Inaccurate Depreciation Calculation

[garyt22]

This is the first year I am using Turbo Tax (previously done by CPA). I'm inputting my rental properties with the year put into service, the total previous depreciation, the total cost and the land cost which yields a net "building cost"   All of the above was taken from my last - 2017 - federal depreciation schedule. My calculated SL depreciation based on my math and the CPA's last calculation match but they are  different than what Turbo Tax is calculating.  In some cases, more the 2K / year. I'm experiencing the same issue with all my rental properties to varying degrees.  Is there something I can do to correct TT ? Thank you in advance

[Carl]

The problem you're experiencing is not with the program. It's with your interpretation of what the program is asking for. Overall, a bit more clarity in the program would help. I've got 3 rentals myself and have been using TurboTax since 2003. It figures depreciation each year to absolute perfection every time. So the problem is with your understanding of what the program is asking for, and it's no surprise as I see this all the time. So I will provide you the clarity you need, that the program does not provide. Below I will cover the actual rental property itself in the assets/depreciation section of the program. If you have other assets listed, then after my clarification of this item, it should help you with clarity on any other rental assets you may have listed on the IRS Form 4562 from your 2017 tax return. So lets begin.
   For that specific rental property you will have two IRS Form 4562's in your 2017 printout. Both of them print in landscape format. One is titled "Amortization and Depreciation"  and the other is "Alternative Minimum Tax Depreciation". You are mainly interested only in the first one. You only need to refer to the AMT Deprecation form if the program specifically and explicitly asks you for AMT depreciation information.
Now, elect to start/update the Assets/Depreciation section. If asked if you want to go directly to the asset summary, select YES and continue. This puts you on a screen titled "Your Property Assets".
On the Your Property Assets screen, click the Delete button next to each asset and delete all assets. We're going to re-enter them correctly. Once all are deleted you'll see no assets listed of course, and an "Add an Asset" button. Click that button.
 - Select Rental Real Estate Property and continue.
 - Select Residential Rental Real Estate, and continue.
 - For "Describe the Residental Real Estate" enter the description exactly as shown on your 2017 form 4562 under the Asset Description column.
 - Now add together the amounts in the "Cost (Net of Land)" box and the "Land" box, and enter that total in the program in the Cost box.
 - Enter the amount in the "land" column of the 4562 into the program in the "Cost of Land" box.
 - For the "Date purchased or acquired" box, enter the date you acquired ownership of this property. This date will "NOT" be on the 4562 usually, unless it just "Happens" to be the same date you placed the asset in service. Then click Continue.
 - Select "I purchased this asset new" and select "I have always used this asset 100% for business".
 - For the date you first started using it for business, enter the date under the "Date in Service" column on the 4562. Then click Continue.
 - On the "Confirm your prior depreciation" screen there will be an amount already there. It "should" match. Basically, to determine your prior depreication already taken, on the 2017 form 4562 you have to add together the amounts in the "Prior Depreciation" and "Current Depreciaton" columns for that asset. If the program does not agree with "your" total, then you can (and should" change it to make it so. Then click Continue.
- On the Asset Summary screen click "show details" Here's what you should see.
    Years to fully depreciate - 27.5 years.
    MACRS Convention - Should match the *last* two letters on the 2017 form 4562 under the Method/Convention column.
    Depreciation Method - Should match the *first* two letters on the 2017 form 4562 under the Method/Convention column.
    Description - Should match what you have on the 4562 under the Asset Description column.
    Cost/Cost Basis - will be the total of the Cost (Net of Land) and Land columns on the 4562.
    Cost of Land - should match the amount in the Land column of the 4562.
    Date I started using it in the business - should match the date Date in Service column on the 4562.
    Business Use Percentage. Should match the percentage shown undder the "Bus. Use %" column of the 4562.
    Sold/Retired from business in 2018 - I'm expecting you didn't sell or covert the property, so that should be NO.
    Asset Category -   I-Residential Real Estate  (that's the letter "eye" not the letter "el")
    Section 179 Deduction - $0
   If all checks out, you're good to go with this particular asset. If it does not check out, then let us know what is different between what the program shows you on the details screen, and what the 2017 form 4562 says.

[pk]

Can you give me a for instance -- I have used  both professional  tax software and TurboTax  over the years and  there is often a small difference based on rounding scheme - but not large.  Please can you  provide Property put in business date, depreciable value  and let m,e work on this

[garyt22]

Hi PK. Here is an example. Date put into service 3/20/15. In TT, I had to put the start date of my company which was 10/10/15. Total cost: 180,388. Land Cost 36,078. Net bldg. cost: $144,310.  Prior depreciation: $9,402. My and CPA's annual depreciation calculation: $5,427. TT depreciation calculation; 5,127.  As mentioned earlier, all 7 properties are off in varying degrees with the worst being $2K.  Thank you for your assistance and please let me know if you need any additional information.

[Carl]

I can pretty much guess your boo-boo, as I see it very often for first time TurboTax users who have rental property acquired before they started using the program. But your boo-boo is caused by more of a lack of clarity by the program, than it is by you the user. So I've covered it in fine detail in my prior comment.

[pk]

@garyt22 , I will work on this  but I suspect the issue is as follows   (a)  your CPA probably computed the depreciation based on a  put in service date of 03/20/2015 -- that is to say it would a different convention  than 10/10/2015.   Thus  when you look at the depreciation ( asset life ) table you should see differences for the first year 1Q vs 4th Q or mid year. (b) when you enter the  put in service date and the depreciable basis , TurboTax should compute the depreciation for all the years  till end of life of asset.  You generally should not have had to enter past depreciation --- it should have got it from the table -- you use this only to correct any issues.  That what I expect --- but I will run it through in the next 1/2 hr  or so and come back

[tagteam]

I will just add another data point with respect to the depreciation deduction for the years in between the first and last year as well as the results of a test that was input into TurboTax Business.

With respect to residential real estate, the annual depreciation deduction (in between the first and last year) is 3.636% of the basis for depreciation. In this case, that is $144,310 x .03636 which equals $5247.12 and I got $5248 after I input that basis into TurboTax Business.

Thus, I am curious as to the derivation of the $5,427 (annual) figure as well as the $5,127 with TurboTax Business.

[Carl]

For TTX to show a difference of only a few bucks is really of no concern, as it really makes no difference in the tax liability anyway. I've since cases similar to this where say they start using TTX in the 15th year of having the rental. Prior to the year they started using TTX the 4562 for that prior year would show $1 more or $1 less than what TTX calculates for the current year. That's fine. Just leave it alone and press on with life.
But if you've got something like say, a difference of a few hundred dollars or so, then something entered in the program is not in agreement with what's on that prior year's 4562 is all.
I've seen people use the acquision date as the in-service date, and that can cause the first year convention to be off, which throws it off for all years following.  The error I see most often is where they use the "Cost (net of land)" figure as the total "cost", and that will definitely throw the math off every time.
Another less common (but frequent enough) mistake I see is where they've entered the property as domestic rental property when it's foreign, and vice-versa.

[pk]

I have the same  figure of yearly 5248 and therefore on 2018 tax return prior depreciation should be $11589 ----  1093 (2015), 5248 ( 2016 ) and 5248 ( 2017)  -- if you change the prior depreciation from $11589 to 9402 -- then the underutilized amount will need to be spread  and thus becomes $5334.

[pk]

@garyt22 ,   my conclusion  ( and corroborating responses from @Carl  and @tagteam  )  is that   (a) you need to  have used the real date when the property was put in service ( not when your LLC --holding company came into existence ) ;  (b) TurboTaxes computation is correct  assuming either date ;  (c) you need to  check to see what was the real prior depreciation --  it should be the sum of allowable in 2015, 2016 and 2017.   Then I think you will find that the figures will come much closer..  I am assuming here that all the properties you are talking about are indeed residential  property  depreciated at 27.5 years and not business / commercial property  depreciated over 39.5 years.  Yes ?

[garyt22]

@pk , @Carl Thank you both for your response.  Yes, these are residential properties depreciated over 27.5 years.  One of my challenges is TTX Business will not allow you to put a service date for a property that is before the start date of your company.  You will receive an error message. In my case, all but 2 of my 7 properties were put in service before the start date of the company.   The other challenge is the Prior Depreciation calculated by TTX Business does not match the calculated Prior Depreciation shown on my Federal Depreciation Schedule.  It will allow you to override the calculated prior depreciation and input your own amount.  If I use the my Federal Depreciation Schedule Prior Depreciation amount from previous years and override the TTX Business calculation, then the annual depreciation calculated by TTX Business is inaccurate.  If I use the TTX Business calculated Prior Depreciation, the TTX Business annual depreciation matches my Federal Depreciation Schedule, but then my Federal Depreciation Schedule Prior Depreciation amount will not be correct for the 2018 tax year and subsequent years.  Any suggestions you may have would be appreciated.  Again, thank you both for the amount of time you've put into this

[TaxGuyBill]

What type of entity is this?  A Partnership (Form 1065)?  I am going to assume this is NOT a corporate return you are doing.

Just because the program gives you an error about the placed in service date, does NOT mean you should lie and use a different date.  That different date is what is throwing things off.

If you use the proper "placed in service" date, it should do everything correctly.


As for the error message, that is a program limitation.  You can either (a) ignore the error and file by mail, or (b) use the fake 10/10/15 date and leave the "prior depreciation" BLANK.  However, whenever you sell the property (or in the final year of depreciation) you will need to MANUALLY make some adjustments for the 7 months from 3/20/15 and 10/10/15

[garyt22]

It is a Partnership (form 1065).  Unfortunately, the program will not allow you to proceed if your enter a service date earlier than the start date of the partnership.  Putting in a false start date of 10/10 /15 then forces me to show a prior depreciation less than my actual prior depreciation to get an accurate annual depreciation.  I believe my only alternative at this point is to abandon this program due to its limitation.  

[tagteam]

You can override virtually all of the inputs in Forms Mode on the Asset Entry (and other) worksheets and then, as @TaxGuyBill mentioned, file by mail. If you do so, the accumulated depreciation will, at least, carry forward to the next tax year and you should be able to e-file your next 1065 with TurboTax Business.

If you "abandon this program", your choices are going to be very limited. The only sure bet is to have your CPA prepare the 1065 because, to my knowledge, only two consumer-level tax programs exist (other than TurboTax) that are capable of preparing a 1065 and you are likely to run into the same issue with both of them.

[TaxGuyBill]

"Putting in a false start date of 10/10 /15 then forces me to show a prior depreciation less than my actual prior depreciation to get an accurate annual depreciation."

No, as I said above, use the fake 10/10/15 date and leave the "prior depreciation" BLANK.  The program should calculate the proper current year depreciation.  You will just need to make some adjustments for the year it is sold (or the last year of the Recovery Period).