I realized i've been using the wrong depreciation basis on my rental property?

[dkuko]

I’ve used those government assessed 

small tax cards that arrived in my mail to determine my basis. To make things simple they said the land was worth 100,000 and the building was worth 70,000. So I’ve been depreciating 70,000 as the basis for a few years now.

I just found out I could’ve used the original purchase price of the unit? let’s say that was $200,000. 

So I’m confused.. what’s my depreciation basis? 

Is it 200,000 aka my original purchase price?

or is it 200,000 minus the land 100,000 = 100,000?

Or what the tax card said = 70,000? 

I’ve been using 70,000, but if it’s wrong, do I need to amend the last 3 years or can I just fix it going forward in my current tax year? I am so overwhelmed.. have i committed a massive blunder by understating my depreciation basis?

[jeffmcpa2010]

You will need to file a 3115 to make your correction.

https://www.irs.gov/forms-pubs/about-form-3115

File this form to request a change in either:

• an overall method of accounting or
• the accounting treatment of any item.

 You are requesting to change the accounting treatment of your rental property.

Your post sounds like you may be doing this for yourself.

Whether or not it is for your personal return, I would not try to complete the 3115 myself.  I would find a tax professional experienced in this form to complete it for you and help you through the process, It is complex and you don't want to screw it up.

[Just-Lisa-Now-]

you still need to break out the land portion of the property, that doesnt get depreciated.

Look at your actual property tax bill, whats the land to dwelling ratio of the total property value?

[dkuko]

thank you for the replies.

im looking at the bill, i have the actual numbers now the above ones were just a generalization.

it says land: 140,000

improvements: 146,800

for a total of 286,800

the original purchase price was 350,000

would my basis be 210,000? (350k minus 140k)

i originally used 146,800 as my basis. I've committed a massive blunder?

[dkuko]

Wow! this form looks complicated.. ill have to get a tax pro to help me... so it has to be this form? Going back 3 years and amending the depreciation basis is not a valid option?

[jeffmcpa2010]

If you had the property in service only in the last 3 (2019,2020,2021) years amending would probably work. If before 1-1-19, you would need to go the 3115 route I believe.

[rbynaker]

Has this always been a rental property?  Or was it once your personal residence and then you started renting after you moved out?

[dkuko]

That’s correct, I used to live in it first, then it became a rental after I moved out 

[dkuko]

I’ve read so many conflicting pieces of information. Saying that 3115 form is not an option. Only it’s a option if property was not depreciated at all. 

Another option is saying to amend as many years as i can, and to enter the previous amount i could’ve taken as prior depreciation. 

[dkuko]

I have found this thread saying:

No, Form 3115 can't be used.  I know somebody that called the IRS lawyer that wrote the rules about 'catching up' on the depreciation via Form 3115, and the IRS lawyer said he gets the question frequently, and said 'no, that is a mathematical or posting error'.

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/rental-property-depre...

[rbynaker]

Do the property assessments in your area represent fair market value (FMV)?  This varies greatly across the country and even within my own state.

A property in Shenandoah County, VA was assessed at $180,500.  It was appraised for $180,000.  Assessments in this area do fairly represent market value.

A property in Fairfax County, VA was assessed at $591,000.  It was appraised for $750,000.  Assessments in this area do not fairly represent market value.

If you paid $350K and your assessment when you placed the property in service was $287K, probably one of two things happened.  Either the assessments do not fairly represent market value in your area.  Or the value of the property declined during the time you lived in it.  IMO neither is more likely that the other, it depends on timing and market conditions.  You are in a better position than anyone here to determine which is more likely.

When you placed the property in service you may have been relying on this tidbit of tax law, explained in IRS Publication 527:

https://www.irs.gov/pub/irs-pdf/p527.pdf

Jump to page 15 under the heading "Basis of Property Changed to Rental Use".

"When you change property you held for per-
sonal use to rental use (for example, you rent
your former home), the basis for depreciation
will be the lesser of the fair market value or ad-
justed basis on the date of conversion"

You may have taken the position that the FMV of the property when you placed it in service as a rental was lower than your cost basis and used the assessment value as an approximation of fair market value.  This could be correct depending on your facts and circumstances.

Rick

[dkuko]

Thank you for the reply Rick.

the assessments definitely do not represent the fair market value. The assessment cards are very understated.. 

the card I received says 

it says land: 140,000

improvements: 146,800

for a total of 286,800

but I paid 350k As the purchase price. 

can the whole 350k be used as the basis? Or 350k minus the 140k land?

[Just-Lisa-Now-]

Id take the % of land vs total value and apply that same % to your purchase price.....looks like close to 50% of the purchase price should be allocated to land and teh remaining portion would be your depreciable basis..

[dkuko]

Thank you! This helps a lot. I have about 50% as my calculation too. 

I have to ask however.. the formula of:

total purchase price of the unit minus land value = basis I should use.

is that formula incorrect? The only formula I should use is the land to value ratio as you said?

[qbteachmt]

Basis = what someone has paid or invested. That Base Value is your Cost, in other words. Certain improvements are added to basis, such as, if you add on a nice deck. Other costs are repairs, such as one broken window would be repaired, but changed windows and doors, putting in a slider, etc are improvement.

The word Depreciation = wears out over time. The money you pay for electricity is POOF! All gone, already. The money you put into Real Property is right there, still in front of you, in the building and the improvements. But they are considered to be wearing out over time, so the tax regulations give you some consideration for this "wear and tear over time" and that is per the IRS schedule for the type of property and the use, and that is Depreciation. It calculates an amount that reduces your Basis, because you get to take it as Expense that tax year. Each year, then, your Basis goes down out of consideration for the amount you wrote off.

That has nothing to do with Tax Base, mill levies, FMV, etc. All of this stuff is the related financial perspective around your real estate.

And...

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Thanks.