Incorrect Cost Basis on Schedule E of FY 2022. Steps to correct in 2023?

[tanx]

So I took a bad advice and used way too low cost basis for depreciation in FY22 (first year of rental). This caused a loss of $2K (rental income - expenses - depreciation) to be carried over to FY23 whereas if correct cost basis would have been used it should be closed to $9K.

FYI - My rental income is counted as passive income.

Q1 - In my research it seems an "Amended FY22" return could fix it but I don't see a place to mention cost basis. What software can I use to take care of this?

Q2 - Do I need to wait for Amended 2022 return to be accepted by IRS and then  file my FY23 return? Considering we are so close to 4/14 deadline, can I request extension from IRS? I owe money to IRS in my FY23 return.

[DianeW777]

First, there is no need to wait to file the 2023 tax return as long as you use the correct numbers to file. Simply correct the cost basis of the property and TurboTax will do the calculations correctly. 

Second, the instructions about amending a prior year are show below.  Lastly, let's make sure you use the correct cost basis before you begin.

Let's discuss the cost basis of your residential rental property (assuming this is the type of property).  

1. If the property was purchased with the intent to rent it and it was never used for personal purposes then you should use the original cost, purchase expenses and any capital improvements before you began to rent; OR
2. If the property was used for personal purposes before it was converted to a rental property then you must use the lower of the following:
   1. The actual cost as calculated in number 1 above, OR
   2. The fair market value (FMV) on the date of conversion (usually real estate doesn't go down in value unless there are specific reasons in your area)

Use the steps below to enter you property in the asset section.  Be sure to enter the total cost including land, then enter the land amount when prompted.

1. In TurboTax, search for rentals and select the Jump to link at the top of the search results.
2. Answer Yes to the question Did you have any rental or royalty income and expenses in 2021 for property you own?
3. Follow the on-screen instructions as you proceed through the rental and royalties section.
   • We'll ask you to enter general information about your rental (like description, address, and ownership percentage).
   • Eventually, you'll come to the Rental Summary screen, which is where you enter your rental income and expenses, 
   • Scroll to select Assets.
4. When you enter your rental house as an asset be sure to select Residential Rental Property 
5. Continue to follow the prompts to complete your asset entry.  

Note: If you made capital improvements after the property began to be rented, you can add those as a separate asset and use the date they were completed as the date placed in service.

The amended 2022 tax return.  Follow the instructions to amend your 2022 tax return and enter the correct cost basis for your rental property.  You should be using the same numbers you entered for 2023.  Be sure to read the instructions carefully so that TurboTax knows the corrected numbers and the original numbers.

• Accessing a prior-year return
• Amending a prior-year return
• How do I amend a tax return for a prior year?

Please add any questions you may have as you go through your returns.

[DianeW777 · Accepted solution]

When you enter the correct information for 2023, use the TurboTax calculated depreciation for prior years. You are making the correction to cost basis on your 2023 return and will amend 2022, which makes the right numbers from amended FY22 flow properly to your 2023 tax return.

The 2023 return will be correct as filed, and when the 2022 return is amended, there will be no difference in the amount on the 2023 tax return for prior depreciation. Once you have the corrected figures for the asset in the 2022 tax return, there is nothing more for you to do.  The math doesn't change, it's calculated on a a different and corrected cost basis.

@tanx 

[Alexandria4]

Hello, 

I am in a similar situation though mine dates back to 2019.  I have not filed 2023 yet.  Can I follow these steps to amend 2020-2022?  What (if anything) happens to 2019 as the rental property will remain with an incorrect cost basis?

Errors:

-cost basis should be higher

-a few months off on in-service date

@DianeW777 

[DianeW777]

Yes, you can follow the steps to amend your 2020-2022 returns. Keep in mind that 2020 must be amended by April 15, 2024. Correct the 2023 return now and file it correctly.

For 2019, and 2020 if you are unable to get the 2020 return amended on time. you can choose to use file Form 3115, either with your 2023 return or prepare it for your 2024 return whichever is easier. 

1. You can use the following form to correct the depreciation for your rental property, take any amount not previously expensed on a prior return, as an expense on the current year tax return as 'Other Expenses'.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2023 (or 2024) tax return.

1. Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
   • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
2. You must use the TurboTax CD/Download version to complete this form. TurboTax does not help you with this form. And your return must be mailed because this form is not supported through e-file.

@Alexandria4