1. I purchased a primary residence 2004 and converted to a rental in 2014. Would i use the cost basis from the purchase in 2004 or 2014? The Value in 2014 when the rental was placed into service was less than the 2004 purchase.
The IRS says that for depreciation, you will use the *LESSER* of what you paid for it, or it's FMV on the date placed in service. Whichever is "LOWER".
2. Also Where do I report the increase in basis from property improvements made over the years
All property improvements are entered in the Assets section. If this is for rental property then it's entered in the Rental Assets section where the main structure is already listed. It will walk you through the process of setting it up for depreciation. I note you say "over the years". Depreciation on a property improvement starts on the date that improvement was placed in service. So if this was done in a prior year and you did not enter it in that tax year, you have a problem that you can't fix by simply entering it now.
3. Where do I report the passive activity loss carryover from my personal return for this? the state CA considers this a pass through since married couple owns the LLC. We do file a 1065 for the LLC
I can't speak for the state return unfortunately. But I do know that PL Carryovers for the federal return remain with the Partnership until such time the property is sold or a member sells their share to another. In cases where the partnership sells the property, if the LLC owns multiple rentals, then the carry over's won't pass through until the last passive income producing asset is sold.
@Hal_Al am I confusing things with a corporation? This post refers to a multi-member LLC/Partnership which of course, remains a disregarded entity as far as the IRS is concerned.
4. Looks like I need to correct the cost basis how would I make this correction? I transfered the rental into an llc in 2014 and file on Turbotax Business form 1065.
From the way I understand your post, you don't need to "correct" anything. Of the assets you may have already listed, I am assuming their cost basis is correct. But you do need to add as assets, any property improvements you have done over the years. If you did any property improvements in 2018, you can probably get away with entering them as a 2019 asset with the correct in-service date for 2018. That just means the 2019 depreciation may be a bit high is all, as it plays "catch-up"
But if you have an asset that was actually placed in service in 2017 or prior, doing a first time entry for it on the 2019 tax return with the correct 2017 or prior in-service date is gonna stick out and risk getting flagged at the IRS.
You'll have to file IRS Form 3115-Change in Accounting Method to fix things correctly and legally. But while the 3115 may look simple, I can assure you it is not anything close to simple and requires professional help to get it right. Attempting to do it yourself and getting it wrong, will take was was a problem, and turn it into a never ending nightmare with the IRS from which you will never awaken.
