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Incorrect Rental Property Basis since 2004

Hello, back in 2004, I did a 1031 exchange and kept the same basis as the original property.  Basis was/is ~$100K and should be ~200K.  I'm planning to sell the property in 2024.  Should I change the basis to be correct on my 2023 return?  It seems that I really messed up and did not get increased depreciation for the last 19 years.  Is there a way to recapture that or fix it?  For sure I need to change the basis to ~$200K since that will impact long-term capital gains.  Thanks.  Any help here would be greatly appreciated.

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Accepted Solutions
DianeW777
Expert Alumni

Incorrect Rental Property Basis since 2004

Yes, you can do that if it represents an accurate land value.  The next question would be if there was any 'buy up' in the original Section 1031 trade and whether you actually did depreciate the additional 'buy up' as a new asset.

 

Again, if the land value does represent an appropriate amount and it would coincide with the tax assessment on this property received you can use your action plan.

 

If not, then you should use the 3115 as indicated by Mike9241, because the IRS tax law is clear.  Depreciation is allowed or allowable which means use it or lose it and at the time of sale, you will pay tax on the amount that would have been allowed for depreciation that was never used.  Form 3115 eliminates that problem by allowing you to claim all unused depreciation in the current year.

 

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 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.

This must be completed and filed with the 2023 return on time.

 

You can change to TurboTax CD/Download if you choose.

@sk-109 

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6 Replies

Incorrect Rental Property Basis since 2004

you have some options

 

1) you prepare form 3115 to correct for the depreciation you should have taken but didn't

2) hire a tax pro to do this. the 3115 can be tricky

correction must be made. the tax laws say you recapture the larger of the depreciation you actually took or the amount you would have taken if you used the correct method and life. so if you don't corret you'll be taken on the 19 years of depreciation you didn't take. 

 

 

Incorrect Rental Property Basis since 2004

Thanks for your response on this. I have some more analysis info:

 

On the old property and the new property, the value of the land was not entered into TurboTax, or it didn't transfer over. The Basis is only the net basis, excluding land. A new basis was entered when the new property was acquired, this included the prior depreciation taken on the old property + any profit.  I'm thinking about changing the total cost when the asset was acquired and entering a total amount of land included in the cost.  The  land value.  The total cost when the asset was acquired - total amount of land included in the cost = current depreciable basis.

 

This way the current depreciable basis is still correct and only a value for the land would be entered.  Since the land is not depreciable anyway, it's pretty much a wash.  Any thoughts on this approach would be appreciated.

 

Thanks again for your response.

DianeW777
Expert Alumni

Incorrect Rental Property Basis since 2004

Yes, you can do that if it represents an accurate land value.  The next question would be if there was any 'buy up' in the original Section 1031 trade and whether you actually did depreciate the additional 'buy up' as a new asset.

 

Again, if the land value does represent an appropriate amount and it would coincide with the tax assessment on this property received you can use your action plan.

 

If not, then you should use the 3115 as indicated by Mike9241, because the IRS tax law is clear.  Depreciation is allowed or allowable which means use it or lose it and at the time of sale, you will pay tax on the amount that would have been allowed for depreciation that was never used.  Form 3115 eliminates that problem by allowing you to claim all unused depreciation in the current year.

 

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 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.

This must be completed and filed with the 2023 return on time.

 

You can change to TurboTax CD/Download if you choose.

@sk-109 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

Incorrect Rental Property Basis since 2004

Thanks for your thorough response on this.  I do believe the value of the land represents ~30%. Formula for this was: New Property Land Value/(New Property Basis+Old Property Depreciation Taken).  I added the Old Property Depreciation back in, since that number was subtracted to arrive at the Adjusted Basis for the Old Property. This certainly seems in-range.  Do you think it would best to make this change prior to filing for 2023 or wait until the property is sold?

DianeW777
Expert Alumni

Incorrect Rental Property Basis since 2004

You have the option.  You can do it now, or you can do it in the year sold.  If you use Form 3115, in the year of sale you will get full advantage of the depreciation expense you may have missed and you will have the correct cost basis for the sale.

 

I must make a disclaimer only in respect of the tax law. This has been tax law for many years, however it can always change without warning. 

 

Instructions: What should I do if I didn’t take depreciation on my rental property?

 

@sk-109

[Edited: 02/19/2024 | 1:13 PM PST]

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Incorrect Rental Property Basis since 2004

Thank you for your response.

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