Selling a rental property but never claimed depreciation

[b87lar]

I sold a condo in 2023 that has been used as a rental property for 15 years (out 20 years of ownership). Unfortunately I never claimed depreciation throughout the years, only to learn now that there will be depreciation recapture tax assessed regardless of me never claiming depreciation. Is there a way for me to minimize losses due to this situation. Thank you. 

[taxlady28]

You have to pay back depreciation, even if you never claimed it. You can file amendments and get back the last two or three years.

[b87lar]

Just out of curiosity, what is rationale behind having to pay tax on something I never claimed/deferred? Just want to understand - somehow it does not make sense to me. 

[AmyC · Accepted solution]

The IRS requires you to claim depreciation. Your choice to not claim it does not change the law. When you sell a house, you are required to reduce the basis by the allowed or allowable depreciation. You do have a way out. The Form 3115 can be filed with your taxes so that you can claim credit now for all the lost depreciation. It is a bit complicated so see my post here for help.

[b87lar]

Thank you @AmyC that's very helpful. I sense it might be better to get professional help from TT with this form - is it possible to get someone help me with just this form or would I need to have all my taxes prepared by a TT expert? 

[AmyC]

We are glad to help here in community and we have experts that will do it for you. The experts will go through the whole return working with you and then file it for you. There is not an option for them to only work on one form since it works together with other forms that all flow into the main form. 

Your schedule E is the main form to be fixed. The 3115 isn't bad. Even when left blank, the program only throws 4 errors in review - looking for the missing depreciation adjustment is the biggest. It is your choice on how to handle this year. You don't have to do the form, you can do the form, you can let us do the whole return.

[b87lar]

@AmyC does choosing of any of the expert options (assisted and full service) imply switching from desktop TT to online TT? 

[SharonD007]

TurboTax Live or TurboTax Full Service isn't available using TurboTax Desktop.  You won't be able to transfer your 2023 tax data file from Desktop to Online but you can transfer your 2022 tax return information into TurboTax Online so you can use TurboTax Live or TurboTax Desktop.

Refer to the TurboTax Help articles How do I switch from TurboTax Desktop to TurboTax Online? and How do I get TurboTax Live? for additional instructions.

[b87lar]

Following up on the above. I have added the rental as an asset in TT. I owned it from 01/2004 till 07/2023, when I sold it. It was put in service as a rental in 04/2009 (continuously until the final sale). 
Question 1: When I first added it, TT came up with a depreciation amount of about $18k and pre-filled the field shown in the screenshot. I have set it manually to 0 since I never took depreciation. Is this the correct way to proceed in TT? 
Question 2: Moving on to the sale of the asset, TT asks for asset sales price but Business Portion only. Is the business portion calculated as the proportion of days the asset was used as a rental to the total days I owned it? (see second screenshot). It's a condo and of course I sold it for one price, how am I to calculate the Land Sales Price?

Thanks!

[DavidD66]

You do not need to do an allocation between business and personal.  Such an allocation would be applicable if you had sold a duplex where you lived in one half and the other was a rental, or if you had been renting out a room in your house.  Since the entire condo was a rental, the business portion is 100%.  

For the allocation between land and improvements, the best way to come up with that is to use the tax assessment.  This allocation should also be done for the original cost basis.  Let's say the total assessment for the condo was $100,000 allocated between land and improvements on your tax bill as $5,000 and $95,000.  You allocate 95% of your purchase price and sale price to the improvements (which is the part you depreciate) and 5% to land (which you do not depreciate).  Since it is a condo, as opposed to a single family house or a townhouse,  it is probably not a fee simple property, which would mean you didn't actually own any land - just the condo unit.  In which case the allocation between land and improvement would be moot. 

For the amount of previous depreciation, that amount should equal the depreciation adjustment on Form 3115, not zero.  That amount will be used to determine your cost basis, gain, etc.    

As recommended in a previous answer, I recommend you seek some professional help for correcting the depreciation and reporting the sales transaction.  TurboTax Live is an option, as is a local tax practitioner  (CPA or EA) in your area.  If it were me filing the return, I would file an amended return for 2022 with Form 3115 to adjust the depreciation.  I would then file 2023 with the correct cost basis and accumulated depreciation to calculate the gain and depreciation recapture in 2023.  

[b87lar]

@DavidD66 @AmyC one more follow-up regarding TT Live Expert service: Is it realistic for me to expect that this service will be able to solve my relatively complex tax situation (the 3115 form, several rental properties, RSUs)? I just made a bad experience when a local accountant bailed on me a week before the filing deadline (he felt he could not confidently handle the 3115 situation). I will have to request extension and find a new source of help, but am unsure if the TT service will be on a sufficient expert level - could you please share your opinion? 

[ThomasM125]

Dealing with a TurboTax expert, you will not be assigned someone who is an expert on your issue. Rather, you will deal with a licensed tax professional who can consult with others that may know more about matters they are not proficient with. To speak in medical terms, you will get a general practitioner as opposed to a specialist.

[Ario]

If you never claimed depreciation on your rental home, you generally will not face penalties for recapture depreciation. However, if you sell the property, any gain may still be subject to capital gains tax, but depreciation recapture rules would not apply since you did not claim depreciation. For more detailed guidance, consider reviewing IRS Publication 544 regarding sales and dispositions of property.

[M-MTax · Accepted solution]

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@Ario wrote:

....depreciation recapture rules would not apply since you did not claim depreciation..

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The above-quoted statement is totally false. See Section 1250.

The excess of the amount realized over the adjusted basis of such property shall be treated as gain which is ordinary income.

In other words, the fact that depreciation deductions were not claimed (or taken), is irrelevant. The "recapture" is based upon the amount of depreciation allowed or allowable.

[tillieservi]

What if the rental property was paid off and never claimed the depreciation on it.  I use it as a rental still?  Is there a way to claim the depreciation now?