Sold rental property after 20 yrs. Tax preparer depr assets in first 5 yrs, then told us to collect asset receipts after that and write off when sold. What form used?

Forum|Forum|5 years ago
March 15, 2021
4 replies
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DavidD66

Level 15

When you sell a rental property, it is subject depreciation recapture. It is the gain realized by the sale of depreciable capital property that must be reported as ordinary income for tax purposes. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis on the amount of depreciation allowed or allowable, as opposed to the amount of depreciation that was actually taken.

If you haven't taken depreciation expense on your rental for the last 15 years, you will have missed out on 15 years of expenses, and will have to pay the recapture tax on in, even though you didn't take it.

You can't file amended returns for the past 15 years, but you can file Form 3115, Application for Change in Accounting Method. This will allow you to take all of the depreciation on your current year tax return. TurboTax does not support Form 3115. I suggest you consult a local tax professional to help you with this matter.

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uniqueatheartAuthor

Level 2

I have been depreciating rental and five improvement assets for 7-20 years. As we kept remodeling unit for the last 15 years, I have saved receipts and was asking if I can claim any of these as expenses and what form to use.

Carl

Level 11

YOu can't "deduct" property improvements and just write them off forever. It just doesn't work that way unfortunately. Property improvements get added to your cost basis in the property, and for every year that improvement/asset is "in service" as a rental asset, you are required to depreciate it.

Then, when you sell the property in the future you are required to recapture that depreciation and pay taxes on it in the year you sell.

So if a majority of your receipts are for those things that qualify as property improvements, and you haven't been depreciating them for all these years, you have a "MAJOR" issue on the tax front that will require the help of a tax professional to help keep the fines, penalties, interest and back taxes you are going to end up paying, to a minimum.

As for any other rental expenses, such as routine maintenance, repairs and the such, those get deducted in the tax year you incur such an expense; not the tax year you sell the property.

Based on my understanding in interpretation of your post, you really need professional help yesterday, if not sooner on this.

Carl

Level 11

Tax preparer depr assets in first 5 years. then told us to collect asset receipts after that and write off when sold.

Either your tax preparer from 15 years ago was completely clueless, or you have incorrectly interpreted what you were told 15 years ago.

You are required by federal law to depreciate rental property for every year that property is "in service". If you haven't been depreciating your rental property for the last 15 years, then you have a serious (and VERY costly) issue here.

I would "HIGHLY" recommend that you seek the services of a tax professional in your local area. If you really haven't been depreciating the property for 15 years, the cost to the IRS for fixing this will be high, and "THEN" you pay the tax professional.

Please seek professional help. Especially if your state taxes personal income, as that may be a double-whammy for you.