Here we go.
Understand that depreciation is not something you “deduct
and forget”. With rental property, you are required by law to take depreciation
on it, during the time that property is “in service” as a rental. Then in the
future when you sell or otherwise dispose of the property, all prior
depreciation taken on the property is recaptured and taxed. Generally, this is
accomplished by subtracting the depreciation taken, from your cost-basis (what
you paid) for the property.
So if you pay $100,000 for the rental property in 2010 and
rented it every year up until the year you sold it, lets say you have $$20,000
of depreciation. You sold the property for $150,000. Your taxable gain is
figured by first subtracting all that depreciation from what you paid for the
property. So $100K minus $20K gives you an adjusted cost basis of $80K. You
sold the property for $150K, and that gives you a $70K taxable gain.
But your case is different. As I’m sure you’re aware, you’ve
only be depreciating the value of the structure that was on that property. Land
is not depreciable. Now that structure has been demolished and is no longer
there. Yet you’re still renting the property. So what happens to all that
depreciation taken on a structure that no longer exists? It does have to be
accounted for, one way or another, sooner or later.
Basically what we’re going to do is take the current asset,
which includes the land and the structure, out of service so as to stop
depreciation on it. Then we’re going to enter a “new” asset which will be the
land only, and on that asset we are going to show the prior depreciation
already taken. That way, it’s accounted for. We also have to account for your
cost of demolition, because what you paid for that will be added to your cost
basis for the property. So lets start by taking the old asset out of service.
During this process you will also need to write down some figures, as you will
need them when you enter the “new” asset of land only.
The first thing you need to do is back a backup of your
existing tax file, in case you mess up, get confused, or just need to start
over for any reason. By default, your tax file ends with a filename extension
of .tax2017 and is located in the Documents/TurboTax directory. So make a
backup of this file right now, before you do anything else. Otherwise, if you
mess up without a backup to fall back on, you will find yourself in a
never-ending nightmare from which you will never awaken.
Start working through the rental property “as if” nothing
happened. DO NOT select the option for “I sold or otherwise disposed of this
property in 2017”. I reiterate, *DO* *NOT* select that option. (You didn’t sell
or dispose of anything really. You’ll understand as we go.)
When you get to the rental summary screen you’ll enter all
rental income received for *the* *entire* *year*. That’s all rental income from
tenants prior to demolition, and all income from the business renting it as a
parking lot after demolition.
In the rental expenses section you will enter all rental
expenses incurred prior to the demolition. You will NOT include the cost of
demolition in this section. You “will” include the cost of the gravel and other
things you paid for, in the process of meeting the needs of your parking lot
renter.
Now after rental expenses, elect to start/update the
assets/depreciation section. At this point, I am going to assume the only thing
listed there is the rental property itself. Being that you rented it out for 20
years, my bet is you have other assets/property improvements listed there. If
so, then the same rules apply to each listed asset, and you must do this for
each and every asset listed, one at a time.
Start working through the first asset (I assume that will be
the property itself) On that first “review information” screen, write down all
you see there. You will need all of that information later. Make sure you label
the figures so you know what each is for. Otherwise if you get confused later,
you’ll risk doing the math wrong. Once you’ve got that information click
Continue.
- Did you stop using this asset in 2017? You will select YES.
- Leave the “date acquired” alone. Don’t touch it. But do write it down. You’ll
need it later. The date of disposition will be the date demolition started. Then
click Continue.
- Special Handling Required? You will click YES.
- Depreciation Deduction amount. Write this figure down and make sure you label
it as depreciation for the 2017 tax year, and what specific asset this amount
is for. Click Continue.
You’re now back on the ‘Your property assets” summary
screen. If you have more assets listed, work them through just as you did the
first asset. Once all assets are worked through and you’re back on that “Your
property assets” summary screen, click the DONE button. (this action confirms
the program saves all your actions up to this point.)
Now elect to edit/update the Assets/Depreciation again, and
elect to go straight to the asset summary screen.
- Now click “Add an asset”
select “Rental Real Estate Property” and then Continue.
- Select “Land Improvements” and Continue.
- For “Describe the Asset” enter something akin to “Raw Land/Parking Lot” or
something of that nature.
- For cost, enter what you paid for the property when you originally purchased
it, plus the cost of any property improvements done to the property during the
time you’ve owned it. This figure will include what you paid for demolition of
the old structure also.
- For the “date purchased or acquired” you will enter the date you originally
purchased the property 20 years ago. Then click Continue.
- Select that you purchased the asset new, and you’ve always used it 100% of
the time for business since you acquired it. Then continue.
- Select the MACRS convention used in the first year you owned it, then
continue.
- Now, all those depreciation amounts you wrote down earlier. Add them all up
for all assets, and enter that amount on this screen, which is titled “Confirm
your prior depreciation”. This accounts for all prior depreciation taken on the
property. Then click Continue.
- You’re now on the asset summary screen. It should show zero depreciation for
2017. If you click the more details box, it shows it’s being depreciated over
15 years. But who cares? The depreciation amount will be zero every year, just
as it should be since land is not a depreciable asset. After reviewing this
screen, click the continue button. This returns you to the “Your Asset Summary”
screen.
Now at this point, you’re
done. But next year when you start your 2018 tax return, you will delete all
assets except for the “land” asset you just finished entering.
