

I rented the house out on 4/1/2017. The 2017 depreciation is a prorated amount.

But 2017 excess amount was carried over as "Vacation Home depreciation" and 2018's as "Schedule E suspended loss". I think that's because in 2017 I have 3 month (>10%) personal use of the property before renting out so the Vacation Home Loss Limitation rule applies.

For the passive activity loss (in my 2018 and 2019 Sch E), it will be reported on Form 8582. How do we report the Vacation Home Loss Limited unreported depreciation?

[AmeliesUncle]

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@toborac wrote:

But 2017 excess amount was carried over as "Vacation Home depreciation" and 2018's as "Schedule E suspended loss". I think that's because in 2017 I have 3 month (>10%) personal use of the property before renting out so the Vacation Home Loss Limitation rule applies.

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No.  For 2017 you need to go back and enter ZERO days of personal use.  It asks for the number of personal days AFTER it was converted to a rental.  After you correct that, it should show up the same as 2018.

[Carl]

I think that's because in 2017 I have 3 month (>10%) personal use of the property before renting out

That makes no sense. If you did not live in the property for *any* personal pleasure use ***AFTER*** you converted the property to Residential Rental Real Estate, then you have:

ONE HUNDRED PERCENT business use and;

ZERO DAYS of personal use.

What you used the property for *before* you converted it to a rental *does* *not* *count* for anything.

So you need to amend your 2017 tax return to fix that. When you do that, it will change your depreciation carry over to 2018.

When done amending your 2017 tax return, since you have to print, sign and mail it to the IRS, you will first need a copy of the 4562 showing the *correct* amount of depreciation taken in 2017, for when you amend your 2018 tax return.

When you amend your 2018 tax return you flat out can *not* import from your amended 2017 return. So you will have to manually enter the *correct* 2017 depreciation in the box that indicates the total of all prior year's depreciation already taken.

[toborac]

@Carl @AmeliesUncle 

Thank you so much! You are totally right. Found this is explained in Sch E instruction and Pub 527. That "any days you used the unit as your main home ... do not count as personal use".

In rented out on 4/1/2017 and entered 90 days for personal use. After corrected it to 0 days, found two changes happened.

1. The whole depreciation now counted into expense, and the excess amount are treated as suspended loss and reported in Form 8582.

2. Whole amount of mortgage interest and property tax and other expenses are not split between Sch A and Sch E. This is same as my hand calculation using Pub 517 worksheet 5-1.

Now I connected all dots. Thank you all very much!

Last, can I mail 2017 and 2018 1040-X at the same time (in different envelopes)? Here's the IRS information. https://www.irs.gov/newsroom/amending-your-tax-return-ten-tips, anything else worth notice?

[AmeliesUncle]

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@toborac wrote:

2. Whole amount of mortgage interest and property tax and other expenses are not split between Sch A and Sch E. This is same as my hand calculation using Pub 517 worksheet 5-1.

Last, can I mail 2017 and 2018 1040-X at the same time (in different envelopes)? Here's the IRS information. https://www.irs.gov/newsroom/amending-your-tax-return-ten-tips, anything else worth notice?

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You need to manually split it between Schedule E and Schedule A.

Yes, mail them both at the same time (in different envelopes).  Just be sure to sign the returns.   

[toborac]

From Pub 527 worksheet 5-1 (on Page 20) Part I, "rental use percentage", I have 275 for rental, 0 days for personal use, got "Percentage of expenses allowed for rental. Device line C by line E" be 100%.

On beginning of page 21, it says "Caution: Use the percentage determined in Part I to figure the rental portions of Part II".

It seems in this case 100% of my full year expense should be reported in Sch E under rental expense and can not split between Sch A and Sch E.

Did I get something wrong here? I hope I can deduct some in Sch A.

[AmeliesUncle]

It must be prorated.  That worksheet is designed for homes that go back-and-forth between personal and rental use.  When it is converted to 100% rental use, you count 100% of the costs DURING that 100% rental period (and you prorate annual expenses, such as real estate taxes and insurance). 

[toborac]

Thanks @AmeliesUncle ! You said to manually split. Is this something TurboTax can help? Once I change personal use days to 0, TurboTax automatically put all expenses into Sch E and not modifiable (fields are in black color, not blue color).

[Carl]

On the 2017 amended return, you personally will have to manually split the mortgage interest for the year between SCH E for the time the property was classified as a rental, and the SCH A for the time the property was "NOT" classified as a rental. 

Depending on your selection, you more than likely also have to manually split the property taxes.

For the property insurance, you have to prorate it on the SCH E. The property insurance is "NOT" deductible at all for the period it time the property was "NOT" classified as a rental.

Clarification for the property insurance and taxes.

Two things that do not matter for each:

1) It "does not matter" when it 2019 the insurance and property taxes were paid - so long as they were actually paid in 2019.

2) It "does not matter" the coverage period paid for with you paid those property taxes and insurance in 2019. For the sake of simplicity, it's treated "as if" insurance and taxes were paid for the period of Jan 1 - Dec 31 of the tax year.

Remember, when you amend the 2018 tax return you will have to manually enter the "prior years depreciation already taken" because the number there that was imported from the original 2017 return will be wrong.

can I mail 2017 and 2018 1040-X at the same time (in different envelopes)?

Yes you can. However, if I were in your shoes I would mail the 2017 return first then wait a week and mail the 2018 return. As it stands right now the IRS is not processing any mailed returns. So I'd mail the amended returns a week apart so that the 2017 return will have a significantly better chance of being processed before the 2018 amended return is processed. I would fully expect that once the IRS starts processing paper returns, they'll process them first in - first out.

[toborac]

Nice suggestion @Carl . I will mail the return out separately. So lucky this year the filing deadline extended otherwise I also have to file 1040X for 2019 later.

I researched again in Turbo Tax 2017 Home & Biz and there may have some way for me to ""manually"" adjust the expenses in Sch E, then I need to find how to add the remaining amounts to Sch A.

Thank you @Carl and @AmeliesUncle !

[Carl]

For the SCH A you simply work it through the "Your Home" section under deductions and credits and include the SCH A side of the split there' Just remember, the split for the property insurance is NOT deductible outside the SCH E. Only the mortgage interest and property taxes.

[toborac]

Hi @Carl and @AmeliesUncle, Thank you very much for all the help! I have prepared both 2017 and 2018 amends and today I mailed out the 2017s. (with Carl's suggestion, I will mail 2018s next Saturday.)

@Carl When I reread the thread to see which reply I could set as best reply (actually yours and AmeliesUncle's answers are all great), I found I made a mistake.

Carl wrote:

"To do that, look for IRS Form 4562. There will be a total of three 4562's for that specific rental property. Each will have a different title.

One prints in portrait format and is titled "Depreciation and Amortization" This is the one (and only one) that actually gets filed and sent to the IRS with your tax return every single year.

Two of them print in landscape format. Of those two, one is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Depreciation" The *PRIMARY* one you need from your 2017 tax return is the one that prints in landscape format that is titled "Depreciation and Amortization Report".

"

All three can be found in Forms view. In final report TurboTax only printed the first one and didn't print the portrait one. I forgot to print manually and attach the "Depreciation and Amortization Report" in landscape format. What do you think will happen? How can I rescue?

Thanks a lot!

[AmeliesUncle]

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@toborac wrote:

I forgot to print manually and attach the "Depreciation and Amortization Report" in landscape format.

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That is not part of the tax return.  It is only a worksheet (which is why the program did not print it with your filing copy).