Rental property depreciation

[armand53]

Sold a rental property on 2/28/19.  TurboTax Premier is allowing a full year's worth of depreciation.  I believe this is incorrect and overwrote the amount the program calculated with one-sixth of the amount shown (2 months/12 months).  Want to file electronically.  When I run my return through the review function, the only error is the overwritten number.  The program is saying there will be a problem with electronic filing if I keep things the way they are.  What am I missing?

[DavidD66]

If you override an amount in TurboTax, you cannot e-file the return, and the accuracy guarantee may be voided. 

[Carl]

overwrote the amount the program calculated

When you do an over ride, you "automatically" can not e-file. It's an IRS thing, not TurboTax.

My guess is you did something wrong in the process of reporting the sale. For starters, depreciation is not as simple as one may think. It's not a "per day" process. It's more like a percentage process based on the convention used. Remember, all depreciation taken is recaptured when you sell the property, and you pay taxes on that recaptured depreciation. So if it takes a full year depreciation for 2019, in the sale it's going to turn right back around and recapture it for taxation.

But overall if you sold the property in Feb, it should be using the mid-month convention at either 3.636% or 3.637% of the depreciable basis. Which percentage is used depends on weather it's an odd year or even year of depreciation in the tax year you are selling. This comes straight from Table A-6 on page 74 of IRS Publication 946 at https://www.irs.gov/pub/irs-prior/p946--2017.pdf

So this confirms the program is figuring things right per the IRS rules.

[armand53]

Thanks for your response.  Looks like I will be filing manually.  Respectfully, I disagree with your analysis of the depreciation situation.  In the main, it is fundamentally flawed to allow a full year's depreciation over just two months of operation.  Even if the depreciation is ultimately recaptured, using your reasoning the taxpayer is able to effectively arbitrage the difference between ordinary and capital gain tax rates (lower rental income at presumably higher ordinary income rates).  I can't imagine that Congress would allow this.  If I paid my real estate taxes for a full year on January 1st and sold my property on 2/28, I would only be allowed two months' worth of that expense.  Same principle.  

[tagteam]

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@armand53 wrote:

....it is fundamentally flawed to allow a full year's depreciation over just two months of operation.  

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I agree, but if this were a widespread issue, more users would seemingly be reporting it. 

I would suggest reviewing your forms and dates on those forms (e.g., the date sold on Part III of Form 4797).

There almost has to be some anomaly in terms of data entry; the program should calculate your depreciation deduction through the date of sale and not beyond. Personally, I have been unable to produce the result you are seeing although I am using TurboTax Home & Business for testing purposes.

[Carl]

I just did a test scenario on one of my rental properties, stating I sold it 2/19/2019 and it correctly figured two months of depreciation for 2019, which on the 4797/SCH D it shows that it turned right back around and recaptured along with the prior 22 years of depreciation; exactly as I would expect and as it should.

So you've done something wrong somewhere.

[armand53]

I was hoping that what I was missing was a box somewhere that I had forgotten to check, but when I go into the worksheet for my rental property I don't see said box.  Programming flaw or user error?

[armand53]

I can see why people don't report it.  Looks like they are getting a benny they don't deserve.  Only an accountant or IRS agent (moi) would take note...lol

[armand53]

Good.  Thanks!  Operator error it seems to be.  Where is the data entry spot for the date of sale?

[tagteam · Accepted solution]

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@armand53 wrote:

Where is the data entry spot for the date of sale?

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Two spots in the Rental Properties section of the program:

(1) Property Profile and (2) Sale of Property/Depreciation.

[armand53]

Much thanks again!