topic Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change? in Investors & landlords

Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

tester74 — Mon, 23 Mar 2020 00:26:19 GMT

Hello,

I had entered an incorrect purchase price for a rental home (converted from primary residence, 355k instead of 365k). Last year, I sold the price and now I see that having 355k as cost basis increases my tax. Turbo tax allows me to change the price I paid for the home, does IRS accept the cost basis to be changed now? What is the correct procedure to deal with this mistake? Any insights greatly appreciated.

Thanks,

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow t...

JamesG1 — Mon, 23 Mar 2020 00:51:02 GMT

If only two or three years are in error, you may amend the tax returns for each year, reporting the reduction in depreciation expense. Then the current year’s tax return would be reporting the correct cost basis.

But tax returns more than three years old may not be amended and refunds will not be honored.

IRS form 3115 Application for change in accounting method can report the change but this form is not supported by the TurboTax software. See the instructions here.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

AmeliesUncle — Mon, 23 Mar 2020 02:03:56 GMT

Yes, you can just change it to the correct amount.

However, with the higher Basis, when it asks for "prior depreciation" you need to be sure you enter the amount that you SHOULD have claimed (based on $365,000).

When you converted it from personal use to a rental, you should have entered the LOWER of (1) your Adjusted Cost Basis at that time or (2) the Fair Market Value on the date it was converted to a rental. Which of those two was lower, and is that the amount that you used?

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow t...

DavidD66 — Mon, 23 Mar 2020 02:30:30 GMT

You can file Form 3115, Application for Change in Accounting Method. This will allow you to make a retroactive change to your depreciation expense on your 2019 tax return due to the incorrect cost basis. Otherwise, you will be paying depreciation recapture tax on the depreciation you were entitled to take, which will be greater than actual depreciation claimed. Form 3115 is not available in TurboTax.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow t...

AmeliesUncle — Mon, 23 Mar 2020 03:01:01 GMT

No, Form 3115 does not apply. Using an incorrect Basis is a "mathematical or posting error", which does NOT qualify for Form 3115.

If the OP wants to get the slightly higher depreciation for the last 3 years, they can amend those returns. But Form 3115 can not be used.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

Carl — Mon, 23 Mar 2020 03:05:41 GMT

@tester74 all of the responses given thus far are wrong. Here's what you do in "YOUR" specific case and "ONLY" in "YOUR" specific case.

Basically, you will report the sale in the "Sale of Business Property" section.

First, work through the Rental & Royalty Income (SCH E) section of the program. for this property select the option for "I sold or otherwise disposed of this property in 2019" and then continue working it through.

Enter any and all rental income and expenses as normal.

Now in the "Sale of Assets/Depreciation" section you *MUST* work through each individual asset listed, one at a time. As you work it through, write down the prior years depreciation and current year's depreciation on each individual asset.

- Select the option for "I stopped using this asset in 2019"

- On the "Special Handling Require?" screen select YES (If you select NO you will be *FORCED* to enter sales information, and we're not reporting the sale here.)

- You must do the above for each individual asset listed, one asset at a time.

When done with everything in the "Sale of Assets/Depreciation" section, continue working through the rest of the SCH E.

If you have claimed *ANY* vehicle use at *ANY* time during your ownership of this property, then work through the Vehicle Expenses section to show that you stopped using the vehicle in 2019 and removed it for personal use. (I seriously doubt you sold the vehicle as a part of the rental property sale.)

Once you've worked through the SCH E in it's entirety, you're done with that section. Now to report the sale.

Elect to start/update "Sale of Business Property"

Select "Sale of business or rental property you haven't already reported" and continue.

Since you sold the property at a gain, select YES.

Now you can enter a description of the rental property you sold, date you purchased/acquired it, date you closed on the sale, the sale price, the "correct" cost, and then total up all of your depreciation numbers you wrote down earlier and enter that total in the last box.

Now press on with life and finish working it through. Easy-Peasy.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

AmeliesUncle — Mon, 23 Mar 2020 03:19:35 GMT

@Carl The OP still needs to claim the correct depreciation this year. In order to do that, the amount needs to be changed in the "asset" section. Because that is corrected, it can correctly be reported in the "asset" section rather than the "Sale of Business Property" section. While it could be claimed in the "Sale of Business Property" section, there is no indication that it would need to be done that way.

But the OP NEEDS to calculate and use the "prior depreciation" that SHOULD have been claimed using the correct higher Basis (if you leave that entry BLANK, the program will automatically use the proper amount). That is need in order to claim the correct current year depreciation, as well as to calculate the correct amount of gain.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

Carl — Mon, 23 Mar 2020 03:28:58 GMT

This is absolutely no different than if the FMV of the property at the time it was placed in service, was less than the original purchase price. It's how you can significantly reduce your chances of an audit while still reporting the sale with the correct information and only paying taxes on what you should be taxed on.

Besides, the other way (that may increase chances of an audit) is to add the $10K difference to the value of the land and leave the value of the structure alone. That makes all prior as well as the current year's depreciation alone.

You go changing the structure value on the SCH E and that's basically screaming for an audit, whereas increasing the land value only is yelling softly for an audit. Reporting it my way in "Sale of Business Property" doesn't even so much as raise an eyebrow. But "if" audited (and I doubt that would happen) they have the paperwork to prove their cost basis.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

AmeliesUncle — Mon, 23 Mar 2020 03:49:53 GMT

Claiming the proper amount of depreciation on Schedule E certainly won't attract an audit. It is simply reporting it correctly. By knowingly continuing to claim the incorrect amount of depreciation, you are filing an incorrect tax return.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow t...

Anonymous — Mon, 23 Mar 2020 08:07:06 GMT

righto and the Taxpayer has to use the depreciation that would have been allowed.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

westenterprisesinc — Tue, 12 May 2020 01:32:57 GMT

How can I correct my cost basis for a rental property I have sold in 2019? I built the home in 2008 and I never caught this until now. The cost was 200K for land and $249K for building. I have $79K in loss carryforwards because my income was higher than $150K each year.

My cost basis is $100k too low - yikes

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

Virginia_PropTax — Mon, 13 Jul 2020 19:07:19 GMT

@CarlI am having a similar issue wherein I have a rental property that I sold in 2019. This was a personal property that I converted to business/investment in 2013 when it was worth less than when I purchased it in 2005. At that time I calculated a FMV, allocated to Land & Building, and depreciated accordingly, all in Turbo Tax. Now, I am trying to record the sale. In my case, I have neither a gain (calculated based on my original cost basis + improvements less depreciation) nor a loss (calculated based on my FMV at time of conversion less depreciation).

In the Rentals section, the FMV is shown and used to calculate a sales "gain". When I follow the instructions for special handling under "Sale of Business Property" and update the cost basis to my regular basis from the original purchase, TurboTax gives me an error that I "do not have a gain" and removes/deletes my entry. It then maintains the "gain" based on the calculation using the FMV that it carry's over from the Rental Income section. I have read all the IRS rules for calculating loss/gain, and I believe that in my circumstances, I have neither a loss nor a gain. But, how do I correctly, enter this info into Turbo Tax?

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

Carl — Tue, 14 Jul 2020 01:34:19 GMT

As I understand it, using the original purchase price you have a loss

Using the lower FMV at time of conversion you have a gain.

Therefore

I have seen this before and always recommended professional help. The bottom line is, the TurboTax program *can* *not* *correctly* handle this situation no matter what you do. I've tried different scenarios myself last year with TTX 2018 and could not get a correct result. But if someone figures it out, it sure would be helpful to let folks in this forum (such as myself) know.

One thing I've never gotten clarity on is for someone with your specific scenario, where you have a gain with one cost basis, and a loss with another. The best information I can find on which cost basis to use is in IRS Publication 551 page 11 at https://www.irs.gov/pub/irs-pdf/p551.pdf. But it doesn't cover what we need it to cover. So the best information I can give you, is "seek professional help". You've got two days before the filing deadline. If you will be getting a refund, there will be no penalties for filing late. But if you owe the IRS, you "will" pay interest on what you owe if you pay after July 15th.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

Virginia_PropTax — Tue, 14 Jul 2020 11:16:49 GMT

@Carl Thank you for taking the time to respond and validate my conclusion that TurboTax isn't addressing my situation accurately. I will file an extension and look for help.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

mishelk — Wed, 15 Jul 2020 19:14:56 GMT

Hi All-

I have a similar situation and appreciate support. I placed my residence into rental service in 2011, at the time the preparer recorded the value of the structure too low by 80k. Is it worth it to correct this year? I do notice with the higher value i get a larger depreciation ...just not sure if i need to fill a form out. From reading this thread i'm under the impression i can change it this year, but did not understand the consideration of adjusting the depreciation for prior years. Any help is appreciated.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

AmeliesUncle — Wed, 15 Jul 2020 19:25:44 GMT

@mishelk wrote:
I placed my residence into rental service in 2011, at the time the preparer recorded the value of the structure too low by 80k.

It may not be the "value" of the structure. In most cases, it should be the "cost" of the structure.

Was it your personal residence? If so, the depreciation the LOWER of (a) your Adjusted Basis (usually your original cost, plus cost of improvements, minus any prior depreciation) or (b) the Fair Market Value when it was converted.

And did you factor in the land? The land is not depreciable, so the amount used for depreciation is the total cost, minus the land (you enter both the total cost and the land into the program).

With all of that in mind, did the preparer use the wrong amount? If so, yes, you can start using the correct amount now and amend any 'open' prior tax returns to correct it.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

bob_brown — Fri, 26 Feb 2021 04:41:11 GMT

Wow you just saved me a ton of time.....so in the "Cost of Property Plus Expenses of Sale" box do I enter how much my property cost plus my commission fees as expenses of sale? Thank you thank you thank you......my house's FMV was different than my purchase price and you solved my issue. I bought it in 2008 at the peak of the bubble and when I rented it in 2014 it was still lower than my purchase price. I used FMV so this year I finally sold for more than I bought it for finally but then it messes up turbo tax. And you my sir figured it out.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

bob_brown — Fri, 26 Feb 2021 04:44:53 GMT

@Carl hey one more thing thank you for your input my purchase price was different than my FMV when I changed it from my residence to a rental. So in the sale of a rental property portion of TT the "cost of property plus sale expenses" box is that the cost of the property with all my sale fees (i.e. realtor commissions and title fees)?

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

Carl — Fri, 26 Feb 2021 05:07:26 GMT

my purchase price was different than my FMV when I changed it from my residence to a rental.

I have no doubts about that. But your sale is reported using the original purchase price, and not the FMV at the time of conversion. It's depreciation that is based on the "Lower" of the purchase price, or the FMV at the time of conversion to rental. For most, the lower cost will be the original purchase price. If that's your case, you report the sale in the SCH E section of the program. If that's not your case, you report the sale in the Sale of Business Property section of the program.

So in the sale of a rental property portion of TT the "cost of property plus sale expenses" box is that the cost of the property with all my sale fees (i.e. realtor commissions and title fees)?

Where precisely are you reporting the sale? Sch E section or the Sale of Business Property section?

If in the SCH E section, you will have a physically separate box for sales expenses. Also, "you" the seller don't pay title fees. The buyer does. Your sales expenses are basically the sales commission paid to the realtor out of any gain realized by you, and are deductible by you.

Otherwise, if in the Sale of Business Property section, the screen in the desktop version of TTX (which is what I use) does clearly state "cost of property plus sales expenses". So in the SCH E section you enter the cost and sales expenses separately, while in the Sale of Business Property section you do the math yourself, and enter the total of cost plus sales expenses.

Re: Can I correct an incorrect cost basis for a rental property when it is sold? Does IRS allow the change?

bob_brown — Fri, 26 Feb 2021 07:40:32 GMT

@Carl my FMV is 205,000 150,500 house and 54,500 land.......my original purchase price is $280,000 so 74,200 land and 205,800 house. I was going to do it your way and put it under the sale of business or rental property. However after reading the internet you have to make sure that section 1250 of form 4797 is filled out for depreciation recapture. When I put it under the sale of business or rental property it does not fill out section 1250.