Incorrect Cost Basis + Deprecation for Many Years - what to do?

[JJ548]

Converted property I own 50% to rental in 2003. At the time put in FULL amount for cost basis due to how the TT interview was worded. I sold this property in 2021 and realized due to a form error that it was wrong all this time which meant depreciation auto-calculation was also wrong.

There is no tax amount impact from 2017-2020 since my depreciation/loss could not be taken and has been carrying over. For 2016 and prior there would be a moderate change of about 4.5K less of a loss on the rental property which would have some tax impact.

Do I realistically need to worry about 2016 and older or would it be acceptable and not cause major red flags if I submit my 2021 return with the correct cost basis, correct (lower) depreciation recapture based on what I should have been taking and correct (lower) rollover loss? I could also amend my last 3 years of returns to at least correct the depreciation/rollover/cost basis amounts if that helps or reduces chance of audit - though there would still be a point where it mismatches older returns.

I started down the 3115 route but a CPA said my situation would be a mess and expensive to deal with. I'm not sure it's worth it given zero tax impact since 2016 and modest impact before that.

Any advice would be great.

[Mike9241]

see this link

https://www.msatp.org/fixing-the-error-how-do-we-solve-depreciation-mistakes/#:~:text=Changes%20that... 

however 2003 is a closed year so 3115 is required.

you do have an option not to file 3115 and change nothing. you can't change the depreciation base or method for 2021 that would be computed using the old method.   also, your depreciation recapture would be the larger of that taken or that allowable. 

[JJ548]

This is where I got hung up. If I populate the TT form according to the instructions the cost basis for sale will be correct (my 50%), then it doesn’t allow me to put in the actual prior depreciation since it’s more than would be allowed based on the 50% cost basis. 

I could put in inaccurate info for cost basis that matches previous years and put in the actual (incorrect) depreciation and rollover loss for recapture but that didn’t seem like a good idea since it compounds the previous mistake and actually causes incorrect tax. 

I was thinking the best path (not involving complex forms, attorneys, CPA, etc for something very old) would be to supply the IRS with accurate data on 2021 and recent years returns.

[AmeliesUncle]

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@JJ548 wrote:

At the time put in FULL amount for cost basis

depreciation auto-calculation was also wrong.

There is no tax amount impact from 2017-2020 since my depreciation/loss could not be taken and has been carrying over. 

You use your actual cost Basis.

You use the amount of depreciation that you actually claimed.

2017-2020 still affect things because you claimed too much depreciation.  The carryover amount is used when you sell the property, so it that 'excess' depreciation *IS* being used.

Form 3115 does not apply.

[JJ548]

It affected my claimed loss for 2017-2020 but I couldn’t take that loss (no diff in actual taxes owed or paid in those years) and could easily correct it this year. 

But it sounds like the suggestion is to continue with what I’ve been doing (which I now know to be wrong). Input the 100% cost basis when computing the sale along with the full depreciation I took over the years and full rollover loss. This will match all past returns even though it’s wrong.

[AmeliesUncle]

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@JJ548 wrote:

But it sounds like the suggestion is to continue with what I’ve been doing (which I now know to be wrong).

No, use the correct Basis now.

[JJ548]

The form and IRS won’t allow me to use the correct 50% basis while then claiming the actual depreciation I took. That would require taking more depreciation than what the cost basis is which of course isn’t possible. You can’t depreciate more than you say you bought the property for. 

So either I can put in all of the correct numbers - NOT matching past returns - which may require I amend recent years so they match, or continue to put in all incorrect numbers which matches past returns. This is the crux of my question. 

[AmeliesUncle]

If the building is now fully depreciated, in my opinion you should just stop taking depreciation.  Print out the information so you have it for your records, and just delete the asset. 

[JJ548]

As I mentioned originally the asset was sold. It was not fully depreciated. It’s on a 27.5 year schedule starting in 2003 (converted to rental in 2005). 

the only way it would be overly depreciated is if I took advice to put in the 50% share of cost basis but actual amount I’ve depreciated (based on full cost basis) from 2005-2020. 

[RobertB4444]

@JJ548  You took depreciation from 2003 to 2016 and got tax breaks for it all of those years.  You need to recapture the full amount of the depreciation that you took.  

Your cost basis should be what you actually paid for the property that you are selling plus the cost of the improvements to that property.  

[JJ548]

Right and that’s the issue. I can’t put in the full depreciation unless I continue to use the incorrect cost basis. If I put in the FULL cost basis (not my portion of it) that would also mean paying twice the capital gains tax I actually owe - since I own 50% not 100% of the property. 

It doesn’t seem there’s a good answer.

[RobertB4444]

@JJ548  Enter your actual cost basis - what you paid for your 50% interest.  The actual amount you paid.  Not the 100% value.  The actual amount that you paid.  Then you can add the improvements that you made in 2021.  That is your cost basis.

Then you need to adjust the depreciation.  TurboTax will want to cut what you got in depreciation in half because you doubled the value.  It will show what the math says that the depreciation should have been on your 50% value.  You will change that to show the actual amount of depreciation that you took.

This will get your gain to the right place.

[raynam8]

Hi, I just discovered I did the same thing.  I transferred to using TurboTax three years ago and at that time, copied over the cost basis for a rental property incorrectly and depreciated more than I should have for three years.  Can I just correct the basis this year taking into account the total I have taken for depreciation which includes the extra these past three years and move forward, or do I have to correct it for three years back up to the present?  Any help is very much appreciated.

[JJ548]

For what it’s worth I got the following info… the IRS does not compare past to present returns. It’s not how they process things. It was also generally stated the main thing to do is put the CORRECT cost basis for the year of the sale and for me putting the depreciation I was supposed to take (auto-populated in TT) not what I actually took along with the corrected rollover loss. 

For me there was no underpayment of taxes for many years so no need to correct past returns. Likely if you underpaid last 3 years You’ll get advice to amend/correct those returns. 

[thezhaofamily]

Where you get the information? is that true? Just wondering.