Depreciation of Rental Improvement - Need 27.5 years

[MikeSF]

I have is I have some improvements some years after purchase. When I enter "Improvements" in TT it takes the 15 year depreciation. However the tax code state the depreciation should match the original building 27.5.

Do you know where to make that adjustment?

[Anonymous_ · Accepted solution]

Use Residential Rental Real Estate.

Do not use any other class for improvements so that you match the original building (which should have a recovery period of 27.5 years).

[Carl]

In the Assets/Depreciation section select the option to Add An Asset. As you work it through select "Residential Rental Real Estate" and the program will automatically set it up for 27.5 year depreciation.

Typically for a property improvement to the structure, the COST OF LAND will be zero. So make sure you enter zero for cost of land.

[MikeSF]

Thank you. And I'm guessing leave land as zero, correct?

[MikeSF]

Great answer and thorough.. Thank you.

First year using TT so I need to transfer depreciation. My Windows are 10 year SL. How do I get a 10 year schedule?

[Carl]

First year using TT so I need to transfer depreciation. My Windows are 10 year SL. How do I get a 10 year schedule?

WIndows are not depreciated over 10 years. I suspect you mean that you are "10 years into" depreciation on the windows. Since the windows became "a permanent and physical part of" the structure, they get classified the same as the structure itself and depreciated the same as the structure. So your windows would be classified as Residential Rental Real Estate and depreciated over 27.5 years, the same as the structure.

Since this is your first year with TurboTax, you just enter the same, original "in service" date for the asset. Then the program (not you) will figure the prior depreciation already taken, and continue from there. Don't be surprised on the prior year's depreciation figured by TurboTax is off by a few bucks. That happens because of rounding, and it has no impact on your tax liability. But when it displays the "prior year's depreciation" it figured, you can change it. Note that if you change it, that will affect and change the current year's depreciation. So that's why it's usually best to leave it alone.

[MikeSF]

Hi @Carl 

My previous CPA depreciated the windows @ 10 years with a $5000 first year depreciation. 

What do I need to do to get the 10 year Dep.

See attached photo.. 

[HopeS]

Now that you have the depreciation detail you will manually enter this information in TurboTax. It is important to make sure your entry matches what was previously entered by the other CPA such as cost basis and the accumulated depreciation (step 13 below).

Please follow the steps below:

Here is a guide for how to go about entering it into TurboTax in order to duplicate the entries that have been made by the CPA and continue the same depreciation.

1. Starting from the Rental Properties and Royalties selection under income, choose Update or Review to get to the details about your rental.
2. Proceed to the Rental and Royalty Summary page, then Edit your rental property.
3. Proceed through the questions until you reach the Review Your ___ Rental Summary page, then Start or Update the Assets/Depreciation section.
4. Proceed to the point where you adding an asset on the page titled Describe This Asset.
5. In order to enter the asset exactly as it has been reported in the past, choose the last option on the list, Intangibles, Other Property, then click Continue.
6. On the next page titled, Tell Us a Little More, select Other asset type, then click Continue.
7. Enter the detailed information about the asset:  description, cost, date purchased or acquired.  Click Continue.
8. Continue with additional details on the next screen, then click Continue.
9. Select the appropriate Asset Class, then click Continue.
10. Choose the MACRS Convention, then click Continue.
11. Select the Depreciation Method, then click Continue.
12. Answer the question regarding Listed Property, then click Continue.  There may be some additional background questions as well, keep going.
13. You will eventually come to a screen to confirm the Prior Depreciation, enter the data and click Continue.
14. Finally, you will see an Asset Summary screen with the current year depreciation amount listed.  There is also a check-box here to Show Details.  This will open a full description for the asset so you can verify that it matches the previously reported information.  If it does not, you can choose to go Back and re-enter the data that needs to be changed.

@MikeSF 

[Carl]

Your previous CPA did it wrong, for reasons I mentioned earlier in this thread. Overall, I would not change it though, unless I get questioned on it by the IRS. Chances of that happening while not zero, are slim if there's nothing else that "stands out" like a sore thumb on your tax return.

To enter it, in the assets/depreciation section select Add an Asset.

Then select Intangibles, Other Property and continue.

Select Other Asset Type, and continue.

Enter the information requested. I.e., the property is "Windows", the cost is $10,000 and the date purchased or acquired is 2/10/2015. Then continue.

Select "I purchased this asset" and select "yes, used 100% for business". The start date you started using it in this business will be 2/10/2015. Then continue.

For asset class, select 10 year and continue.

Select "I used the half year convention" and continue. (Your image shows HY, so that's half year convention)

Depreciation method is Straight Line, then continue.

On the Recovery Period screen, it shows 10 years. Click continue.

On the Listed Property screen, click NO.

On the "Did you take the special depreciation allowance?" screen, click YES. Below that you should see where it says the program has figured $5000 for your allowance. If that's what it says, leave the box blank and continue. If it says anything other than $5000, then enter $5000 in the box, and continue.

On the "confirm your prior depreciation" screen, it should show $3250. But from what I see on your screen shot from your 2021 tax return, it shows a total of $2000. $1500 for 2020 and before, plus $500 for 2021. So for 2022 that gives you $2000 of prior depreciation already taken.

So if the total depreciation taken up to and including 2021 is really $2000, change the amount in the box from the default of $3250, to $2000. Then continue.

That gives you $857 of depreciation on the windows for 2022.

@Anonymous_ please check my math on this. I know it's not IAW what should have been done from the start, and what should be done now (the IRS Form 3115). But notwithstanding, is my math right?

[Anonymous_]

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@Carl wrote:

@Anonymous_ please check my math on this......

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I have no idea what this CPA did, but it is way wrong and, although your math appears to be correct, I am just not sure how to proceed with the current year (and future years) deduction.

It appears, however, that the CPA just started deducting a flat $500/year (based on the $5,000 left over after the $5,000 bonus deduction) so I suppose I would go with that figure (i.e., $500/year until the basis is recovered). This is rather messy but correcting it now would probably result in a bigger mess and the dollar value is not sufficiently high to warrant going through the trouble of rectifying the mistake.

[Carl]

It appears, however, that the CPA just started deducting a flat $500/year (based on the $5,000 left over after the $5,000 bonus deduction)

That's what I see, which indicates the CPA did not take into account the first year's depreciation correctly, based on the HY convention, even though they used the wrong convention too. It appears to me that particular CPA didn't do anything right. They have the fence incorrectly classified as rental, when it should be land improvement. I also don't think that sewer line is correctly classified either, as that also falls under land improvement per IRS Pub 946.To the best of my knowledge, the laws/rules were not any different on that front in the tax year the assets were placed in service. It's a mess.