Depreciation on Condo Rental exclude Land - just found out from Tax Accountant

[Anonymous]

I've owned a Rental for several years and have been entering cost and land for TurboTax software to calculate the depreciation. I recently asked a tax accountant to review my last year's TurboTax filing. He told me that for a rental property that is a condominium I have to depreciate the full cost (what I paid for the condo), instead of just the building. Ouch!

Before I move forward, I like to understand why TurboTax did not provide the correct calculations (or verified the properly correctly). I've also searched and only found very little literature on calculating the full cost of condo rental price. Nothing other than an IRS Publication that has a small paragraph on Special Situation such as owning a Condo Rental. 

I wonder who is correct, TurboTax or my tax accountant. Any advice?

Note: I've been using Home & Biz and Premier desktop versions 

[Critter]

The accountant is correct ....   

When the program asked for the total cost of the home did you not enter the entire purchase price ?   

And then the program asks how much of the purchase price belonged to the land value.  So how did you come up with a land value when you do not own the LAND ?   When you own a condo the association owns the land not the individual owners  ... so if you answered the question in the program incorrectly that is a data entry error on your end and not a failing of the program.  

[Critter]

[Anonymous]

In general, each condo unit owner owns a percentage of the land collectively as dictated by the declaration and/or its amendments. It's part of the common elements.

The first owners buy the units from the developer. After the developer sells all of the units they intend to sell, future owners will buy from existing owners.

When developers to decide to build a building, they typically buy the land themselves or partner with another company/investment group to develop the property in the form of equity investments or debt financing.

having been with a firm that handled the bookkeeping and tax returns for developers.   here's what happens from the developers standpoint .  it purchases the land which is recorded as an asset  then build the condominium which is  recorded as an asset.    the developer assigns ownership % to each unit which includes the common elements - the common elements including the land.    when a unit is sold the sales price is recorded as income and the % interest related to the unit in land and building is recorded as the cost.   when a specific number of units are sold the land is deeded to the condo association.      so the original purchasers in fact have paid for the land even though title rests with the condo association      and don't the original sellers try recoup what they paid for the land and building when they sell.     your deed probably includes a notation as to the percent of the common elements you own and that includes land as well as the other condo's common elements. 

admittedly, I have heard arguments both ways as to whether a portion of the cost of the condo purchase should be allocated to land.        

you ownership interest includes an ownership interest in the condo association.  if you didn't own the land, how could you deduct the portion of the real estate taxes or  other costs pertaining to the it. 

[Anonymous]

Thanks for your reply and pointing out the difference. I entered the purchase price of the house and then the land value.  I got the land amount from the property tax documents.

If I understand you correctly, I should’ve only entered the price of the condo and not the land value. Although, the software does not make that distinction and provides a field for land portion of the purchase price. 
That’s what makes it confusing. 

[Anonymous]

@Anonymous @Critter 
Thanks for the explanation. It would haven been more helpful if the software offered the option to choose property as a condo and provided the questions specific to condo rentals, where it would specifically ask for the full price and omitted land value.

The help text is not as clear cut as one would expect (my lack of knowledge/understanding, perhaps). I am also not finding any IRS description (and my accountant is hesitant to provide that, as well).  I am frustrated by the fact that the error in the depreciation was repeated since 2013. 

[GalleySlave]

I'm confused. 15 years ago, I paid $70,000 for a condo. I don't know the assessed value of the land at the time. (Currently, it is 30% of the 2020 total assessed property value.). I have been depreciating the full purchase price of the condo ($70,000). Have I made a mistake? If so, what should I do moving forward?

[Carl]

I got the land amount from the property tax documents.

Solid proof that you own a portion of the land. Otherwise, you are not assessed a property tax for real estate that you do not own.

I'm confused. 15 years ago, I paid $70,000 for a condo. I don't know the assessed value of the land at the time. (Currently, it is 30% of the 2020 total assessed property value.).

Assessed value is only used for determining what percentage of your purchase price gets allocated to the land. That's it.

I have been depreciating the full purchase price of the condo ($70,000). Have I made a mistake? If so, what should I do moving forward?

You need to fix it, as you have been taking more depreciation each year than you are entitled to. Since you're more than halfway through the class life (27.5 years for rental property) I would highly suggest you seek professional help.  This would be especially necessary if your state also taxes personal income.  BTW - I always recommend professional help for situations like this if it's been more than 3 years of doing things wrong, for two reasons.

1) TurboTax only supports their product for the current tax filing year and 3 years back. If you use TurboTax to amend or file a return more than 3 years back, chances are high it will be wrong. That's because you flat out can not get the required critical updates and corrections for the TTX program more than three years back.

2) If amending a return more than 3 years back and the amendment will result in a refund, you will not get that refund because of the IRS's three year statute of limitations on that. The amendment may still be needed though, to correct things on the front end. Unfortunately, if amending a return up to 10 years back results in you owing the IRS money, you'll have to pay it plus interest and any fines or penalties that may be assessed. A tax professional may know a few loopholes or work-a-rounds to help with that for all I know.

[M-MTax]

A tax professional may know a few loopholes or work-a-rounds to help with that for all I know.

I'd say the main "loophole" here.....that professionals would know.....would be NOT to amend returns on which the statute of limitations has run. It works both ways.......you can't get a refund after 3 years because of the statute of limitations and the IRS CAN'T assess additional tax after 3 years unless there is fraud or substantial understatement of income. No matter what, a pro is needed.