What Value do I use for land and property when I started to depreciate a rental property? Value at purchase or value by County assessor in year when I started renting it?

[Deaninkansas]

I purchased a property in 2008 and then rented it out in 2011. I want to make sure my depreciation is correct. I know that you can only depreciate the buildings and not the land. My Question is what value do I put for the buildings and land in Turbo Tax. is it the value of the building and land when I purchased in 2008 or the value when It was assessed by the County assessor in 2011? 

The value was lower in 2011 than when I purchased so I need to know which one to use. 

Thanks!

Dean 

[Carl]

You must use the LESSER of what you paid for it, or the fair market value at the time you placed it in service.

[Deaninkansas]

Thank you that helps explain it. How doninfond out the FMV of the property in 2011. Is there a website you can recommend that may have that info.

I appriciate the help!

Thanks,

Dean

[Carl]

I can assure you that unless the property is located in Wash. D.C., it's value was lower when you converted it in 2011. You'll have to look at appraisals as close to the conversion date as you can find. There is no magic website that will give you that information. But perhaps the county property appraiser's website would be a descent starting point.

[Deaninkansas]

Thanks Carl, I agree - We have our records from the county assessor in 2011 when I converted. So I will use that as it is less that the value when we purchased.

Thanks again for the help! You guys are awesome.

Dean

[Carl]

Generally, since the county assessor appraises at what is usually significantly below FMV, the IRS frowns on that. But, if you have absolutely no other source to determine it's FMV when placed in service, then you have no choice. One question the IRS may have is this: "Why are you reporting this FMV for depreciation 4 years after it was placed in service?" (Can you say "possible audit?")

[Deaninkansas]

Carl, I am not now just reporting the value, I did that the first year that I started to depriciate, however I used the Purchase price for the buildings and left the land part blank - So I paid $242K for the house and that is the number I used when originally filing for tax year 2011. This is wrong, and should be just the building portions (no land) so I will be taxed higher when I sell as I have deprecating against a higher value - 242,000 / 27.5 = $8,00 per year - When it is probably more like $180K building value which would be $6545 per year. I guess I will also have to repay any deductions that I received for the higher deprecation for Tax years 2011 - 2015. Any ideas on how I calculate what the amount I may owe back to the IRS for this original error?

Thanks,

Dean

[Carl]

You can only amend a return back 3 years and get a refund. However, in your case you need to go back 4 years to 2011 and it would result in you paying back some taxes, along with penalties for each year you amend that was previously incorrectly filed. It is my understanding (I don't know this for a fact) that you can file a form 3115 to request a "change in accounting method" so that you can get things right either this year or next, without having to file four years worth of amended returns. I do not know how it works, but I'm tagging @TaxGuyBill who would most likely know more about this than me. The form 3115 can be seen/obtained at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f3115.pdf">https://www.irs.gov/pub/irs-pdf/f3115.pdf</a> and I note that one of the selections on it is for a change in depreciation/amortization - which is what you need for what I believe would be one year only. But let's wait for TGBill and see what he says so we're both educated on this.

[TaxGuyBill]

Unfortunately, Form 3115 can not be used.  You should amend the 3 prior years.

Form 3115 can be used if there was NO depreciation taken, or it was taken using an incorrect procedure (such as depreciating it over 15 years), but it can NOT be used to correct the basis being depreciated (mathematical error).

Whenever you sell the property, makes sure you report the amount of depreciation that you actually took.  When you do that, you will sort of be paying back the amount from your original error.

The IRS probably won't question any changes on your current tax return.  The computers don't pick up that type of information very well (at least not yet), so unless an auditor looks at your tax return, it is very doubtful if any changes would ever be questioned.  In the unlikely event they do, it should be a simple explanation of what happened.

[Carl]

I'm wondering if he can get away with just correcting the basis on the 2015 return, since we're only talking the previous 3-4 years that are wrong. What that would do is significantly reduce (or even eliminate) the 2015 depreciation taken, because of what would be excess prior depreciation.
I know I did this on one of my rental properties, but I corrected my basis in the 2nd year (2nd full year) so it didn't reduce the 2nd year deprecation by that much, and didn't really "stick out" as far as I could tell.

[TaxGuyBill]

As a tax preparers, I need to say that he "should" amend the prior years because they are wrong.

However, if I wasn't a tax preparer, I would consider not amending and just start things correctly on the 2015 return.   🙂

[Carl]

I doubt the IRS would ever catch it. If they did, so what. I pay the late fees and fines either way - be it amending the prior 3-4 years, or when they "catch" me.

[DS30]

Depreciable basis :

In general, the adjusted tax basis of a principal residence is the cost of the property (i.e., what you paid for the property when you first purchased it), plus amounts paid for capital improvements, less any depreciation and casualty losses claimed for tax purposes. Improvements add value to the home, prolong its life, or adapt it to a new use. Regular repairs and maintenance are not included in the tax basis of the home. When a principal residence is converted to rental property, you need to know its basis for depreciation purposes. Its basis for depreciation purposes is the lesser of:

• The adjusted basis of the residence on the date of conversion, or
• The fair market value of the property at the time of conversion

When the property is converted the basis for depreciation is the lower of the adjusted basis on the date of conversion or the Fair Market Value (FMV) of the property at the time of conversion. Generally the basis is the cost of the property plus the amounts paid for capital improvements, less any depreciation and casualty losses claimed for the tax purposes.

[Deaninkansas]

Thanks, I will check the FMV on 2011 and use the lesser of that or the value when purchased.

Thanks for your help.

Dean

[DS30]

One additional note: you will not be able to deduct depreciation from prior years on the current year's tax return. You would have to file amended tax returns. (You generally must file an amended return within three years of the date you filed the original return, or within two years of the date you paid the tax, whichever is later) and could file Form 3115, Application for Change in Accounting Method for any deprecation not taken for tax years that you can no longer amend.
 <a rel="nofollow" target="_blank" href="https://www.irs.gov/uac/About-Form-3115">https://www.irs.gov/uac/About-Form-3115</a>

You would not be able to file 3115 for a math error related to your basis calculation.

On form 3115, which is attached to your current years filing you will need to calculated your depreciation as it should have been take and what was actually take and report the difference as an 3115 adjustment under your rental property.

A copy of form 3115 will need to be mailed separately to the IRS to the address in the 3115 instructions.