Sold Rental Property. Convert from personal use to rental, never deducted deprec expense for the 6 yrs on SCH E

[taxesohmy2017]

We bought our Condo back in 2005 for $128,000.  We moved out and started renting the condo in Aug 2012 and we sold the rental property Jan 10, 2019.  We looked up our FMV for 2012 and the FMV was $54,700.  For the years we rented we did have a Schedule E however we never took the depreciation expense.  Now since we sold the unit, we have to not only pay on the gain but we have to recapture the depreciation we never took.  We are ok with that, it was our mistake for not claiming at the time.  We want to make sure we are calculating things correctly.

1. We are using the $54,700 FMV when we converted our Condo from personal use to Rental to calculate the recaptured depreciation.

2 We calculated the recaptured depreciation of $10,941. ($54,700/27.5=1989.00 per year, however for 2012 we took 1989/12=165.75 per month, and took 166x6=996 for the 6 months in 2012 and 2013 thru 2018=9945.00 totaling $10,941

3. Now to calculate Profit we took FMV of $54,700 plus closing cost of $2675 = $57,375 which will now be our Cost Basis.

4. Sold Property for $104,000

5. Gain shows: $104,000 - 46,434 = $57,566

(adjusted basis which comes from cost basis - depreciation allowed or allowable) $57,375 - 10,941 =$46,434

6.  form 4797 shows gain of $10,941 and Capital gains schedule D shows $46,625 (this came from $57,566 - 10,941)

Trying to make sure I am understanding this.  We never took the depreciation so I am trying to make sure we are properly recapturing it.

Our Form 4797 Part III Section 1245 looks like this

Line 20 Gross Sales: $104,000

Line 21 Cost or other basis $57,375

Line 22 Depreciation (or depletion) allowed or allowable $10,941

Line 23 Adjusted Basis $46,434

Line 24 Total Gain: $57,566

Line 25a Depreciation allowed or allowable from line 22 $10,941

Summary of Part III Gains

Line 30 Total gains of all properties $57,566

Line 31 Add lines 25b,26g,27c,28b, 29b = $10,941

Line 32 Subtract line 31-30 = $46,625

========

$46,625 shows up on Schedule D  and $10,941 shows up on Form 4797 recapture.

Not sure if I did this right since we never took depreciation for those 6 years.

Any help would be greatly appreciated.

Thank you

Lee

[DianeC958]

You can still receive the deduction for the depreciation you did not take for the 6 years.  In order to do this you need to file form 3115 with your tax return.  

In order to file a Form 3115 in TurboTax program, you  need the TurboTax desktop version to complete the entries.  You cannot use the online version.  If you are currently using TurboTax online , please follow the instructions below in TurboTax online edition to switch to the desktop:

1. After sign into your account, select Take me to my return 

2.  At the right upper corner, in the search box, type in 3115 and Enter 

3.  Select Jump to Form 3115 

4.  On the screen, Change in Accounting Method, select CD/Download version of TurboTax to continue

5.  Once you are in the CD/Download version, use Forms View to enter Form 3115.

• At the right upper corner, select Forms 
• Under Forms mode, at the left upper corner, select Open Form, type in 3115 to open form to enter information

The depreciation recapture information will be taxed at ordinary income tax rates.

The depreciation for the condo should be based on the amount you actually paid for the condo when you originally purchased or Fair Market Value when you converted the property to a rental, which ever is lower. 

Other than those two items  all your other information is correct.

[Carl]

Understand that since your error goes more than 3 years back, you flat out can not use TurboTax to file your 2019 tax return and report this sale. As stated earlier, you need to file IRS Form 3115 with your tax return, and that form is *NOT* simple by any stretch of the imagination. It *requires* professional help.

So for 2019 you need to seek professional help to complete the 3115 and report the sale. If your state also taxes personal income this is going to be a double-whammy for you, and the cost of professional help is going to seem like a pittance in comparison. So for the sake of your own wallet, please seek professional help for your 2019 tax return.

A professional will be more apt to keep the fines and penalties you are going to pay, to a minimal amount. But you're still going to feel it financially - even if you sold the property at a gain.