Correcting an ERROR of LAND BASIS on Rental Property

[jjq90]

I inherited a FOREIGN (London, UK) property in 2008 and after adding $25K worth of improvements, I immediately began to rent it out. I never lived in he property.

I sold the property in 2021, and while preparing my taxes I noticed the following COST BASIS error in my ORIGINAL (2009) Tax Return:

Recorded Basis info on 2009 tax return:

Basis for Building Portion of property = $325K (Building plus improvements)
Basis for Land Portion of property = $400K
Total FMV of property in 2008 = $725K

The actual basis should have been the following:

Basis for Building Portion of property  = $325K (Building plus improvements)
Basis for Land Portion of property = $700K
Total FMV of property in 2008 = $1,025,000

The original recorded PROPERTY portion of the valuation ($325K) is correct, and subsequently the depreciation taken each year over the last 13 years is CORRECT and the Total accumulated depreciation recorded on my 2021 return is CORRECT.

However:

The original recorded LAND portion of $400K is $300K lower than it should have been on both my 2009 and all following year returns.  

Subsequently in 2021 TT is reporting a huge Cap Gain on the sale of my property because the LAND Portion of the ORIGINAL FVM was recorded wrong.

Exchange rate has no bearing on error, as all calcs have been recorded at CORRECT exchange rate.

I’m not sure how the original error was made, but by my casual observation it had no material effect on my PAST returns, because depreciation has no bearing on the land portion of the property, and depreciation on the building portion was recorded correctly each year.

I just never noticed the error before because it just shows up on the worksheets and has no effect on the actual return calculations or taxes owed UNTIL disposal of the property.

Although there was no “official” property valuation done back in 2008, I have COMP SALE documentation from 4 similar properties on the same block, in the same year, which support the higher LAND value calculation.

Basically, from a 10,000 foot view, the FMV can be substantiated at $1MM Plus the $25K I put into the property to prep it for rental use.

So with the understanding that the FMV makes sense and can be supported by publicly available comp data— What can I do to correct the LAND Portion of the total property price on my 2021 return?

Thanks.

[jjq90]

Upon further review of the hard-copies of my Tax Returns all the way back to 2010 (I don't have returns before 2010 due to a hard drive failure)--

I can find NO AREA IN ANY OF THE RETURNS which actually records the LAND VALUE portion of the FMV of the Property at time of Acquisition (inheritance.)

The Land Value IS recorded on a the depreciation WORKSHEET each year-- But the worksheet is NOT filed with the IRS in any year.

QUESTIONS

1) Did I simply  "Luck Out" here since the CORRECT Depreciation was recorded each year for the building?

And...

2) Since Im using a NEW version of TT which does NOT have any of my property's historical depreciation data....

Can I simply file as "normal" entering the "CORRECT" Land Value Portion when TT prompts me to enter the Acquisition Price split between Property Value and Land Value? 

This will essentially produce the CORRECT tax calculation without filing any additional forms.

Comments?

Thnx.

[DaveF1006]

After reviewing your comments, I will give my opinion based on the facts that you just stated.

1. First it is good that your building basis has been depreciated correctly. The land basis was never a factor until now since land is never depreciated. Let's say the original land basis was irrelevant then but is now.
2. Now in 2021, you can report the correct basis split between land and building on how it should have been, just as you suggested above.
3. For the proceeds split for this year, make sure you use the correct ratio that should have been used in 2009. in this case, the building is 325/1025 while the land is 700/1025. in this case, the ratios are .317 and .683 respectively. So if you sold your property for $2M, the split is $634,000 for the building and $1,366,000 for the land. Then TurboTax will determine a taxable gain, if any.
4. Keep in mind, I used the above examples without knowing what your proceeds were from the sale.
5. I hope this helps.

[jjq90]

THANKS!

I love the TT community.

THANKS AGAIN.

Just as an aside--

You would think that this property "investment" would have been a huge winner for me.

But it was actually a 10+ year nightmare.

Some time around 2016 the UK voted for BREXIT and the pound fell by 40% against the dollar, recovered slightly, but is still off 30% from the day I took possession of this property.

Since the rental property was GEARED to break even, or slightly lose on the income side BEFORE the pound slid (I was relying capital appreciation for the long term total gain)... I was saddled with an investment that actually lost a great deal of money every year on the Income Statement after converting Rent Roll and expenses from pounds to dollars.

The UK market softened from 2015 onward, and I've been stuck with a non appreciating piece of Real Estate.

As the old saying goes... "The best laid plans of mice and men often go afoul!"

THANKS AGAIN for the help.