Form 4562 - Business Use Percentage does not go up

[FortuneCookies]

Hello,

I just checked my Form 4562 and noticed that the business use percentage has not increased since I started listing the property as a rental. I have correctly answered the TT question, indicating that the property was fully rented in both 2023 and 2024. Should the percentage be adjusted to 100% in 2023 & 2024?

Purchased foreign property in 2017 but starting rental in 2022.

YR 2022 - started rental in 08/2022 - form 4562 business use 42%

YR 2023 - fully rented - form 4562 bus use 42%

YR 2024 - fully rented - form 4562 bus use 42%

TIA for your help!

[DianeW777]

No, the straight line method means just that. You will have the same amount of depreciation each year over the life of the asset. The amount at 100% would be the cost basis divided by 40 years in your situation.

Your property in a foreign country is depreciated over a 30-year or 40-year period, depending on when it was first placed in service for rental use. Instead of the 27.5 year for US residential properties the period is different.  

• Prior to 2018, depreciation of foreign residential property was limited to 40-year period.   
• 2018 and Future: New assets placed in service now get the lower 30 year period.

[FortuneCookies]

@DianeW777,

It seems that the business use percentage was fixed (prorated) during the first year of rental usage and remains the same each subsequent year. Is that correct? This approach results in only 40% of the depreciation amount being allocated. Can the percentage be adjusted?

[DianeW777]

No, that is not correct. You likely need to change the percentage of use to 100% since it was fully rental in 2023. You should indicate it was rented all year at fair rental value and, if you altered the cost of the rental asset initially, enter 100% of the cost of the home in the asset section (if not already at 100%).

You have two options for 2023 and/or 2024.

1. You could amend 2023 to change and correct the depreciation. Continue with the 2024 with the corrected changes above and file it even though the 2023 is not yet amended.  
   1. How do I amend my federal tax return for a prior year?
2. File Form 3115 to capture the missed depreciation in 2024 (some what more complicated).
   1. What should I do if I didn't take depreciation on my rental property?

[FortuneCookies]

I have submitted my tax last night. I should wait for your reply instead.

In 2022, I have entered the full cost of my asset. TT has prorated my depreciation to 40% that day.

In 2023 & 2024, I have answered correctly stating that this property was rented for the entire year with fair market value. I thought TT would update the business usage for me!

I would like to choose the amended return option. According to the link you provided, amendments are allowed within one year. Does that mean I can only amend the return for 2024? Can I file Form 1040X without submitting Form 3115, correcting the business use percentage from 40% to 100%, and letting TurboTax recalculate the figures for me? 

Additionally, I’ve missed approximately $6,000 of depreciation each for 2023 and 2024, totaling $12,000. In your opinion, what's the best option for me?

[DianeW777]

No, you can amend 2023 and 2024, if you didn't make the necessary changes for a correct 2024 tax return. Amending is not a problem either way.

• A note for future use: if you find an error on a prior year return while completing the current year, you are allowed to make the adjustments to accurately reflect the correct figures in the current year, then go back to amend or finish your amendment for the prior year.

There is plenty of time to complete your amendments.

2023 Amendment: Must be completed and received by the IRS no later than April 15, 2027

2024 Amendment: Must be completed and received by the IRS no later than April 15, 2028

• Or two years after the final payment of tax due if it is later.

When you start off with property that is not 100% rental use, it will be a manual adjustment to make sure you are taking the full allowed depreciation and expenses.

@FortuneCookies 

[FortuneCookies]

@DianeW777 

Are these the correct sequences?

Amend 2023: Change business usage to 100%. Print Form 1040X.

Amend 2024: Change business usage to 100%. Print Form 1040X.

In TurboTax 2024: Open Form 3115, manually enter the information to include the adjustments made for 2023 and 2024, then print Form 3115.

Create a statement explaining the reason for the change.

Questions:

1. Can I avoid filing Form 3115? If I can't, will the connected TurboTax tax expert be assisting with filling out/review the Form 3115 for me?
2. Is a self-typed statement sufficient as an attachment to send along with Form 3115? I may have difficulty obtaining official documents since the property is overseas and individually managed. Additionally, the rental contract is in a foreign language.
3. Should I mail all forms together—2023 Form 1040X, 2024 Form 1040X, Form 3115, and the statement explaining the reason for the change?

TIA.

[DianeW777]

Yes, the sequence is correct for the 2023 and the 2024 tax return. If you amend both of those returns then there is no need for Form 3115.

1. Yes, you can avoid Form 3115 all together by amending both 2023 and 2024. There would be no need for this form.
2. When amending do not include Form 3115.
3. Mail each amended return separately. Do not mail them together. The IRS has difficulty when two returns are mailed together and one can get lost. Simple is best.

Form 3115 is used only to avoid amending returns or when amending returns is not an option. It is not necessary when you still have an open time frame to amend returns. Reasons for the use of Form 3115:

1. It is a great option for a year of sale when depreciation was missed or had excess depreciation in an earlier year. 
2. It's a great option when the amending time frame has expired and a depreciation adjustment is needed.

@FortuneCookies 

[FortuneCookies]

@DianeW777 

Thanks! It's a relief that I can file Form 1040X for tax years 2023 and 2024 without needing Form 3115.

I am working on the 1040X for TY2023 now, and have few questions:

Steps:

TT 2023 - Update the Business usage to 100%.

Reason: The rental property was fully occupied throughout 2023. The business usage percentage was updated to 100%, and the depreciation for the year was recalculated accordingly.

Does this explanation clearly outline the reason of the amendment?

TT 2024 - Update the Business usage to 100%. 

I am assuming TurboTax may not automatically update the amended 2023 values. Should I manually enter other details, such as the carryover depreciation from 2023? Please specify the exact form or section where this information needs to be input.

I can't find in TT desktop version offering an e-file option for 1040X. Is this correct?

[DianeW777]

The answer to your questions follow:

• TY2023: Yes, you are amending to correct the depreciation calculations and business use percentage error.
• TY2024: Yes, you need to update the amended 2024 with the new 2023 depreciation numbers. Write down the total 'prior depreciation and the current amount from the 2023 tax return in the rental asset(s). When you are in the asset section of the rental in 2024, then correct the prior depreciation if it does not match the figures you wrote down.

If there is no e-file option for the amendments in the TurboTax Desktop then it must be mailed, at least for 2023. If you don't have an e-file option for 2024, then you would mail that one as well. Do not put the 2023 and the 2024 in the same envelope. Believe it or not, it's too much for the IRS to handle.

@FortuneCookies 

[FortuneCookies]

@DianeW777 

TY2023

Besides the Business % to change to 100%, do I need to change the date field to '01/01/2023'?

 

TIA.

[RobertB4444]

No.  You began using it for business on 8/1/22.  Leave that date.  The 100% usage began on 1/1/23 and the only reason to enter that date is if you had to create a new asset to depreciate.

@FortuneCookies