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avinash82
Returning Member

Did not claim depreciation on rental property for 2017 and 2018

Hello,

 

I forgot to claim depreciation on my rental property in years 2017 and 2018. What is the expected procedure to fix this issue now, so that I can claim the depreciation on previous returns as well as in 2019?

 

Do I just file amended tax returns for 2017, by adding the depreciation through Turbotax Software and filing the new 1040-X form? Then do the same (amend) for 2018, and finally file the new 2019 forms?

 

Is it necessary to do the form 3115, or just file the 1040-X Forms? My understanding seems to be that since no depreciation was taken for the 2 years, there is no change in accounting method as such - so no need for the form, but just file the amended returns. Is that correct?

10 Replies
Carl
Level 15

Did not claim depreciation on rental property for 2017 and 2018

Since you can amend a tax return for the current tax year and three years back, you have no need or requirement to file the 3115. You need to amend the 2017 and 2018 tax return. Note that you *MUST* amend starting with the oldest return first. Additionally, when you amend the 2018 return you can not import your carry forward data from the amended 2017 tax return. It's physically impossible to do so. Therefore you will have to manually enter the carry forwards from the 2017 return, into the  2018 return when you amend it. It is also imperative that the carry foward amounts be correct. 99.9999% of people in your situation get the amounts wrong and end up getting audited anyway.

So get the 2017 tax return amended and once you've done that *PRINT* *EVERYTHING* (not just the forms required for filing) and post back for guidance on the 2018 amending process.

Take note that an amended return can not be e-filed. The IRS Says so. You have to print, sign and mail it to the IRS. Each individual amended return has to be mailed to the IRS in a separate envelope too. But you don't mail anything to anyone until you have completed *everything* and are satisfied with the results.

For amending guidance of a prior year return, see https://ttlc.intuit.com/community/amending/help/how-do-i-amend-a-return-in-turbotax/00/26768  I know it refers to 2016. But the basic guidance still applies.

Again, note that you need to complete each return in order, starting with the oldest first. You really can't even start your 2019 return until you've amended the 2018 return. That's the only possible way to get the correct numbers into the 2019 return, from the amended 2018 return.

 

 

 

Carl
Level 15

Did not claim depreciation on rental property for 2017 and 2018

Also, assuming 2017 was the first year you rented the property, the below information provides the clarity that in my opinion, the program does not.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

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.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable 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.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

tagteam
Level 15

Did not claim depreciation on rental property for 2017 and 2018


@avinash82 wrote:

Is it necessary to do the form 3115, or just file the 1040-X Forms? My understanding seems to be that since no depreciation was taken for the 2 years, there is no change in accounting method as such - so no need for the form, but just file the amended returns. Is that correct?


Yes, it is necessary to file Form 3115 since, by not taking any depreciation deductions for two or more tax years, you have used an impermissible method of accounting; you cannot merely file amended returns for both tax years.

 

You will make a Section 481(a) adjustment on Form 3115 to account for the depreciation foregone on the returns for the preceding two tax years.

 

See Rev. Proc. 2018-31 (https://www.irs.gov/pub/irs-drop/rp-18-31.pdf)

 

@avinash82 

 

 

avinash82
Returning Member

Did not claim depreciation on rental property for 2017 and 2018

Thanks for the replies.

@Carl , it looks like I will have to file the 3115 form based on what @tagteam is saying.

 

I have the amended 1040-X form for year 2017 ready. It seems like I will have to file the 3115 form as well, along with the 1040-X form for 2017. Now, the procedure would be:

(1). File Form 1040-X and Form 3115 together. Mail the forms to IRS now.

(2). Next week, I will prepare 1040-X for 2018, and mail it to IRS.

(3). Finally, a couple of weeks after that, I should be ready to file the tax returns for year 2019.

 

Is the above procedure correct, @tagteam?

tagteam
Level 15

Did not claim depreciation on rental property for 2017 and 2018


@avinash82 wrote:

Is the above procedure correct, @tagteam?


No, it is absolutely not correct, @avinash82.

 

You do not file an amended return (1040-X) for any prior year with your 3115. 

 

Rather, you file Form 3115 with your current year's return to make the Section 481(a) adjustment on this year's timely filed return.

 

See https://www.irs.gov/instructions/i3115#idm140516454118016

 

I know you do not want to hear this, but I firmly believe you need to seek professional guidance with respect to this issue and probably should have your return professionally prepared.

avinash82
Returning Member

Did not claim depreciation on rental property for 2017 and 2018

Okay. Thanks @tagteam. I just spoke with Turbotax Support, and they said that I would need to file the amended returns, and the form 3115 with each amended return for 2017 and 2018. I am not sure that this is right. I will probably need to talk to a CPA, to get this set right.

 

Just one question: I hope I will still be able to get the tax refund for 2017 and 2018, based on the depreciation deduction, even with the form 3115 and no amendments?

Carl
Level 15

Did not claim depreciation on rental property for 2017 and 2018

@avinash82 the 3115 is *NOT* simple. In fact, it can be extremely complicated. Your life will be sooooo much simpler if you just amend the 2017 and 2018 tax returns.

Since the IRS says you can amend a tax return for a *maximum* of three years back, you need to amend. Now if you had not been taking depreciation since 2015 or earlier, then you would be *required* to file 3115. But like I said, the 3115 is *not* simple and for many (if not all) TurboTax users it requires professional help - which means you will not be using Turbotax to file the return you include the 3115 with.

If you pursue the 3115 path with TurboTax, you risk creating a mess that will *require* professional help to clean up. That will make the cost of professional help for a 3115 seem astronomical when compared to just amending the prior two years of returns in your case. (It will definitely cost more than doing it yourself with TurboTax.)

 

 

tagteam
Level 15

Did not claim depreciation on rental property for 2017 and 2018


@avinash82 wrote:

Okay. Thanks @tagteam. I just spoke with Turbotax Support, and they said that I would need to file the amended returns, and the form 3115 with each amended return for 2017 and 2018. I am not sure that this is right. I will probably need to talk to a CPA, to get this set right.


@avinash82 Sorry but what you were told by Support is inaccurate. Below is the link that relates to the 481(a) adjustment (scroll down to page 20).

 

https://www.irs.gov/pub/irs-drop/rp-18-31.pdf

 

If you adopt an impermissible method of accounting for two consecutive tax years (and have already filed returns for those years using that impermissible method) you need to file Form 3115 to rectify that situation with your timely filed current year return. 

tagteam
Level 15

Did not claim depreciation on rental property for 2017 and 2018


@Carl wrote:

Since the IRS says you can amend a tax return for a *maximum* of three years back, you need to amend. 


The IRS also says that you cannot amend if you adopted an impermissible method of accounting (taking no depreciation deductions is an impermissible method) and used that impermissible method for two consecutive tax years (which is the case in this thread). 

 

In that event, you need to file Form 3115, make the one-time adjustment, and file the 3115 with your timely filed return for the current tax year.

 

 

AmeliesUncle
Level 13

Did not claim depreciation on rental property for 2017 and 2018

Tagteam is correct.  You are NOT allowed to amend.  You NEED to use Form 3115 with your current year tax return.

 

PLEASE go to a tax professional that is familiar with Form 3115.  TurboTax does not support it, and it can be complicated, so please go to a tax professional.

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