I discovered Turbotax never included depreciation expenses for any of the years we rented out our home. Now that we've sold the home, how do I calculate depreciation?

[Hal_Al · Accepted solution]

You should probably get your taxes done professionally, this year. You have a problem. When you sell a rental property, you are required to "recapture" (pay tax on) depreciation allowed or allowable. That is, you must adjust the gain (or loss) on the sale as if you had claimed deprecation. You may be able the amend up to three years back to add depreciation (2014 must be amended by 4-15-18)

[TaxGuyBill]

Technically amending is not allowed if depreciation was not claimed for 2 or more years.  The only way to fix it would be by filing Form 3115.  As you say, a tax professional is highly recommended this year.

[craigdicht]

Thanks for these same-day answers. Correct me if I'm wrong, but the main problem seems to be that I must include the depreciation into my adjusted cost basis in spite of the fact I didn't benefit from depreciation expense on my Schedule E. I'll lose out on some money this year.

If that's the only issue, I can probably live with it. The house wasn't a big purchase or a big sale and I imagine it would cost me more to use a professional than I'd lose from just filing properly this year.

[Coleen3]

That is true. You can potentially avoid this with the Form 3115. Otherwise, you will have to recapture it even though you never took it originally.

[TaxGuyBill]

How long did you rent it out?  Did you rent out the entire house?  Or did you just rent out part of it?  Or was it a back-and-forth property that alternated between personal use and rental use?


Just to give you an idea of amounts, let's use an example.  Let's say the house only cost $42,500, and $15,000 of that is land.  So the depreciable basis of the house would probably be $27,500.  Let's also assume you sold the property for more than you paid for it.

That would be $1,000 per full-year of depreciation that you missed out on.  If you are in the 15% Federal tax bracket and 5% State tax bracket, that would means you have been paying $200 too much, per full year because of the missed depreciation

In that example, if you missed more than two full years, it would probably be worth the cost of a tax professional to fix things.

If your depreciable Basis of the house (usually purchase price minus cost of land) is more than $27,500, the savings would also be proportionately larger.

[Coleen3]

 Under the depreciation section, the is an asset summary page:

There are several reasons why TurboTax may not have calculated depreciation for your asset. They include:

 - the asset may already be fully depreciated

 - you may have incorrectly entered the date you acquired the asset

 - you may not have entered a cost for the asset

There are numerous screens that deal with the depreciation of a rental property.

• Describe This Asset
• Tell Us a Little More About Your Rental Asset
• Tell Us About This Rental Asset

Once you have double-checked you answers and entered the information correctly, you will see the screen shot below

To manually calculate:

If you rented the home in 2017, be sure to include the 2017 partial year amount. Except for the first and last years which are partial, you may calculate it as below.

Year 2 though 9=3.636% times the basis. Years 10-26/27 see the table in link below if you want to be exact. Otherwise, continuing with the 3.636% will get you very close.

Year one= see table in the link below.

Last year=3.636 times the number of months held out for rent.

http://www.fkco.com/tax-forms-and-support/macrs-275-year-residential-real-estate-table

[Coleen3]

You may also use the following technique as a solution.
Unfortunately the depreciation recapture is "allowed or allowable" meaning even if you never depreciated it, you would still have to recapture the depreciation. Depreciation taken would be on line 18 of Schedule E.
One solution is to elect an accounting method change and file a Form 3115 in the current year and take the  prior depreciation as a section 481(a) adjustment. [land  value is separated, land is not depreciated]
Below are the IRS links related to the change in accounting method. TurboTax does not have that form.
May be these will help
Form 3115, Application for Change in Accounting Method
<a rel="nofollow" target="_blank" href="http://www.irs.gov/uac/Form-3115,-Application-for-Change-in-Accounting-Method">http://www.irs.gov/ua...>
Instructions for Form 3115 (03/2012) 
<a rel="nofollow" target="_blank" href="http://www.irs.gov/instructions/i3115/index.html">http://www.irs.gov/instructions/i3115/index.html</...>
Form 3115,
<a rel="nofollow" target="_blank" href="http://www.irs.gov/file_source/pub/irs-pdf/f3115.pdf">http://www.irs.gov/file_source/pub/irs-pdf/f31...>

[craigdicht]

Thanks for these same day answers. As I said above, neither the adjusted basis for the purchase or the sale price was very high, so I'm thinking about just doing the manual calculations on depreciation to add to the adjusted sale basis. I can look into amending previous returns after that.

All other things being equal, does the IRS mind if I didn't take the allowable depreciation as long as I include it for adjusted sale basis now?