Discussion:Depreciation on a Residential Real Estate Property
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Discussion Forum Index --> Tax Questions --> Depreciation on a Residential Real Estate Property
| 9 March 2007 | |
| Isn't it true that, even if depreciation isn't taken as an expense throughout the life of a residential rental property on Schedule E, depreciation MUST be subtracted from cost basis if/when the property is sold and a capital gain/loss is triggered? I have a new client whose tax preparer was not depreciating a rental property because the taxpayer does not want to reduce the cost basis by the amount of depreciation taken. My opinion is that the depreciation has to reduce the cost basis regardless of whether or not it was used to reduce rental income. | |
| March 9, 2007 | |
| You're correct. I have violated a few times on the office in the home issue...which seems to require depreciation even when you don't enter the data for it. It's a silly rule, in my opinion, requiring you to recapture something you never took?! I wonder what the case law behind that is? No time to care about it right now...but that clearly violates that rule about ...is it Cohan? where you get whacked (not Chicago style whacked) twice for one thing...Anyway, yes you're correct. | |
| 9 March 2007 | |
| I am curious. If it is a personal residence and a home office, should someone not take depreciation. Does any adjustment result? Especially if the gain is within IRC 121? | |
| March 9, 2007 | |
| On audit, it probably would be...but practically speaking, if you've never claimed depreciation on an asset, the service has no way of knowing that. On sale, it has no way, then of knowing that there should be recapture. I'm not saying it's right, but practical. And it really shouldn't be legal to collect tax on phantom income, the recapture of non-existent depreciation. We all know this is the rule, I wonder if anyone has ever had it assessed? | |
Death&Taxes (talk|edits) said: | 9 March 2007 |
| And I believe there are procedures that if IRS wanted recapture of the depreciation, would rectify the omission. | |
| March 9, 2007 | |
| Never had it assessed here, JR. I agree with you completely with office-in-home. It's too much recordkeeping and hassle for these small businesses that come and go within a year or two. I always depreciate business and rental property but not office-in-the-home (except for my own, which is fully depreciated, but I plan on dying in this house). | |
Death&Taxes (talk|edits) said: | 9 March 2007 |
| Give me somebody using 5-10% of one of the McMansions in the suburbs and I will depreciate it anyday, but I am surprised to see the number I on which I did not use it. I don't claim it myself because the room is very small and is the entrance way to the house and byway between the kitchen and the family room. | |
| 9 March 2007 | |
| As a preparer, you have to follow the "allowed or allowable" rule. We can't pick and choose those rules we disagree with. I would have a difficult time signing a return that doesn't report the depreciation recapture when it is required.
How many years are you talking about that missed the depreciation? And why would a taxpayer not want to claim a deduction that they are legally allowed to claim, especially one that will cost them taxes on the back end? The statement that the client didn't want to reduce his/her basis doesn't make any sense to me. I could be off base, but isn't there a 3115 procedure that may fix this? | |
Death&Taxes (talk|edits) said: | 9 March 2007 |
| Yes, that is what I was referring to, and it also covers just that situation where the property is sold. | |
| March 9, 2007 | |
| And D&T reminds me of my office in home escape clause...dang, it wasn't used exclusively after all, so the depreciation couldn't have been allowed. So sue me! | |
| 10 March 2007 | |
| So, my (new) client's previous preparer who was not taking depreciation of the rental because the client "didn't want my basis to decrease by the amount of depreciation taken" was wrong and I should go back and amend the returns back to 2002 when the rental property was placed in service? And, just to clarify, there is no (legal) way to NOT claim depreciation of an income earning asset and not decrease the cost basis at sale? Also, could you elaborate on the "3115 Procedure"? | |
Death&Taxes (talk|edits) said: | 10 March 2007 |
| In the search box at the top of the Tax Questions forum, type '3115' without the quotes and many discussions will pop up....I just sampled one and think you will find your answers there. | |
| 12 March 2007 | |
| If the taxpayer that owns a rental property dies would you file the 3115 on the final return? and does the inheritor of an income producing asset get to take the steped up basis and depreciate the property with a new date placed in service or does the asset continue on unchanged? | |
| 12 March 2007 | |
| Why would you do a 3115 for a deceased taxpayer unless you needed the additional depreciation for the final return? | |
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