Rental Deprecaition- CPA used 15 year instead of 27.5, no Cost seg study.

[SincereEffort]

Hi,
I have a weird situation.
First to be clear, yes, I am asking the CPA that did this, but we are no longer clients, so the support is weak. Since their work doesn't seem right, my faith in them is diminished. I'm looking for insight from alternative sources. 

Two issues

#1 I think my CPA used wrong schedule and #2 wrong basis on depreciation. 

Multi-family rentals put into service 2014 and did not take depreciation annually.
We used a CPA for 2021 taxes and expressed we wanted to fix it. We provided our purchase data.

He submitted taxes with 15 year depreciation and no "other" correction line, no evidence of 3115. We have never done a cost segregation study. The CPA never discussed this either way.

In 2022, out of confusion and ignorance I just repeated his depreciation (did not use them again for other reasons). Now I am doing 2023 and studied up. My interpretation is that it should have been a 27.5 year depreciation. Also, can't figure out their basis as it wasn't the purchase data I provided. 

Since they used 15 years and a high basis, compiled with me duplicating numbers a 2nd year, I may have overclaimed depreciation.

We plan to sell later this year, so looking to clear this all up.

#1 Do I amend those two years, or correct those two plus all prior collectively with form 3115 DCN 7 with attachments on math to fix everything all at once.
#2 Then since this would not be an expense, but rather something I owe from overclaiming, what line do I enter the overclaimed (positive income) amount on. This is a Section 481(a) increase in income (form 3115 part IV sec 26), but schedule E "other" is for expense (expense entered as positive), and the software will not accept a negative.

Thank you

[DianeW777]

Yes, first, you should amend the tax year 2020, 2021, 2022 (2020 should be done by April 15, 2024).  Claim the appropriate depreciation for those years correctly.  It may be that you have not used more depreciation than you should have since it was not included in 2014-2019 tax returns, but you can check to be sure. This assumes you will amend the 2020 return.

The modified accelerated cost recovery system (MACRS) chart is placed here for you to calculate the depreciation that you would have been entitled to for each year and accumulative to date. It may not be necessary to use Form 3115 because of the possible excess depreciation claimed.  

If, in fact, you did take more than you were entitled to, keep track of the excess until you sell the property and you must include that as a reduction in the cost basis at the time of sale. All depreciation will be recaptured when the property is sold.  The key in tax law is that you will recapture it whether or not you used it (allowed or allowable, essentially use it or lose it).

The cost basis should be recalculated because you are unsure of it's accuracy.  The cost basis should include original purchase price, purchase expenses such as commission, legal fees (see the list below) and any capital improvements made before you began renting it in 2014.  If any capital improvements were made after 2014, then that amount would be added as a new asset in the year completed and begin depreciation on that date using 27.5 recovery period. This would include things like a new roof, a garage, siding or anything that is attached as part of the structural components.

Loan charges - Loan charges are part of the loan and not added to cost basis

• Application fees
• Lender fees
• Appraisal Fee
• Inspection Fee
• Condo Questionnaire
• Credit Report
• Debt Report

You can't include in your basis the fees and costs for getting a loan on property.

Government Recording and Transfer Charges- these are added to the cost basis of the property

• Recording fees
• Title Charges
• Lenders Tile Policy
• Settlement or Closing Fee
• MLC  - Assuming it means Municipal Lean Certificate
• Title Exam
• Owners title Insurance

You can include these closing costs and add them to the cost basis of the property as noted above.