TurboTax automatically changed ADS from 40 years to 30 years on a rental put into service prior to 2017.

[NS2005]

I have had a foreign rental property put into service prior to 2017 and always took the 40 year depreciation. While filing 2021 taxes I noticed that Turbotax automatically changed this from 40 to 30 years. Is this correct? Everything I have read (including some posts on the forum) indicate it is not allowed. Is there a mistake in how turbotax is treating the rental?

Is it possible to manually change it back to 40 years if this is a mistake? 

[DaveF1006]

To test to see if the program is working correctly, I used the same scenario and put the rental unit into service prior to 2017. I was able to claim the 40 yr ALT/MM.  Here is a sequence of steps to follow.

1. First delete the rental unit information you have already entered.  After deleting the entry in the step by step method, go to the forms mode and see if any forms or worksheets that still inhabit the program. Select each of these forms and delete them in your program so no contamination will occur when you renter this information.
2. Next update your Turbo Tax software program by going to online>check for updates if you are using windows.
3. Next reenter the rental information by going to federal taxes>wages and income>rental properties and royalties.
4. Next begin entering information about your rental property 
5. When you reach a section that asks Is your property in Any of These designated Areas, you indicate that your assets are outside the United States.
6. After entering your property profile, you will reach a summary page. Go to assets/depreciation to begin recording information to determine your depreciation for the year.
7. Begin entering information. Be sure to list your date you placed it in service prior to 2017 and not 2017.
8. After the depreciation has been calculated, there will be a page that will inform you what your depreciation expense is for the year. Click the details box to see if you are receiving the 40 yr MM/ALT standard.
9. Let me know if this works.

[ Edited 03/22/22|06:04 PM PST]

[NS2005]

Thx Dave - i will try by creating a new return. Having said that I have also come across additional explanation that may indicate the treatment by turbotax may actually be correct. 

1 40 years for property placed in service before January 1, 2018. Note. The ADS recovery period for residential rental property placed in service before January 1, 2018, is 30 years if the property is held by an electing real property trade or business (as defined in section 163(j)(7)(B)) and section 168(g)(1)(A), (B), (C), (D), or (E) did not apply to the property before January 1, 2018.

Above is from:
https://www.irs.gov/publications/p946

Electing real property trade or business

Under Sec. 163(j)(7)(B), an electing real property trade or business is (1) a trade or business that is a real property trade or business, as described in Sec. 469(c)(7)(C) and Prop. Regs. Sec. 1.469-9(b)(2), or real property trades or businesses conducted by real estate investment trusts, as described in Prop. Regs. Sec. 1.163(j)-9(g), that (2) makes the election to be a real property trade or business under Sec. 167(j)(7)(B) and Prop. Regs. Sec. 1.163(j)-9.

A trade or business under Sec. 469(c)(7)(C) encompasses "any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business." Prop. Regs. Sec. 1.469-9(b)(2) defines "real property" to include land, buildings, and other inherently permanent structures that are permanently affixed to land, or any interest in real property (such as a leasehold). However, assets that serve an "active function" are excluded, even if permanently affixed to land (e.g., elevators, escalators, and HVAC systems). "Real property operation" is defined as day-to-day activities by a direct or indirect owner of the real property relating to maintenance and occupancy that affect the availability and functionality of the property used, or held out for use, by customers paying primarily for the use of the property. Providing significant personal services in connection with real property, where the use of the real property is incidental, is not a qualified activity. "Real property management" is defined as the handling, by a professional manager, of the day-to-day operations of a trade or business relating to the maintenance and occupancy of real property that affect the availability and functionality of the property used, or held out for use, to customers paying primarily for the use of the property.

Above from:

https://www.thetaxadviser.com/issues/2019/may/sec-163j-real-estate-infrastructure-businesses.html

So if this is accurate maybe TT is correct. Anyone have thoughts on this?

[DaveF1006]

To clarify, did you make the election in Turbo Tax that this was a qualified business in your return for QBI purposes?

NS2005

[NS2005]

I think I did initially but then got the prompt that said an overseas property does not qualify for QBI so I went back and unchecked that option.

I plan to initiate a new return today and see how it behaves by following your earlier instructions and making sure i do not select QBI.  Will update the post after that experiment.

[NS2005 · Accepted solution]

I think I found the answer:

https://taxnews.ey.com/news/2020-2932-consolidated-appropriations-act-2021-applies-tcja-depreciation...

Act expands TCJA change to properties placed in service before 2018

Section Title II, Section 202 amends the TCJA to allow all residential rental properties, including those placed into service prior to 2018, to use the 30-year ADS recovery period.

Implications

The changes made by the Act will provide welcome relief to taxpayers owning residential rental property placed in service prior to 2018, who otherwise were required to apply a 40-year ADS recovery period to these assets if the taxpayer elected to be excepted from the application of the IRC Section 163(j) business interest limitation rules.

I will see if I can find any other supporting articles. but I think Turbotax's calculations are correct.

BTW I did try setting up a new return and not taking the QBI deduction and depreciation remained at 30 years (which is why i applied more google-fu).

[Ash2]

The link you shared is helpful.

I have a similar observation though I see that while for Federal TurboTax is using 40yrs, its automatically using 30yrs for California. This is for a foreign residential rental property placed in service in 2016. Last year, it used 40yrs for both.

I am not certain if its correct. 

[DaveF1006]

In this instance, California conformed to the federal change in the TCJA depreciation provisions to all residential rental real estate using a 30 year depreciation schedule for foreign rental property.

@Ash2

[kleinyan]

it seems to turboTax update that mid 2022 to 40 years for California even if Federal is 30 years

that was well after some folks filed their return, can anyone confirm if California conforms with the IRS on Residential rentals, or if the 40 years depreciation is the right way to go? 

what should one do if they already filed before the update to the software?  

[Carl]

If the property was already being depreciated over 40 years because it was placed in service prior to 2018, then you can (and probably should) continue with 40 yr depreciation. To do that in TurboTax, enter the property as "other asset" and work through the menus to select the 40 year option. That will keep things "on track".

[kleinyan]

my problem is a little bit different then the original post, my property went into service in 2019 

and so the last couple of years it was reported with 30 deprecations method on both federal and California report (turbo tax decision, not mine) 

this year after already submitting my report and getting approval, TurboTax update state software around June

and went back to 40 years deprecation in California (which might be the right way to report)  

i am not sure if i should do anything with my already accepted 2021 report at this point,

any thoughts?