Depreciation of rental property two owners 50%

[cvmcb]

My brother and I inherited rental property this year from my mom (50%/50%).  Turbo tax figured the income and expenses 50/50 when I input the full amount.  For depreciation am I suppose to input only 50% of the appraisal and land amounts?

Cost: $200,000 (appraised amount)
Land: $43,500

Do I input $100,000 and $21,750 for the amounts that go on Form 4562?

[TomYoung · Accepted solution]

Yes, you need to enter your 50% ownership in the assets.  TurboTax warns you about this on the "We Can Automatically Divide Your Income and Expenses for You" page where you enter your ownership percentage:  "The percentage you enter here applies only to your expenses.  The cost of your assets must be entered as the amount that represents your ownership percentage."

Tom Young

[Rick-Cook]

Thanks, Tom. This is EXACTLY what I was looking for, and I found it within 10 minutes of putting in a similar question. Much appreciated!

[guyshomenet]

I remain confused.

If I tell TT that I have a 25% ownership in a property, and it prorates all income and expenses, is it in error for not also prorating depreciation?

[eronrox]

@TomYoungI know this is an old post but as it's the top hit for this question, I wanted to try a follow up here with regards to how TurboTax generates the actual depreciation schedule.

When I have had an accountant prepare my returns in the past, they have always shown a more verbose form of the depreciation schedule whereby it starts with the original basis amount (100%) and then applies a 50% exclusion to derive the share of basis, before then calculating the corresponding share of depreciaton. I seem to recall my accountant telling me it needs to be shown that way.

TurboTax however only ever shows the resultant basis amount even if I enter full amounts and tell TurboTax to automatically divide everything. You never see the original amount or show that you are claiming the depreciation at 50%, it's just shown as if the basis of the property was that half amount in the first place. The end result is the same, but is this simpler version actually OK for IRS purposes or is this a bug in TT?

Example, accountant prepared returns show:

Building = $300,000

Less Exclusion at 50% = -$150,000

Depreciation = ($300,000 - $150,000) / Life

TurboTax just shows, even if you enter the full amount (i.e. $300,000) and ask TT to divide:

Building = $150,000

Depreciation = $150,000 / Life

Thanks

[KathrynG3]

What TurboTax is reporting will meet the requirements. You are referring to the Special Deprecation Allowance currently available.

Form 4562, Part V, page 2 will include these details in columns (d) Cost or other basis and (e) Basis for depreciation for Listed Property.

Otherwise, keep your receipts and document the reduction in the business records.

For more information, see: Publication 946 How To Depreciate Property.

What is depreciation?

How do I handle capital improvements and depreciation for my rental?

@eronrox

[Carl]

This is the one instance where I recommend reporting the rental on a partnership return. Here's why.

- The owners are not married to each other, and therefore not filing a joint return (and probably never will)

- Makes it easier for each partner/owner to report their share of income, expenses and depreciation via the K-1 issued by the partnership, on their personal 1040 tax return.

- Makes it simpler if any one partner wants to sell or otherwise dispose of their share - even to the other partner(s).

- Makes it simpler to deal with, should one of the partner's die.

-Makes it simpler do deal with an uneven distribution of rental income and/or expenses, as well as depreciation if the ownership percentages are not equal among the partners.

There's more. But that's what comes to mind in the moment.

[jlb215]

Hi.

Thanks for this post.  It is exactly what I am struggling with.

When you say, "...even if I enter full amounts and tell TurboTax to automatically divide everything.." .

How did you tell TT to automatically divide by 50% relative to depreciation?  (At the beginning of this section I entered 50% ownership and my expense are correctly calculated at 50%, but TT mentions this percentage doesn't carry over to depreciation or vehicle use. ) 

So, specifically, on which page did you enter the 50% ownership for depreciation calcs?   Thanks so much for any advice.

[jlb215]

This was meant for @eronrox

Thanks. JLB

[eronrox]

@jlb215I think we are saying the same thing. I may have missed that guidance about the percentage not carrying over to depreciation, it's been a little while since I looked at it. I agree that nowhere does it give you the option to tell it to create your depreciation at 50% of an input amount.

Rather I was just describing (read: complaining) that the earlier selection as to how you are entering your income and expenses, has no bearing whatsoever on what the software does once you get to depreciation.  To my mind, that selection adds confusion unless it's going to apply it to all expenses equally. Ultimately depreciation is also an expense line. So I just input all income and expenses, including the data for the depreciation section, pre-calcluated for consistency's sake.

My particular gripe was that the depreciation schedule attachment ends up looking different to how it's always been shown when I've had accountant-prepared returns. They normally show the cost basis as a whole, and then apportion my share. I was just hoping that maybe if I told it to divide up everything else, the information that TT was getting about that data representing a 50% share might also trigger something clever within the depreciation schedule to more explicitly show that the cost basis and depreciation detailed within was with respect to a 50% share.

It makes no difference to tax in the end, I just didn't want to invite unnecessary scrutiny over presentation/cosmetic discrepencies. Per KathrynG3, I was comfortable enough that what TT shows would meet requirements. What my accountant was doing may have been unnecessary, and in theory TT should have your back if something is done wrong as a result of the software. 

I hope that helps clarify.

[JaniceKnight]

I understand that Turbo Tax does not determine the % amount of ownership for rental depreciation and lists only 100% of the amount.  Does this mean that I have to override the amount that Turbo Tax puts on Schedule E?  If so, does that mean that everybody who co-owns rental property can not file?  It’s saying that, since I overrode a figure I must paper file.

[Carl]

Generally, two things can happen when you execute an over ride.

 - The TurboTax 100% accuracy guarantee is nullified

 - You will not be able to e-file. You will have to print, sign and mail the tax return.

Generally, if you report 100% ownership of the property, and just enter half of everything (your half of the cost basis, your half of all expenses, your half of all income, etc.) then it all works out fine.

[JaniceKnight]

I just discovered that, since 2005, I have claimed 100% of the depreciation instead of 50%.  I errored in assuming that TurboTax was automatically calculating the correct percentage.  Obviously I’ll need to file amended returns.  How do I correct the error for 2021?

[Carl]

I just discovered that, since 2005, I have claimed 100% of the depreciation instead of 50%.

I would highly recommend you seek professional help yesterday if not sooner. Especially if your state taxes personal income. Form what I read on numerous websites (including irs.gov) there is no definitive concensus I can find on how to handle this.

Some say you need to file IRS Form 3115-Chanage in accounting method. That form is used when you have used an impermissible method for depreciation or did not depreciate at all. But the issue I see there is that you have a mathematical calculation error - not an error caused by an impermissible method of depreciation.

Other's say you need to amend, but even numerous IRS sites say you can only amend 2 or 3 years back, with no mention of what to do when the issue exceeds 4 years.

There are many issues with amending back to 2005.

- If the amended return prior to 2018 will result in you getting a refund, that refund will not be paid because of the three year statute of limitations. However, if it results in you owing taxes, then you have to pay it, plus any interest, fines and late fees that may be imposed on the amount due. (Can get very costly, very quickly.)

- When it comes to the TurboTax program, they only support their software for the current tax filing year and 3 years back. So for the TurboTax program for 2017 and older, it's not possible to get the *required* corrections and updates to the software. This means the chance of your amended return being wrong are extremely high, if not 100% certain.

- The Turbotax 100% accuracy guarantee is only valid for the software they support. Since TTX only supports their software for the current tax year and 3 years back, you have no valid claim to errors in the program prior to 2018. In other words, you're on your own.

- When you amend a prior year tax return with the TTX software, the amended figures are not carried forward to the next years return for amending, and flat out can not be carried forward to the next year's return for amending. It is just not possible to import from the prior year when you are amending a return. You would have to know the correct values from the prior year's amended return and enter them manually into the tax return for the year you are amending.

- An amended tax return can not be e-filed. The IRS Says so. You have to print, sign and mail the return to the IRS.

Overall, I highly recommend/suggest/encourage you to seek professional help to get this fixed. I'm guessing based on no facts what-so-ever that you'll probably end up reducing your cost basis by the amount of excess depreciation taken. But it's not that simple with TurboTax, as changing the cost basis of an existing asset will completely skew the depreciation history and make your current and future depreciation wrong. So professional help is called for.

[tagteam]

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@Carl wrote:

......numerous IRS sites say you can only amend 2 or 3 years back, with no mention of what to do when the issue exceeds 4 years.

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No, they do not. The reference to three years relates to filing an amended return in order to get a refund. After three years, the general statute of limitations has run and no refund will be issued.

Regardless, taxpayers are not limited (by any statute or regulation) as to how many tax years they can amend.