What should I do with rental property assets that were reported as expenses in previous tax years?

[michaeljd]

I converted my primary residence to a rental property in 2018. Since then, I have reported all major improvements as expenses up until the current tax year (ie. carpeting AC/furnace, dryer and water heater). In addition to that, the rental property itself was never reported as an asset either. 

My questions are...

1. If I am even able to, what is required of me to begin reporting these items as (depreciating) assets? Or am I better off leaving as is and only report new assets as they are attained? 
2. Should the property be reported as an asset? I have no reason to believe it wouldn't be except that TurboTax doesn't require the information when filling out the Schedule E and doesn't seem as clear as it could be. Assuming it is, how are special depreciation and section 179 deductions applied?

[ColeenD3]

You must depreciate the property itself. It has a useful life of 27.5 years. There are no Section 179 deductions or special depreciation for real property It is entered on Schedule E, not Schedule C.

You will have to go back and amend for 2018, 2019, and 2020. 

[michaeljd]

Rental expenses were reported on Schedule E, not C. I have corrected the post.

[ZoltanB45]

Depending on the amount paid for each new appliance, you can leave it as an expense in prior years. However, you should amend the prior returns by depreciating the property. Otherwise the IRS might decrease your basis by the depreciation amount for the 3 years, which would increase your gain on sale, when you decide to sell.

When entering rental activity, Turbo Tax always ask the the basis of the property and date it was put in service. There are 4 steps to follow.

1. Rental info
2. Income
3. Expenses and Asset 
4. carryover losses and other less common items

You would enter the information in step 3.

[Carl]

In addition to that, the rental property itself was never reported as an asset either.

This is not as simple as just amending returns. Especially since you're talking more than 2 years back. What you have will be referred to as a "change of accounting method" which requires you to file IRS Form 3115 to fix this. While that form is included in the program, it's not simple by any stretch. Especially for you since you expensed items that you "may" have been required to be depreciated.

You need to seek professional help ASAP to get this fixed so the 3115 can be correctly filed with your 2021 tax return, everything corrected from the past, and bring it all up to date so that you can continue on your own next year.

Unless you yourself are well versed, I don't recommend tackling the 3115 yourself. Doing that wrong will just make things even worse. Overall, the expense of professional help will be cheaper than if you do the 3115 wrong.

[Anonymous_]

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@michaeljd wrote:

.....the rental property itself was never reported as an asset either. 

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You need to file Form 3115 to catch up on the foregone depreciation.

You adopted an impermissible method of accounting when you failed to begin depreciation deductions three years ago. As a result, you cannot amend because you used that impermissible method in two or more consecutively filed tax returns. 

See https://www.irs.gov/publications/p946#en_US_2020_publink1000107386

Seek professional guidance for assistance with filing Form 3115.

[michaeljd]

I just want to make sure I understand correctly...

1. Apply to change the accounting method with Form 3115. How long can I expect this take?
2. After approval, file 2021 and amended tax forms for 2020, 2019, and 2018

Oddly enough, I paid for the Turbo Tax live to review the 2018 returns before they were sent and am surprised this was missed. Does TurboTax have professional accountants or support line I could talk with to help file the amended returns and 3115? 

[Anonymous_]

There is TurboTax Live and Full Service.

See https://turbotax.intuit.com/lp/ppc/1271?srqs=null&cid=ppc_gg_b_stan_all_na_turbotax-live_ty21-bu2-sb...

[Carl]

Does TurboTax have professional accountants or support line I could talk with to help file the amended returns and 3115?

Again, since you will have a change in accounting method, amending is not an option. Per IRS Publication 946 at https://www.irs.gov/pub/irs-prior/p946--2019.pdf on page 14:

The following are examples of a change in method of accounting for depreciation.
• A change from an impermissible method of determining depreciation for depreciable property, if the imper-
missible method was used in two or more consecutively filed tax returns.
• A change in the treatment of an asset from nondepreciable to depreciable or vice versa