How to correct the basis of a residential rental property

[socalpatrick5]

I purchased a rental home in October 2023 and did not have the county assessment on time when I filed my 2023 taxes. I ended up using the purchase price $585,000 minus land price from the old owner's assessment ($97,000) plus closing costs as my new basis (Turbotax calculated about $511,00 as basis). 

When I finally received my new assessment in June 2024, the county upraised the land as $176,000 instead of $97,000 and structure as $411,000 vs my $493,00 that I used in Turbo tax + closing costs.

My basis will now be much lower.  Do I need to change my basis and how do I do it?

Thanks. 

[pk]

@socalpatrick5  what I understand  from your post is 

(a) you bought a rental property for  585,000 plus closing costs "C"

(b) you did not have current allocation for land vs. improvement and so used  a land value of 97,000

(c) Thus your depreciation for  the tax year 2023 and follow on year may need to be adjusted.

(d) Note that your  total basis in the property has not changed  -- it is still   585,000 + C

(d) From the figures you quote of Country assessor's  valuation ( which is usually lower than  FMV),  the land value is approx. 30% of the total.

I think , in  the long run you will be better served  ( for Gain and recapture purposes ) to amend your  2023 return to adjust the  land value. This would reduce your depreciation for the year. Then use that amended return as basis for your 2024  return.  This now will fix  your depreciation  schedule here onwards.

That is my opinion -- 

[socalpatrick5]

Hello and thank you.

Actually, since you only depreciate the structure and not the land, my basis is structure + closing costs.  I calculated it will be lower by around $70,000.  So, can I ammend my 2023 and file my 2024 at the same time? How can I change my basis on my 2024 taxes in Turbo Tax? I can then ammend my 2023 sometime soon.

Thanks.

[pk]

@socalpatrick5  the reason I suggested  that you amend 2023  (you can file when ready -- it is by mail anyways ), is that then will carry forward the depreciation details for the 2024 return.   The other way to do this is to  essentially start 2024 with no depreciation details -- fresh start . Then tell it the details that this was purchased in  2023,  and give the correct details about the cost,  land value etc. It will recompute the depreciation schedule and apply the amount for 2024.

Then you can  go back to amend the 2023 , just  update the allowable depreciation  ( computed by 2024 ) for 2023.  That would also work.

My assumption here is that you are using download for both 2023 and 2024 i.e. everything is on your machine.

A thing to note  -- if the actual taxable income on your amended 2023 return is  pretty much the same as the filed return, you can  forget about filing an amended return.  ( it costs IRS quite a bit to process an amended return.

Is there  more I can do for you ?

[socalpatrick5]

Thank you for that advice, I will try your suggestion to start with fresh depreciation details. Yes, nothing else will change if I ammend 2023 and Turbo Tax calculated 0 and 0 for what I owe or IRS owes me.  It is only to correct the depreciation for 2023 and going forward.

Now, when I go into my 2024 return, go to the rental property, click on assets/ depreciation, update, "No, I want to review my answers to the annual election questions", go through until I get to the section labeled "Your property assets" , here I can click "edit" next to depreciation and I can change the land value to reflect the correct amount (this was the problem initially, I had way understated land and overtstated structure in 2023 since I didn't have my assessment yet). 

TurboTax seems to then adjust the depreciation for 2024 correctly on form 4562.  The only incorrect information on form 4562 for 2024 is that 2023 depreciation is $20 off ! I only owned the property for Oct, Nov, Dec. 

Thank you, I will now try your suggestion and see if that also works.