Lower Cost Base Used for SL Depreciation on Rental

[Rob218]

I have a rental property for two years and I (or TurboTax really) have used SL (27.5 years) for depreciation. The cost base is $500,000 ($1mil purchase cost minus $500,000 land cost as entered on TurboTax for residential property). This year I am doing a cost segregation study and it splits depreciation of the still roughly $500,000 into 5/15/27.5 years buckets. Now the the cost base for the 27.5 years is only $300,000 ($200,000 goes to 5/15 years). Question is how do I update depreciation asset (Sch E) on this year's filing to reflect that the cost base using 27.5 years SL deprecation method is only $300,000 not the $500,000 based on purchase cost minus land cost? TurboTax seems to only ask purchase and land cost for residential rental real estate. Thanks!

[Critter-3]

Once started the depreciation method used cannot be changed without IRS approval. If you wanted to use a cost segregation method it should have been done in the beginning.  

[Rob218]

Even with a new cost study that generates a 3115 form to attach? This study would consider how much I already depreciated. In fact, my impression is that 3115 is designed for those that already did SL and wanted to change method a few years after SL was used.

[Carl]

On page 2 of the instructions for form 3115 at https://www.irs.gov/pub/irs-pdf/i3115.pdf it states:

In general, a filer that fails to timely file a Form 3115 will not be
granted an extension of time to file except in unusual and
compelling circumstances. See section 6.03(4)(b) of Rev. Proc.
2015-13 and Regulations section 301.9100-3 for the standards
that must be met. For information on the period of limitations,
see section 5.03(2) of Rev. Proc. 2023-1

Keep in mind that the 3115 is a request. Such request can be denied by the IRS too.

[Critter-3]

@Rob218 

The form 3115 is not a DIY project  and you will need to use the downloaded program and make overriding entries as the program will not / does not handle this situation thru the interview screens.   I highly recommend you seek professional assistance with this matter unless you know exactly what you need to do and how. 

[Rob218]

In my case, there'd be agency that specializes in cost segregation (with fees and not cheap) and they will give me 3115 to file. It will have new 5/15/27.5 years cost bases. The 5/15 years would be on Other expenses section on Sch E, but how'd we tell TT that the new base for 27.5 part is not the old purchase price - land cost anymore, perhaps by reducing the (purchase) cost by the same amount of 5/15 years from 3115? I saw this link https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/bonus-special-depreci... for similar matters. The host says he "restarted by first adding the "27.5 year structure" (total cost minus the cost of segregated 5 and 15 year items)". I am wondering how he did that as TT 27.5 year asset will always ask you total cost and land cost. I am guessing he might have used purchase/total cost minus 5/15 years bases from the cost study and just entered that on TT directly? Is that the correct way?

[Carl]

If you change the cost basis of any existing asset in TurboTax on which depreciation was started before the 2022 tax year, it will alter the depreciation history, current year's depreciation will be wrong and all future depreciation will be wrong. You can't do this with TurboTax unless you do an over ride. Note that an over ride is not possible with the online version of the program. Two things happen when you do an over ride.

1) You completely void the TurboTax 100% Accuracy Guarantee

2) You can not e-file the tax return. You have to print, sign and mail it to the IRS (same for state tax return if applicable)

Also keep in mind that the 3115 is a "request" for a change in accounting method. The IRS does not have to approve it. For your situation, unless there's something you're not making the reader aware of, I would not expect the IRS to approve it.

[Rob218]

Yep sounds like a CPA time :).