Bought over 50% of rental property from my friend in 2019. How should I handle this acquisition ?

[amyonghwee]

In 2010, I bought a rental property with a friend with each of us having 50% ownership.

In 2019, I bought over this 50% from my friend, making me 100% owner of this property. 

For 2019 I added this newly acquired 50% into the property depreciation report.

From 2010 to 2018, the original property depreciation is reported at 50%.  

In 2011, we performed remodelling and depreciation report is at 50%. 

How should I handle this from 2019 onwards ?

[Mike9241]

for your original 50% you should have been taking 100% of yearly depreciation using only your cost not 50% on 100% of cost (my opinion)- i'll skip on whether you should have been filing partnership returns for the years your friend had his interest.  

you now create a second asset for what you paid your friend and start depreciation with the purchase date in 2019

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for the 2011 remodeling you should have only included 50% of the cost and taken 100% of the yearly depreciation

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when you bought your friends interest you also bought the improvements so there is no separate asset for this

[tagteam]

I agree with Mike9241 but believe you can get around filing a partnership return by virtue of Section 301.7701-1(a)(2).

[amyonghwee]

Thanks @Mike9241 and @tagteam .  After I amended my 2019 with this new asset, how do I proceed with 2020, 2021 and 2022 ?

Start with amended 2020, 2021, 2022 returns or  add new asset to 2020, 2021, 2022 just like what I did for 2019 ?

[tagteam]

When you do not take depreciation deductions for two or more consecutive tax years, you are considered to have used an impermissible method of accounting.

As a result, you need to file Form 3115 (not amended returns) and make an adjustment for the foregone depreciation.

See https://www.irs.gov/instructions/i3115#en_US_202212_publink100035791

You will most likely need assistance with this form. It is included in TurboTax but must be prepared in Forms Mode (only available in desktop editions of TurboTax) and is somewhat complex.

[amyonghwee]

Meaning I have to file  Form 3115    for  2019, 2020, 2021, 2022 ?

[tagteam]

No, you only file the form once, with your current return (1040).

[amyonghwee]

@tagteam Little confused... So I continue to file amended returns for 2019 to 2022

and for 2023, file Form 3115 ?

[tagteam]

No, if you only need to make adjustments on those previous returns for foregone depreciation, you do not need to file amended returns for those years. 

Rather, you would file Form 3115 with your current year's return (1040) and make a 481(a) adjustment (once) for the total foregone depreciation (i.e., it's a one-time adjustment).

[amyonghwee]

Thanks @tagteam ! 

How do I handle the CA state returns for 2019 - 2022 ?

[tagteam]

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@amyonghwee wrote:

How do I handle the CA state returns for 2019 - 2022 ?

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Frankly, I'm not sure, but I did find the following:

https://www.ftb.ca.gov/tax-pros/law/ftb-notices/2020-04.pdf

[amyonghwee]

I understand I can file or mail Form 3115 separately. I have already filed 2022 tax returns.

Should I file Form 3115 this year for the missed depreciation for 2019 to 2022   or wait till next year to file together with 2023 tax returns ?

[tagteam]

If you already filed your 2022 return, there is not much of a point.

You would most likely be better off filing the 3115 with your 2023 return (next year). Note that you need to file the 3115 with your tax return and also file a copy separately (a duplicate).

See https://www.irs.gov/instructions/i3115#en_US_202212_publink63215hd0e222

For the 481(a) adjustment, you will also need to file a statement detailing how you computed the adjustment and an explanation of the methodology used to determine it.

Again, you might want to consult a local tax professional next year.

[amyonghwee]

@TAG

 FYI. Found a relevant article by Turbotax on form 3115

https://ttlc.intuit.com/turbotax-support/en-us/help-article/asset-depreciation/didnt-take-depreciati...

I reviewed the form 3115. 

I will need to run Turbotax (as in amended version)  for 2019-2023 to get the depreciation values.

Add these annual depreciation values which I have missed into form 3115.

Let me know if I missed any steps..

[tagteam]

Yes; you need the total foregone depreciation figure and how it was calculated for next year.