Rental Property Sale

[subway41]

Sold a rental property in 2019 that was vacant since 2014. Following TT instructions, we did not deduct any expenses and/or depreciation in the years 2014 - 2018.

Reading some recent posts from the community, we realize that we should have entered (1) day of active rental in each year and that would have carried the rental property info forward to the current year. 

Is it necessary to go back and try and redo the returns for "sale" purposes or does it all come out when we prepare the 2019 TT?

[Anonymous]

this is from iRS 946

Idle Property
Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine.

another source https://www.investopedia.com/articles/investing/060815/how-rental-property-depreciation-works.asp

When Does Depreciation Start?
You can begin taking depreciation deductions as soon as the property is placed in service or ready and available to use as a rental. Here’s an example: You buy a rental property on May 15. After working on the house for several months, you have it ready to rent on July 15, so you begin to advertise online and in the local papers. You find a tenant, and the lease begins on Sept. 1. As the property was placed in service – that is, ready to be leased and occupied – on July 15, you would start to depreciate the house in July, not in September when you start to collect rent.

You continue depreciating the property until one of the following conditions is met.

You have deducted your entire cost or other basis in the property.
You retire the property from service, even if you have not fully recovered its cost or other basis. A property is retired from service when it is no longer used as an income-producing property – or if you sell or exchange it, convert it to personal use, abandon it or if it’s destroyed.
You can continue to claim a deduction for depreciation for property that is temporarily “idle” or not in use. If you make repairs after one tenant moves out, for example, you can still depreciate the property while you get it ready for the next.

from IRS pUB 527 rental property

Idle Property
Continue to claim a deduction for depreciation
on property used in your rental activity even if it
is temporarily idle (not in use). For example, if
you must make repairs after a tenant moves
out, you still depreciate the rental property during the time it isn’t available for rent.

this issue is critical, because you must treat the property as if it had been depreciated all those years.

seek professional advice sine 2014 and 2015 can no longer be amended. but you must take into account the depreciation you should have taken those years

[Carl]

Is it necessary to go back and try and redo the returns for "sale" purposes

Yes, it's necessary. But there are a few reasons why "you" can't do it.

1) TurboTax only supports it's software for the current tax filing year and 3 years back. Therefore you can't use TurboTax to amend your 2014 or 2015 returns to fix this. Even if you can get TurboTax 2014 and TurboTax 2015 to install on your computer, you can't get the *REQUIRED* corrections and updates needed, and chances are extremely high that your amended 2014/2015 return will just flat out be wrong. Since that's more than 3 years back, TurboTax will not honor their 100% accuracy guarantee.

2) If amending a tax return more than 3 years after you originally filed it will result in a refund to you. then you will *NOT* get that refund from the IRS. THey have a 3 year statute of limitations on that.

Basically, you should amend the 2018 tax return to fix this with IRS form 3115 - Change In Accounting Method to fix this and take all that depreciation you "should" have taken, but didn't. Now that form *IS* complicated. So you should seek professional help with this. This is particularly important if your state also taxes your personal income.

[subway41]

Thank you for the prompt and informative answers.

The property had been fully depreciated by the end of 2013 so that depreciation is not a factor. However we did have expenses such as insurance, real estate taxes, utilities directly attributable to the property. How can we record those expenses against the profit from the sale of the property in 2019?