How do I properly include improvements to a rental property in the same year i disposed of the property. When I enter them correctly, turbotax is not adjusting the basis?

[GrantM]

I have not disposed of the property. In fact, May 1, 2019 was the first use of this specific property after my parent died in late December 2018. The home is now used as a rental. I just found this question to pertain most to the challenge I am having since it has to do with adjusting the basis.

Adjusting Schedule E business depreciation. Building depreciation matches my accountant's number but the carpet depreciation does not.

Building acquired 12/20/18 with assessed value of 1,527,720; Depreciation SL MM 3.636% (MACRS Method); 27.50 (Rate) for a current year depreciation of $53,241 and 2045 (final year).

Capital Improvements

- HVAC  installed 09/09/19; cost of $14,570; Depreciation SL MM 3.637% (MACRS Method); 27.50 (Rate) for a current year depreciation of $155 and 2045 (final year).

- Furnishings: Carpet installed 01/04/19; cost of $17,874; Depreciation 5YR MACRS (MACRS Method); 5.00 (Rate) for a current year depreciation of $6,256 and 2045 (final year).

Instead of getting the numbers my accountant used ($53,241, $155, and $6,256), using TurboTax I got ($53,239, $155, and $6,256 (using a Section 179 of $3352 and depreciation of $2,904).

I opened the Forms view of TurboTax Home & Business Schedule E but cannot make minor adjustments to match my accountant's number for new carpet installation. It has to do with the MACRS figures. I've tried every option to make adjustments in the "interview mode" but the only way to get total numbers closer to my accountants is to jerry-rig Section 179 but that will create a problem for next year's filing. How do I modify the Schedule E Form to match my accountant's numbers?

[AmeliesUncle]

Are there any other assets on your tax return, particularly a large dollar amount that was "placed in service" in October-December 2019?

If not, at first glance it looks like the accountant may have done it wrong.  If they used $6256 for a 5-year asset of $17,874, they used the Mid-Quarter convention.  But the Mid-Quarter convention only applies if 40% of the assets that were "placed in service" that year were "placed in service" in the last quarter of the year.  That doesn't seem to be the case, which would mean the accountant used the wrong method.

[Carl]

This is easy - just not intuitive is all. I am assuming the improvements were completed after the last renter moved out, and before the closing date of the sale.

Your property improvements will be entered in the Assets/Depreciation section (could be called Sale of Assets/Depreciation).  Under no circumstances and with absolutely no exceptions, will you change anything for any asset already listed there.

When entering the new property improvements there is no need to depreciate them since they are never placed "in service" as a rental asset. But it can be a bit tricky to get the program to understand this. Here's how you do it.

Enter the asset and give it a business use percentage of ZERO percent. Then make your "in service" date any date between the date the last renter moved out, and the closing date of the sale.

In some situations the program will flat out refuse to accept zero percent business use. That's fine. Give it 1% business use and make the in service date the date of your closing on the sale. If any depreciation is taken (I doubt there will be, but never say never) it will be so negligible that it won't matter.

[GrantM]

Carl wrote, “I am assuming the improvements were completed after the last renter moved out, and before the closing date of the sale.”  No, my parent died in December 2018 and the house is now used as a rental (5/1/19). Carpet replaced 1/4/19 and HVAC replaced 9/9/19. Changing the “Placed in Service” date to 12/19/18 (even tried 12/21/18 since TurboTax didn't like the date 1 day prior to transfer/acquisition) still has different numbers from the accountants for building and carpet. This is a new jointly held business (as of 12/20/18). The accountant I’m referring to is highly qualified and does taxes for my other partners. I’m the only one using TurboTax so I’m trying to make it work to match the accountant’s numbers. I’ve tried the options you suggested but I’m not getting the correct numbers. As I wrote in my original post, the HVAC numbers in TurboTax matched the accountant’s depreciation figure of $155. It’s just the building and carpet numbers that differed. Now I’m getting $55,638 and $5,720 respectively and TurboTax keeps trying to put 179 depreciation numbers in too which the accountant said would be problematic in future years. I tried to change those 179#s to 0 but still didn’t get the accountant’s numbers for building ($53,241), and carpet ($6,256). I haven’t touched the correct HVAC numbers ($155). 

You wrote, “This is easy - just not intuitive is all.” Doesn’t appear to be easy and certainly isn’t intuitive. Can I use the “Form’s view” to change the numbers to reflect the accountant’s numbers for building and carpet? If not, are you getting the numbers the accountant has if you enter them in TurboTax? Thanks!

[Carl]

Here's the problem.

You are including the property improvements as "a part of" your initial entry for the property itself. The Turbotax program flat out does not do the figures correctly when you do that. Here's what I think is happening to you.

You enter the property in the assets/depreciation section and during that process it asks you for property improvements and you enter them as "a part of" that initial entry. The problem is that the program does not add those property improvements to the structure value only. It adds it to the total value and then figures the deprecated structure value based on that total. Exampe:

FMV of property (your cost basis) on the date your parent(s) passed: $100,000

Then based on your property tax bill 30% of that value is allocated to the land.

Therefore the non-depreciated land value is $30,000 and the depreciated structure value is $70,000. However, while making that initial entry you were asked for property improvements and you did $30,000 of property improvements after you acquired the property and before it was placed in service as a rental.

That makes your new cost basis $130,000. Then using the percentages based on the allocation of your last property tax bill, 30% of the land value is *INCORRECTLY* figured at $39,000 and 70% of the structure value is *incorrectly* figured at $91.000.

So what you have to do is enter the property itself using the values *WITHOUT* including your property improvements. Then enter the property improvements as a physically separate entry, even though both will have the same "in service" date.

The initial entry of the property itself will properly allocate 30% ($30K in my example) to the land that will not be depreciated, and 70% ($70K in my example) that will be depreciated over the next 27.5 years.

Then you will enter your $30K of property improvements as a physically separate entry also in the assets depreciation section, also classified as Residential Rental Real Estate. The structure value of this entry will be $30,000 and the land value will be $0 (ZERO).

This way, the the total structure value of $100,000 will be depreciated over the next 27.5 years, and the land value of $30K does not change and will not be depreciated.

Does this make sense to you? I can understand if my attempt to explain this to you may be hard to wrap your head around - especially if my assumptions about your specific and explicit situation are wrong.

[AmeliesUncle]

@GrantM wrote:

Now I’m getting $55,638 and $5,720 respectively

Did you change the "placed in service" date for the carpet to sometime in 2018?  That would explain it.  Or just delete the carpet asset and enter it again.

As I said before, it looks like the accountant used the Mid-Quarter convention for the carpet, which based on the information you provided would be wrong.  Ask the accountant about it.

When was the actual "placed in service" date?  In other words, what date was it available and ready to be rented?

For the building, are saying the accountant used $53,241 and TurboTax used $53,239?  So only two dollars difference?  If so, that is probably because TurboTax uses the mathematical method of calculating depreciation, and the accountant may have used the "tables".  That sometimes will have slightly different results.  When you do next year's return, just enter the proper amount of "prior depreciation" that was taken.

[GrantM]

Thanks to both Carl and Amelies Uncle.

Still not finding the right answer. I tried separating out the Carpet as a new asset (Residential R.E.) and Turbotax applied the 27.5 years to result in $1,045 which is way off the $6,256 the accountant has based on 5 YRS MACRS.

I think Amelie's Uncle is correct that it's the MACRS Turbotax uses but I can't find a combination that works.

As I've written in earlier posts, the HVAC numbers in TurboTax matched the accountant’s depreciation figure of $155. It’s just the building and carpet numbers that differed.

I'm not concerned with the $2 difference (Accountant $53,241 and TurboTax $53,239) for the building?  It's the $516 difference (Accountant $6,236 and TurboTax $5,720) for the carpet.

TurboTax and my entries are:

Using In Service date of 01/01/2019 results in a Depreciation expense of $3,575. TurboTax has MACRS Convention "HY" and Depreciation Method "200DB". 

As instructed, I changed the In service date to 12/19/18 [one day before the property was transferred to me upon parent's death] even though carpet was installed on 1/4/2019; 0 for 179 entry; and "half-year MACRS Convention" [Turbotax entered Amount of Depreciation taken in prior years = $3,575].

Mid-quarter year MACRS Convention resulted in $536 difference (Accountant $6,236 and TurboTax $6,792). Turbotax entered Amount of Depreciation taken in prior years = $894.

Still banging head against the wall...

Since I've asked three times if I can just change the numbers in “Form’s view” to reflect the accountant’s numbers for building and carpet and neither of you has addressed it I'm now assuming I can't which is unfortunate. Thanks!

[AmeliesUncle · Accepted solution]

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@GrantM wrote:

Still not finding the right answer. 

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I've told you TWICE the probable right answer about the carpet.  The accountant probably incorrectly used the mid-quarter convention.   Ask the accountant about it.  Don't try to force TurboTax to match an incorrect method.

Also, as I said before, WHEN was the property first available to be rented?  That is the date the building was "placed in service" and probably the date the carpet was "placed in service".  You can't use a "placed in service" date before the property was available for rent.  If the accountant used a different date (which would change the depreciation for the building), ask the accountant about it because it is probably wrong.

[GrantM]

Kudos to AmeliesUncle who was right both times.

After much silence and an accountant's apology, I was told they should have used the HY convention (AmeliesUncle's point) and therefore the depreciation for the carpet is $3,575.

I made all the changes and everything looked right until I got to the summary page. Since there are three partners the numbers I entered were correctly divided by three. Turbotax gave me a co-owner share of income $25,522.76 and expenses of $30,815  which matched the accountant's numbers. Unfortunately, the 1/3 co-owner split of Assets/Depreciation ($18,990.14) isn't listed on the rental summary. Instead, it lists the full $56,970.42 for all three partners.

Why would Turbotax divide the other two items (Income and Expenses) correctly based on the building and land cost basis, but not divide the Assets/Depreciation figure by three? According to Turbotax, I have a Net Loss on property of $62,261 for which I can deduct $25,000. The accountant's spreadsheet has a Net Loss of $72,844.62 for all three with a co-owner share of $24,281.54.

[AmeliesUncle · Accepted solution]

Yeah, the program is weird that way.  You need to either (a) enter YOUR Basis of the property for depreciation (1/3 of the amount) or (b) enter the business  percentage of 33.33%.

There are a few circumstances that the second option could have problems, so I would recommend the first option.

[GrantM]

THANK YOU! THANK YOU! THANK YOU!

I had totally missed the enter basis aspect since I thought the 33.3333% entered for overall property ownership was carried over from Income and Expenses to Depreciation. I made the adjustment for the building and had another eye-rolling and ear steaming period since I was close but not on target until I realized I had to do it for the HVAC and carpet too.

After putting in the basis numbers (1/3) for building, HVAC, and Carpet, my total numbers for everything - including Net loss ($24,282) now match the accountant's numbers (revised based on your HY convention depreciation fix for the carpet).

You were right at every step with your recommendations!

Have a wonderful day because you clearly made mine!