Rental Property Depreciation - Correcting cost basis and depreciation for 6 years

[StatenIsland]

I have discovered that the original cost basis for the condo apartment was entered incorrectly in 2014. The tax preparer did not include mortgage, which made the cost $120K instead of $380K. It there a way to correct it for the past years and going forward?

Thanks in advance

[Mike9241]

are your numbers correct? a mortgage should not reduce the cost basis.

look at the closing statement- the purchase price on line 1 + applicable closing costs is your tax basis. a mortgage simply reduces the cash needed to buy the property but does not affect the basis.

[StatenIsland]

Unfortunately my numbers are correct. Looks like the pax preparer did not pay attention while doing the 2014 taxes. I have never reviewed since that, so the original cost basis and depreciation has been propagated to all the tax returns including 2020. Now I am doing 2021 with turbotax and this number looked suspicious.

Is there a way to correct it for the previous years and going forward?

Thank you

[Mike9241]

i can't see the closing statement. but I see no way a mortgage would reduce tax basis. 

do you have the closing statement? what is on line 1 for the purchase/sales price? $120K or less (because closing costs would add to basis) or $380K or less - same reason.

if $120K is correct see a tax pro. you'll need to file form 3115 to change the depreciation and in addition you will owe taxes on the excess depreciation taken

[StatenIsland]

Sorry for not expressing myself clearly. The purchase cost of the condo apartment (one unit of 32 in the building) was $380K. Which included $120K downpayment and $260K mortgage. Tax preparer mistakenly put $120K (down payment only) as a cost basis. Depreciation was wrongly calculated based on this value. I am looking for a way to correct it. Thank you

[Carl]

Because of how long this has gone on, correcting this is not simple by any stretch of the imagination. It requires IRS Form 3115 be filed. The 3115 is not simple and requires professional help. Especially if your state taxes personal income since that doubles the work required to fix this. I would suggest that if possible, you have the CPA who created the error be the one to fix it. Since it was their mistake, I'd fully expect there to be no charge for them to fix their screw-up.

[StatenIsland]

Thank you for your response. Since the tax preparer, who made a mistake have not done my taxes since then, I do not anticipate he will be willing to do any corrections even for fee.

Can I file amendments to my returns for 2018, 2019, and 2020 with a correct cost of property instead? I understand, that I will loose on taxes for the 2014 - 2017, but it is OK.

A different question:

I realized that my rental loss for 2020 is about $20K and I actually do not have any taxable income. Could it generate a carryover NOL and if so, how would I claim it using Turbotax

Thank you 

[Carl]

Can I file amendments to my returns for 2018, 2019, and 2020 with a correct cost of property instead?

No. What you have is an accounting error, which is something bigger than just a math error. you can not amend returns. You *have* to do the 3115 to correct the accounting error.

Generally, unless otherwise provided, a taxpayer must secure the IRS's consent before changing its accounting method. To obtain the IRS's consent, taxpayers file Form 3115, Application for Change in Accounting Method. Even when the IRS's consent is not required, taxpayers must file Form 3115.  This form is not simple by any stretch. Trying to do it yourself and getting it wrong will just turn your current molehill into a mountain. you *need* professional help. Especially if your state taxes personal income, because you've been taking incorrect depreciation on your state return also.

[StatenIsland]

Thank you very much. Would you be able to recommend someone in NYC?

[Carl]

Sorry, can't help there. I don't do recommendations, as I've had those come back to bite me in the past.

[tagteam]

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@StatenIsland wrote:

Thank you very much. Would you be able to recommend someone in NYC?

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Try the following link:

https://taxexperts.naea.org/listing/location/united-states/new-york

[AmeliesUncle]

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@Carl wrote:

Can I file amendments to my returns for 2018, 2019, and 2020 with a correct cost of property instead?

No. What you have is an accounting error, which is something bigger than just a math error. you can not amend returns. You *have* to do the 3115 to correct the accounting error.

I disagree.   Using an incorrect Basis is a "mathematical or posting error", NOT an incorrect "method of accounting".

As such, the only option is to amend.  Form 3115 does not apply.

[tagteam]

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@AmeliesUncle wrote:
Using an incorrect Basis is a "mathematical or posting error", NOT an incorrect "method of accounting".

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Yes, absolutely correct; using the wrong basis cannot be corrected with Form 3115.

[StatenIsland]

Next step Turbotax incorrectly calculate depreciation

I am trying to ament 2018 tax return. This is a condo apartment in a 32 units building. The purchase cost was $385,655 It was placed in business on 02/01/2014. I anticipated depreciation to be 385,655/27.5 = $14,097

In TurboTax Premier 2018 I deleted the asset and created a new one with the cost basis 385,655. By some reason TurboTax calculated depreciation $14,024 instead of expected $14,097

A side note, TurboTax recalculated Prior Depreciation to $54, 343 instead of $16,564 as it was on original return

Could you please help me to sort it out? Thank you

[AmeliesUncle]

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@StatenIsland wrote:

I anticipated depreciation to be 385,655/27.5 = $14,097

Also I have updated Prior Depreciation to be equal to original 2018 return.

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Unless I am entering it wrong, 385,655/27.5 is 14,024, not 14,097.

You need to enter the "prior depreciation" that SHOULD have been taken (unless you previously took too MUCH depreciation, in which case you may need to enter the amount you actually took).  If you leave the "prior depreciation" BLANK the program will assume the proper amount was taken.