Re: Rental property - depreciation
posted at 4/11/2013 7:51 AM EDT
In response to CP321's comment:
Situation - I own a rental property which I acquired in 2006. Accountant at the time started depreciation using a 27 year useful life S/L method reported on Form 4952 under Other Depreciation. Then from 2007-2011 no depreciation was taken on the rental property.
Now in 2012, I want to take depreciation. Should I file Form 3115 to change depreciation method to 27.5 year mid-month S/L depreciation? Also, would I be able to take a 481(a) adjustment for the depreciation I missed out on from 2007-2011 or would I need to amend my past returns?
Any help is appreciated.
Your instincts are correct. Since the Statute of Limitations has closed on the earliest returns for which the error in both computing and claiming the correct depreciation deductions has closed, your only option to correct for these errors is using a Form 3115 - Change in Accounting Method to correct ALL depreciation errors with repsect to the property. A Section 481(a) adjustment results from such changes. If it is positive (an increase in income), it is usually spread over the current year and the next three years (25% per year), unless it is less than $ 25,000 OR the taxpayer chooses to include the entire amount in income in the year of change. If the adjustment is negative (your case of claiming additional depreciation deductions that were missed in earlier years), the entire deduction is allowed in the year of change. With respect to depreciation, you are charged for the GREATER of the deduciton you took (a mistake you made on the high side as opposed to what you should have claimed) or the deduction that you were allowed to claim under the tax laws (whether you took it or not). Thus, on a future sale of the property, even though you did not claim depreciation deductions for several years, the tax laws demand that you compute your gain on the sale as though you did, in fact, claim those deductions in the years you missed them. Your best option is to "catch up" using the Form 3115 filing to get things right.
Hope this helps in preparing your returns!
Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal
Katz., Nannis + Solomon, P.C.