Prior preparer used FMV of $360,000 for rental property depreciation basis instead of cost = $130,000 since 2005. Now accum depr greater than cost. How to fix?

[toddcbad]

Prior preparer used FMV of $360,000 for rental property depreciation basis instead of cost = $130,000 since 2005. Now accum depr greater than cost. How to fix?

[TaxGuyBill · Accepted solution]

From what I understand, using incorrect Basis is a "mathematical or posting error".

That means that Form 3115 does not apply, and the only thing that can be done is to amend the 'open' years.

Other than that, it can't be fixed, and the Basis is now $0 with no further depreciation.

[toddcbad]

Thanks Bill. $0 basis was my first thought as well. This means that when taxpayer sells there will be a larger depreciation recapture than if it had been done correctly - essentially "negative basis" which we all know doesn't really exist in our world.

[sjrcpa]

Form 3115 Change in accounting method.

[toddcbad]

DCN 7, Recalculate tax for each year back to 2005 and bring forward to 2018 adjusting disallowed PALS along the way?

[sjrcpa]

I'm not sure. Also see Bill's answer below. I shot from the hip and did not research this.

[sjrcpa]

If there are disallowed PALs, maybe the correction - however done- will work out OK.

[toddcbad]

Thanks Bill. $0 basis was my first thought as well. This means that when taxpayer sells there will be a larger depreciation recapture than if it had been done correctly - essentially "negative basis" which we all know doesn't really exist in our world.