A new client came in for tax review and noticed on his rental property (Duplex) which he lives in one, had no depreciation.

[1stoptaxservice]

no mortgage or property taxes on it. I asked year he purchased property 2011 which he happened to bring all his taxes and noticed that no depreciation was ever taken and the last preparer applied all of the mortgage to the Schedule A long form. I suggested to add the depreciation this year, however question is what to do with all the prior years? Suggestions and tips welcome.

[Just-Lisa-Now-]

Is it being rented at less than FMV maybe?

[1stoptaxservice]

It appears yes the rent is fairly low in comparison, they have not raised the rent.

[abctax55 · Accepted solution]

1) Extension

2) Amend where possible

3) Form 3115

[TaxGuyBill]

However, DON'T include the depreciation on the amended forms.  Just amend to correct any interest deductions.  Only use Form 3115 on the current year return for the depreciation.

But as Lisa pointed out, if the rental is truly at less than Fair Rental Value (such as for family or friends), it may have been reported semi-correctly.  But if it is just low because the taxpayer doesn't increase rent and the renter is not a friend or family, it still might be considered a for-profit rental on Schedule E.

[1stoptaxservice]

They are renting as non family/friend. If I don't amend to include the depreciation, does that mean we lose on the prior years, or we just extend the depreciation years starting now going fwd 27.5 years?

[1stoptaxservice]

Thank you all in advance for the comments.

[abctax55]

I still say extension...it's too late in the season to figure out this can of worms..  JMHO.

[TaxGuyBill]

Form 3115 can be used to 'catch up' on all prior depreciation, and it will be on the current year's tax return.

I agree, file an extension.

[1stoptaxservice]

Awesome info, like always great full to have you all here, Will do the check list 1-3.

[abctax55]

YVW...we are all in this madness together...

[itonewbie]

With 3115 and the amended returns, I'd want to establish the market rent and rationalize any material difference, just to make sure the story is air-tight that this is a for-profit venture.

[abctax55]

ah HA....does a 481 adjustment impact QBI ??? .   Inquiring minds want to know....

[itonewbie]

§1.199A-3(b)(1)(iii) says it is taken into account, unfortunately.  You gain some, you lose some, I guess.

[abctax55]

Tell me you AT LEAST had to look that up :stuck_out_tongue_closed_eyes:

[itonewbie]

I did look that up to be sure and there's no way I can remember the exact citation.  Wish my brain is THAT good. :smile:

[robinweaver]

I'm also needing to claim the 'catch up'.  I'm including a 3115 but how do I add that extra catch up depreciation?  I can't figure out how to get it on the depreciation sheet.