turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
turbotax icon
cancel
Showing results for 
Search instead for 
Did you mean: 
Announcements
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

Anonymous
Not applicable

What to do if tax preparer used incorrect property classification in prior year?

I'm trying to do my own taxes for 2020 tax year and notice that my tax preparer has been using 25-year property for my residential rental properties since they were put into service. How can I fix this? Could I just calculate the correct depreciation using 27.5-year straight line and enter this in form 4562 line 17 starting this year and then continue until it is fully depreciated in the 27.5 years? Or is this more complicated?

 

Also, last year I added a new roof to a property that was put in service a couple years ago. Do I add this to line 17 or do I have to put this in line19h?

Connect with an expert
x
Do you have an Intuit account?

Do you have an Intuit account?

You'll need to sign in or create an account to connect with an expert.

5 Replies
Carl
Level 15

What to do if tax preparer used incorrect property classification in prior year?

In what tax year was the property placed into service with the 25 year depreciation schedule?

Also, last year I added a new roof to a property that was put in service a couple years ago.

By "last year" I assume you mean the 2020 tax year. The new roof is added to the property in the assets/depreciation section, classified as residential rental property and gets depreciated over the next 27.5 years with year one being the date the roof was completed, or the date the property was placed in service - whichever date was "last".

 

Anonymous
Not applicable

What to do if tax preparer used incorrect property classification in prior year?

One property was placed in service in 2017 and the other in 2014. 

 

 The new roof is added to the property in the assets/depreciation section, classified as residential rental property and gets depreciated over the next 27.5 years with year one being the date the roof was completed, or the date the property was placed in service - whichever date was "last".

So do I put the roof depreciation in the same form 4562 with the existing depreciation for the property or do I have to complete a separate form 4562 just for the roof? 

 

Really appreciate your help! Thank you in advance.

Carl
Level 15

What to do if tax preparer used incorrect property classification in prior year?

One property was placed in service in 2017 and the other in 2014.

Legally speaking, what you need to do is file IRS Form 3115 to fix this. Now while the TTX program does include that form, it does not include any help for that form. The 3115 is not simple by any stretch either, and I always advise folks to seek professional help for dealing with the 3115. Of course, that completely defeats your desire to start doing your taxes yourself then, and you still end up paying another CPA to fix the mistakes of the previous CPA.

Now the monetary difference between 25 year depreciation and 27.5 year depreciation probably isn't all that much in "the big picture" of everything. We're talking 6 years of incorrect depreciation on one property and 3 years on the other property. Basically, you took to much depreciation in those years.

What I would do, even though it's technically not the correct thing to do, is to just enter each property into the 2020 TTX program using the original in service dates. When you do that, the program is going to "assume" the amount of depreciation taken in prior years, based on a 27.5 year depreciation schedule. You can then change that "assumed" amount to the actual amount taken. Then the program will adjust the current, 2020 tax year depreciation accordingly.

My bet is, on the SCH E for both of those properties you showed a loss on line 22 of the SCH E every year the property was in service. I'm betting that by doing the above, even with the reduced amount of the 2020 depreciation, you will still show a loss on line 22 of the SCH E for both properties.

So do I put the roof depreciation in the same form 4562 with the existing depreciation for the property

Yes. As you work through the Rental & Royalty Income (SCH E) section of the program, after dealing with Property Profile, Rental Income, and Rental Expenses, you'll elect to start/update the assets/depreciation section. In this section is where you'll enter the property itself using all the same numbers and dates from the 2019 form 4562. (See below to ensure you pull your data from the correct 4562.)

After you add the property itself, simply click the "Add Another Asset" button and enter the new roof. Of course, the "in service" date for the new roof will be whatever date in 2020 the installation of that roof was completed and depreciation on that roof will start on that in service date. It too will be depreciated over the next 27.5 years.

 

In your 2019 tax return printout, you should have two IRS Form 4562's for each individual rental property you own. Both of these 4562's print in landscape format. One is titled "Depreciation and Amortization Report" and is the one you will need for enter the asset into the TurboTax program.  The other one is titled "Alternative Minimum Tax Depreciation Report". You will only need data from that one if the program specifically asks you for AMT depreciation information.

Take note that I am assuming that you have no dollar amounts listed under the Section 179 column, or the Special Depreciation Allowance column on either 4562. If you do have a dollar amount listed there for an asset and need help with entering it correctly in the TTX 2020 program, just let me know.

If under the "description" column you have an "amortization" item there with financing fees listed under it, let me know if you need help in entering that correctly in the TTX program also. Amortized assets are not entered the same way as other assets are entered. You have to "know" how to enter them correctly, and the program is not all that intuitive in doing that for your specific and explicit situation.

Finally, in TTX 2020 when entering the amount of prior depreciation taken on an asset its important to enter the "correct" amount here. To get the correct amount take a look at the 2019 form 4562 "Depreciation and Amortization Report" for that property. On the 2019 form 4562 you add together the amounts in the "prior years depr" column and the "current year depr" column, to get the total amount of prior year's depreciation taken, for the 2020 tax return.

 

Anonymous
Not applicable

What to do if tax preparer used incorrect property classification in prior year?

One property was placed in service in 2017 and the other in 2014.

I wish I'd had known the issue earlier, I just started to learn more about depreciation for rental properties. What do you recommend? Should I seek another CPA to help me correct this or should I attempt to correct it myself in the 2020 taxes? In the latter, would I still have to file form 3115?

 

Finally, in TTX 2020 when entering the amount of prior depreciation taken on an asset its important to enter the "correct" amount here.

When you say "correct" do you mean the amount it should have been or the amount that was depreciated (although so far, we know it's not correct) ? Also, when looking at 2019 form 4562, I do not see a "prior or current years depreciation" column, am I missing something or is there a different title that I should be looking for?

Carl
Level 15

What to do if tax preparer used incorrect property classification in prior year?

I wish I'd had known the issue earlier,

You can thank our wonderful education system for that. I can recall my home economics class back in my high school years where we learned how to budget, balance a checkbook, do taxes, house buying, car buying, grocery shopping, dealing with credit and many other things that required financial planning and running a household. These are essential life skills that should be required for HS graduation. Ever since president Carter enacted the U.S. Dept of Education, back in 1979 things have go downhill on that front every single year since then. The subjects of home economics and social studies was no longer taught in my school district starting sometime in the late 80's and early 90's. A vast majority of today's young adults were not taught any life skills in grade school, and for many not even in college. It's dismal. I find it appalling when a college student complains because only their W-2 box 2 taxes were refunded, and not their box 4 SS taxes or box 6 Medicare taxes were refunded. They have no knowledge of how the tax system works at all. I've even seen posts here where folks expect to get "all" of their taxes back, no matter how much they made during the tax year. It's not that they're stupid. It's that they've never been educated on how our economic and tax system works. For that, I blame my generation, one hundred percent.

Should I seek another CPA to help me correct this

To correct things the right way, that would actually be the best way to go, and the 3115 would definitely be necessary. But I would suggest you let them know you do not want to e-file, and will instead sign and mail it yourself. That way, you can review it first and ask questions to educate yourself and increase your knowledge on the subject. 

When you say "correct" do you mean the amount it should have been

No. I mean you will enter the actual incorrect amount of the total prior year's depreciation that was actually taken. The program will then compensate for that and decrease the amount of depreciation that will be taken for the 2020 tax year. That will get things "back on track" starting with the 2021 tax return you will complete next year. But if you seek professional help (which is best) so that the 3115 is completed correctly, then this action would be a moot point.

 

 

message box icon

Get more help

Ask questions and learn more about your taxes and finances.

Post your Question
Manage cookies