Foreign residential rental property depreciation

[SatishUpadhyay]

Hi, I have a residential rental property overseas that was bought in 2006 but put on rent in the beggening of 2017. I never claimed its depreciation until last year taxes.  Last year in 2021 my cpa claimed  depreciation first time with MACRS 27.5 years MM/SL method. This year I am filing my own taxes with turbotax and turbotax is calculating based on 40 years MM/ALT.  Questions are 1) Is it okay to do it turbotax ways as it is changing the calculation method from 27.5 year to 40 year?  2) Can turbotax allow me to depreciate it over 27.5 year the same way as it was. done last year? to avoid any calculation discrepancies.  Appreciate any thoughtful advices here.

[HelenC12]

Prior to 2018, depreciation of foreign residential property was limited to 40-years.  The Federal tax law changed in 2017 (effective 1/1/2018) due to the Tax Cuts and Jobs Act to shorten the recovery period for foreign rental properties from 40 years to 30 years,

• Per IRS Publication 946, page 32, 40 years for foreign residential rental property placed in service before January 1, 2018. 

No, it's not OK to use the 27.5 year depreciation method for foreign residential rentals. Technically, you are not required to claim depreciation expense. But you are required to "recapture" depreciation allowed or allowable when you sell the property, in the future. That is, you will pay tax on the depreciation, when you sell, whether or not you actually claim it while you were renting it out.

You may file amended returns.  You have three years from the date you filed your return or two years after you paid the tax due (whichever is later) to file an amendment

You may request a change in accounting method from the IRS. Please see Form 3115, Application for Change in Accounting Method. 

[SatishUpadhyay]

Thank you HelenC12 for your answer.

Does that mean I cannot file with 40 years depreciation method as turbotax is calculating without  getting my 2021 taxes amended first even though I will be claiming less in depreciation expenses?

[AmyC]

You should file your 2022 return and then correct the past.

Your property became a rental in 2017 -the IRS says it must be 40 year  depreciation for the property.

Helen is saying you can file Form 3115 for all the years from 2017-2020 and amend 2021 to get back to where you should be. You should contact the preparer and ask them to correct their mistake with an amended return. They should have done the Form 3115 when they learned you had not been depreciating the house. They can also e-file the amended return for you. If you have state tax, this will also need to be amended.

If you want to go back and amend 2020 federal and state you can, Then use  Form 3115 for 2017-2019.

It is up to you how you want to correct the past.

[SatishUpadhyay]

Finally, I heard from my 21 tax preparer and he says as below.

"Since we had to recreate the depreciation on the 21 tax return, and the prior accumulated depreciation, I would not recommend amending the tax return…rather, I would adjust the A/d and current depreciation for years moving forward."

I don't want to go through him again and want to do it myself. How can I do it using turbotax? Does it make sense of what he is recommending?

[Carl]

I don't want to go through him again and want to do it myself. How can I do it using turbotax?

For the 3115 I would not recommend doing it yourself. This is not simple by any stretch, and doing it wrong will be more costly in the long run. Just find another CPA that has a clue, as I'm sure the one you were using is not the only one available to you.

Does it make sense of what he is recommending?

It's not exactly clear just what is being recommended. Per IRS Publication 946, since it's been more than 2 years you've not depreciated or used incorrect depreciation, you can't just amend prior years to fix this. The IRS says you have to use IRS Form 3115-Change in Accounting Method. This is made clear is IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf on page 14. To wit:

Generally, you must get IRS approval to change your
method of accounting. You must generally file Form 3115,
Application for Change in Accounting Method, to request
a change in your method of accounting for depreciation.

The following are examples of a change in method of
accounting for depreciation.
•A change from an impermissible method of determin-
ing depreciation for depreciable property if the imper-
missible method was used in two or more consecu-
tively filed tax returns.