Depreciation of foreign rental property

[RoyCo]

I'm doing my 2021 return on TT desktop (mac).

I have a residential property outside the US, placed in service in 2012. I have been depreciating this over a 40 year period. The amount TT calculates is the same as my own calculation. Prior to this year the depreciation amount has been the same federally and for CA state. This year (2021) the amount on schedule E (IRS) is the same as last year, which I was expecting. The CA schedule E however has a value based on a 30 year depreciation life duration. This in turn leads to a subtraction on CA (540) to the rental income.

a) Is this correct?

b) if so, why the change from 2020?

c) how can I see the total for depreciation for both Federal and CA as they are now diverging?

d) Will TT be keeping track of the differing rates of deprecation over the years?

Thanks,

Roy

[Carl]

I can confirm that on the federal taxes, 40 yr depreciation is correct for a foreign rental property placed in service before 2018. We'll wait for another response on the CA taxes from someone more familiar with CA returns, than I am.

[RoyCo]

I have an update to this…

Firstly, thanks to Carl for his answer.

I spent multiple hours onto TT support, who were not able to explain why this was happening and generally concluded that there was nothing they could identify in CA  tax law that would explain this. Having reached this conclusion they somewhat  bizarrely and resolutely refused to accept that it was even conceivable that this might be an error in their software and that my next step was to pay to talk to a CPA. I refused  to do this unless they agreed to pay costs if/ when the CPA determined the CA Sch E was being produced wrong. Eventually, escalated and the supervisor agreed to raise an investigation and got me to speak to one of their CPAs.

In my initial post I said TT was using  a 30 year life for depreciation (this is stated on 3885A). However, on checking the numbers, I found TT is not even using this, they are using 27.5 years!!!

The CPA’s assessment was that the deprecation for CA should be the same as the federal, i.e. 40 year life and consequently there should be no CA adjustment to rental income.

This is the first time TT have raised an investigation on my behalf. Does anybody know what I should now expect? I’ve had no communication from TT. I would have expected an investigation to have some sort of ticket number, if it does this was not conveyed to me. How will they advise of progress and when the fix is completed? Any idea how quickly fixes get issued (I know that is a bit like asking about the “length of string”, but this one can’t be too difficult: they got it correct for many years prior to this one!).

Regards,

Roy

[Carl]

@RoyCo again, I can't be of much help on the CA state return side of things. But confirm that you selected the option to indicate this was foreign rental property on the federal side. You'll find that option on the first screen in the Property Profile section. Also confirm the in service date.

For assets classified under MACRS as "Residential Rental Real Estate", if the "Foreign Country" option is selected and:

 - The in service date is in 2017 or before, it gets depreciated over 40 years.

 - The in service date is in 2018 or after, it gets depreciated over 30 years.

Now I don't know if there will be similar options available for this on the CA state tax return side. I would expect it to just be imported into the state return. But still, it's something to check, as it "appears" the state return is identifying it as U.S. property. Maybe the state treats both U.S. and foreign rental property the same for depreciation? I really don't know. But it's a thought and maybe something worth checking out.

[DaveF1006]

I received the same results you did when I ran the scenario in my Turbo Tax program. No matter when it was  placed in service, it reported a 30 year depreciation both prior and after 2018.

 Presently, I reported the matter to my lead staff to see if we can get an active investigation started.

@RoyCo

[ Edited 03/16/22|03:51 PM PST]

[RoyCo]

Thanks Dave (@DaveF1006) for running with this.

If it assists the investigation I have made the following observations. Although it says 30 years instead of 40, it is actually using 27.5 years. The figures for the AMT CA Sch E  are correct.

Should I expect any communication from TT as to progress or do I just power up the App periodically to see if it is fixed?

Regards,

Roy

[DaveF1006]

Unfortunately at this time, I have no ETA for the update.

@RoyCo

[Ash2]

I have exactly the same issue. Foreign rental property placed in service in 2016. TT (online) uses 40yrs for Federal but for some reason uses 30yrs for California. Looking at the numbers, it indeed is 30yrs (unlike 27.5yrs that you are seeing). 

I have been on call for about 4 weeks now and TT has neither acknowledged or denied that there is an issue but no-one's able to explain. I have an investigation initiated as well on this but they got back saying that its a computation error ie my entries were not correct. I've since reached out to their customer support (who otherwise have been very patient) and walked through the entries and they haven't been able to point out any issues. I have asked the investigation to be reopened to confirm if 30yrs for CA is correct or not.

FYI...I have though been forwarded this thread: 

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/turbotax-automatically-changed-a...

which talks about using 30yrs for properties placed in service prior to 2018 but this is for Federal taxes. If indeed this rule change that TT is basing the change upon, then I should have seen both Federal and CA change to 30yrs, and not just CA. There is still inconsistency there.

[RoyCo]

Thanks @Ash2. for adding to this thread.

I have not heard anything from TT either.  I'm not convinced that TT have screwed up the federal and got CA correctish (the depreciation for AMT is 40 years: show me the divergence in the FTB tax code for this). Every source I've come across indicates that CA conforms with the IRS, so your final comment is spot on.

TTs own CPA told me that it should be 40 years for both tax authorities.

Very unimpressed with TT, they should be communicating with those who have opened investigations. They should be 

1. Documenting how they are applying the tax laws

2) Fixing their code

3) if 2. is not feasible immediately (not sure why this should be as they had in correct for 2020), then they should provide a work around to enable people to file on time.

[RoyCo]

Should have added.

The website for another well known provider of tax software states 40 years for the IRS and  our circumstances.

I have tested this on another piece of software (not from the website above) and this gives results of 40 for both CA and IRS.

[jchangxu]

@RoyCo did you end up using the other software to file? I have an opposite problem. My federal is 30, and my California depreciation is 40 years. I want it all just to match 30.