TT2025 Desktop does not subtract Special Depreciation Amt from property's cost basis in Form4562.

[rkaw]

TurboTax 2025. Home & Business. Desktop version.

Form4562 is not subtracting SDA from Depreciation cost basis. 

Here's what I am seeing using made up numbers. 

Form 4562 Depreciation and Amortization: 

Line 14: Special Depreciation allowance for qualified property - $104,000

Line 19: Section B. Column c - Picks up the Cost basis of the property minus the cost of land. 

($360,820 - $100,000= $260,820) and calculates a 27.5 yr SL depreciation with MM convention for 100% business use and 02/25 service month, which works out to  3.182% of the cost basis i.e. 260,820. The figure is correctly calculated at $8299

Line 22: adds $104,000 and $8299 to come up with a total depreciation of $112,299.
There is nothing wrong with the calculation of these numbers, except for ONE thing.

From what I have researched from IRS Form4562 instructions. 

It would appear that the calculations as per IRS should have been as below:

Form 4562 Depreciation and Amortization: 

Line 14: Special Depreciation allowance for qualified property - $104,000

Line 19: Section B. Column c - Should pick up the Cost basis of the property minus the cost of land as before but subtract the amount taken as SDA from Line 14 yielding a depreciable amount f $156,000

($360,820 - $100,000 - $104,000=  $156,820)

Using the same 27.5 yr SL depreciation with MM convention for 02/25 service month, works out to  3.182% of the cost basis i.e. $156,000. The correct figure should be $4990 NOT  $8299

Line 22: Should be $104,000 and $4990 to come up with a total depreciation of $108990

 It is easy to replicate by adding any property to TT and putting it into 100% business use in month of Feb 2025 and then claiming a SDA deduction. The figure that TT calculates for Depreciable basis does not exclude the figure taken as SDA. 

As a result of this mis-calculation,  the depreciable asset value in Form4562 for AMT gets inflated by the amount taken as SDA..

Grateful if experts on this forum can weigh in. Maybe this is a feature not a bug? 

Thank you in advance

[PatriciaV]

Residential Real Property is not eligible for Special Depreciation. This includes the building and any improvements, and is the only type of property depreciated over 27.5 years.

When testing this calculation, entering a different class of depreciable asset (7 year) and claiming 50% special depreciation resulted in the correct depreciable basis.

[rkaw]

Thank you for your response. I re-tested based on your suggestion hut I am not seeing the behavior you are able to see. I tested this with a dummy property and in order to keep the figures simple, I entered the following in TTax.

Price of Property = 120,000 

Cost of Land =20,000. Cost of Improvements =100,000

The basis of the property correctly gets set to $100,000 and the SL deprecation calculates to $3499.  So far so good.

Then I went back into the property's asset/depreciation section and selected "add an asset" . Under Rental Real Estate Property I chose "Rental property appliances, carpet , furnishings". This leads to another page where I chose the category for this asset as " Appliances, Carpet, Furniture". Further options ask you enter description, cost , date acquired etc. I added $50,000 as cost for Furnishings. When all data entry is completed, TTax  adds this as a Furnishings depreciable asset and offers you a choice between a Section 179 deduction or a SDA deduction.

Choosing the SDA deduction yields a total of $26,000 extra depreciation which brings the total depreciation to $29499.

So under the assets summary this is what shows up 

Now I am expecting TTax to reduce the basis of the Improvements by $50,000 due to furnishings asset because the total basis of the improvement excluding land was $100,000.

When I look at Form 4562 I see that furnishings $50k has been added to original basis of the $100,000 bringing the total basis of the property to $150,000. Form 4562 AMT worksheet shows this very clearly

Why is TT allowing a special Depreciation but not decrementing the total basis by that amount? 

Is it ok if I manually subtract the $50,000 basis from the property and make the value of improvement only $50,000 as then the total basis would be correctly reflected as $100,00

Any thoughts ?

Thank you for your time 

RK

[DaveF1006 · Accepted solution]

This is a common mix-up around the order of operations, especially when it comes to adding and subtracting.

The "Subtractive" vs. "Additive" Method

1. When you told the software your Cost of Improvements was $100,000, you were telling it: "The structure itself (the sticks and bricks) cost $100,000."
2. What you were expecting: You expected the $50,000 in furnishings to be carved out of that $100,000 (leaving $50k structure + $50k furniture).
3. What the software did: It assumed the $100,000 was the cost of the building alone. When you "Added an Asset" for $50,000, it added that to the total project cost ($100k building + $50k furniture = $150k total basis).

Why Form 4562 shows $150,000

The software is behaving correctly based on the data provided. In tax accounting, "Improvements" (the 27.5-year asset) and "Furnishings" (the 5-year asset) are separate line items. If your total purchase price was $120,000 (including land) and that price included the furniture, your math should actually look like this:

• Total Purchase Price: $120,000
• Minus Land: -$20,000
• Minus Furnishings: -$50,000
• Remaining Building Basis: $50,000

To fix this in the software: You need to go back to the original property entry (the one currently showing $100,000 for improvements) and change that $100,000 to $50,000.Once you do that, your Form 4562 will show:

• Line for Residential Rental: $50,000 basis.
• Line for 5-year Property: $50,000 basis.
• Total Basis: $100,000 (plus the $20k land which doesn't depreciate).

A Note on SDA (Special Depreciation Allowance)

You mentioned taking the SDA on the $50,000. By reducing the building basis to $50,000 and keeping the furnishings at $50,000, you are "shifting" $50,000 from a 27.5-year recovery period to a 1-year (or 5-year) recovery period. This is the essence of Cost Segregation.

Just be aware that if you ever sell the property, that $50,000 in "extra depreciation" you took now will be subject to Section 1245 recapture, which is taxed at ordinary income rates rather than the lower capital gains rates.

[rkaw]

Thank you so much for taking the time to respond.

The way I worked around this issue in TTax is exactly how you suggested, that is  I reduced the basis of Brick and Mortar portion of the property by the amount that I am adding as a 7yr depreciable property, such that my overall cost basis remained equal to the purchase value - land value.
Thank you for the heads up on the depreciation recapture. That recapture will attract ordinary income tax whether I use Sec179 or SDA , right ?

thanks once again.

Rakesh

[DaveF1006]

Yes, that is correct. Any depreciation recapture will be taxed as ordinary income.