Problem with Section 179 and Turbotax

[paforeleft]

I am amending my 2019 tax returns because i have determined that i can use section 179 to deduct an expense on a commercial real estate building that i own. I have changed the depreciation entry and checked the box to take 100% deduction in 2019 instead of the 39 year depreciation, On the "Your Property Assets page" it shows the full amount of the improvement listed under the section 179 column. However it does not deduct that amount - or any amount from the taxable income from that property. I am have not come close to the annual limit for section 179.

When i look at this in FORMS, the amount appears in the CARRYFORWARD TO 2020 SMART WORKSHEET, but the amount is not deducted from the income. In fact the taxable income goes up because the depreciated part of this expense has been removed.

I feel that there is a bug in the program because there is no reason that i can find to push this forward to 2020.

 If i am not asking this question in the correct place please guide me gently to the correct location

Thank you

[Critter-3]

You may not have been over the 179 limit on the form 4562 however your Sch C or E income may be limiting the deduction thus the carryover  where the depreciation may have been allowed.  

 Review your return both ways to see how each choice affects the return.  

[AmeliesUncle]

Section 179 is only allowed for a "Trade or Business".  Does your rental rise to the level of a "Trade or Business"?

TurboTax automatically assumes it does NOT rise to the level of a "Trade or Business".  So if it does rise to that level, you need to fill in/override the information on the top of Form 4562 about the income limitations.

[Anonymous]

on form 4562 what is the amount on line 2 and line 11?

[Carl]

For starters, long term residential rental real estate does not qualify for SEC 179. Commercial real estate "can" qualify, but only if your rental business rises to the level of being your primary trade or business (primary source of income).

Rental income is passive income. Therefore the related expenses are also passive. Your passive expenses/losses can only be deducted from that passive income.

So if the rental only produced $30K of rental income during the year, once your deductible rental expenses reaches $30K, that it's you can't deduct any more. (There is an additional $25K allowed against "other" ordinary income under certain conditions. But I'm not going to complicate things with that right now.)  Any additional losses in excess of the rental income are just flat out not allowed and get carried forward to the next year.

Now when it comes tax filing time it is *NOT* *COMMON* for rental real estate to actually show a profit "ON" "PAPER" on your tax return. it is much more common to show a loss in excess of the rental income every single year. That loss in excess of the rental income gets carried forward to the next year. So with each passing year your losses carried forward will continue you grow larger.

IN the tax year you sell the property, all of those carry forward losses can be claimed and realized in that tax year. But here's the issue with depreciation.

Depreciation is *NOT* a permanent deduction. Depreciation merely reduces your cost basis in the property. In the tax year you sell the property you are required by law to recapture that depreciation and pay taxes on it. The recaptured depreciation also adds to your AGI for that tax year and can easily bump you into the next higher tax bracket. But the recaptured depreciation itself will be taxed at a maximum of 25%.

So if you qualify to take the SEC179 deduction on your commercial real estate and actually take it, then you are effectively reducing your cost basis in the property to "ZERO". So if in ten years you sell the property, you will be taxes on *every* *penny* of your sales price, as your effective cost basis will be ZERO.

So I highly recommend you leave will enough alone and do "NOT" take the SEC179 deduction. It *will* bite you in the year you sell the property if you do.

[Critter-3]

Agreed ... just because you can doesn't mean you should ... this is where advice from a professional tax pro would come in handy so you can make an informed decision.  When you use a DIY program then you must educate yourself in the options you have at hand.  Advice from a public forum like this may not be sufficient for such a decision. 

[paforeleft]

Thank you for the response.

Yes i believe that the rental property rises to the level of a business due to the managing, leasing and maintaining of it. Turbo tax give you the option of invoking section 179, which i did, it just doesn't change the net income for the building.

[Critter-3]

And back to the original answer ... there are limitations on the 179 & the passive losses allowed ... review the returns carefully to see what changed ... look at the forms 4562 & 8582. 

[paforeleft]

Thank you for the reply,

line 2 = $16,685

line 11= 0

[paforeleft]

Thank you for the reply,

I believe section 179 applies as real estate is my sole source of income and myself or my agent work put a lot of effort into it. The property makes a profit even with the improvement in question accounted for. I do understand the depreciation has to be recaptured, it's likely that i will hold this property until i pass then leave it to my heirs. Also i'll consider myself fortunate to live half of the 39 year depreciation schedule for this so using section 179 should be a net cost savings, in really any scenario.

[paforeleft]

"So if you qualify to take the SEC179 deduction on your commercial real estate and actually take it, then you are effectively reducing your cost basis in the property to "ZERO". So if in ten years you sell the property, you will be taxes on *every* *penny* of your sales price, as your effective cost basis will be ZERO."

This sounds like you are implying that using section 179 changes the cost basis of the entire property - which is much higher that the cost of this improvement - to zero. If that is true it's a game changer but i don't see how that is possible or where that is documented. Do you mean the cost basis of that specific improvement?

[Lynn39]

how do you override that form

[Cynthiad66]

Section 179 is addressed in the interview questions about the particular asset.  It asks if you would like to  expense the item or take bonus depreciation etc.  

Go back into the Section to claim assets then select the item to review.

You have not provided enough details about the item and what and how you want to override.  So here is a generic answer that might assist with your issue.  If not contact us again with details about your situation.

Use this information to make the proper election for the depreciation.

Now regarding assets.

1. After checking assets, taxes and licenses, and other expenses related to your work, press continue on the bottom of the page. The next screen will list all of expenses you chosen so let's begin assets.
2. Answer the question in the first screen until you get to a screen that asks Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2020? if you wish to expense your phone rather than depreciate it, you will say yes.
3. Then the next screen will ask you questions like if you wish to use this election yearly, here you will say yes or no. 
4. Now if you wish to take the 179 deduction rather than expense the item, you would say no to the questions in #2 above.
5. You will enter the information that this item and then it will ask you the purchase date, cost, and all other relevant information.
6. The next screen will ask if you use this 100% for business, here will say no and you will enter the date you started using it and the percentage of time you used it for business.
7. You will navigate over the next few screens until you come to a page that asks How Do You Want to Deduct this Item?
8. Here is where you will select I'll deduct the full value of the item this year. (Take the Section 179 deduction) Note there are other options to take also.
9. if you reported your information correctly, the amount of your 179 deduction is the same as your expensed percentage.

@Lynn39