Catch Up Rental Deprecitation - all in one year?

[MG26]

I made the grave mistake of not depreciating a rental property. I'm now learning how to do it now by catching up. I have the instructions on how to change accounting method and I've done my research on how it's calculated. I am just about to enter it on TurboTax so I'm sure I'll have more questions. So, When I enter the depreciation adjustment amount. It'll be the 11 years depreciation amount (I didn't depreciate) + partial year put in service amount right? Well, my question is do I really have to claim all that depreciation this year? This would bring my income negative I would think. My other concern is that I wouldn't qualify for purchasing health insurance on the marketplace right? I'd have to pay the tax credits back? I guess I'm not sure how it all works together.

side note...I do wish TT would have gave me a tip (a flag that pops up) about this seeing that I have a rental and wasn't depreciating. That's the kind of thing I would have expected TT to guide me on seeing I'm not a professional tax preparer and is why I pay for their software.

[MG26]

These are additional questions, I started entering the information for the rental property asset. It seems to spread the catch up depreciation over years as it's only about 4000 this year and not the huge amount catch up that I predicted.  It is asking for the land value amount for the purchase year. I understand to use the percentage from the assessment to calculate. I was under the impression that I should use the fair market value when it placed in service and was using that year's land percent with my own calculations. The purchased land value percentage is quite different than placed in service date percentage. I actually don't have the assessment for purchased year of 1997 seeing the online records don't go that far back. The percentage for two years later (2020) than the purchased year as an example is 10.53 and the percentage for year in service 2012 is 6.43. It seems strange that TT would use the land percentage from a year that wasn't the placed in service year. Do I really have to call the county to get the assessment for purchase year?

[DianeW777]

Yes, you need to know the cost basis which is what you paid for the property.  Fair market value (FMV) is not an option unless you converted the property from personal use to rental use at the time the property became available for rent 11 years ago. Once you have that number you can use the current tax assessment or the one from 2012 to prorate the land and building value (divide land value by the total value to arrive at the land percentage and same for building or simply subtract).

Based on your information, the answer assumes you are using the Form 3115 to capture the lost depreciation in 2023 (change your accounting method).  TurboTax is calculating the depreciation correctly based on the assets you entered for the property and that means there is an accumulated amount for prior years.  The amount for all depreciation before 2023 is entered as Other or Miscellaneous Expense with a description example of F3115 adjustment.  This places the full expense on your Schedule E and the Form 3115 is filed with your tax return by mail, e-file is not an option.

Please update here if i can clarify or answer any other questions.

@MG26 

[MG26]

Thanks for answering. I did convert the property from personal use to a rental in 2012. I think I should use FMV minus original closing costs minus land value for 2012 where TT asks for cost of property instead of original purchase price. I don't know if I should put conversion date or original purchase date there because it asks later for the conversion date. I was hoping it wouldn't depreciate prior years all at once or maybe just claim depreciation going forward only.  I haven't worked through form 3115 yet so we'll see where that leads. Please comment so I can get through this correctly. 

[MG26]

now I come across this information from turbo tax learn more link. I makes me think I need to use the lesser cost which is the purchase price rather than the fair market value which is more.

Personal use property converted to business use

The cost is the lesser of the item's fair market value or your basis for this property (how much you've paid for it, including whatever you spent to acquire it) at the time you started using it for business.

[MG26]

I'm going to use the adjusted cost from original purchase because it's less. I'm just confused about when you said to use the land value from 2012. It is 6.43% and the original year is more like 10.53% (as in 2020 not 1997 purchase year). It's a big difference in percentage so is it really okay to use a different year's land percentage value than original purchase assessment value (which I don't really have)? Sorry to post so much. Thank you.

[DianeW777]

Yes, you were required to use the lesser of cost or fair market value (FMV) on the date of conversion from personal use to rental use.

Yes, you can use a different year's land value. For the land, you can use a reasonable percentage of the cost for land. If you have the assessment from 2012, that is the percentage you should use to allocate the portion of cost to the land since the rental began then.

@MG26