Sale of a rental property

[jblynch]

Have a client that sold a rental property in 2023.  Property first purchased in 2012 and I have a copy of the filed return for that first year from the prior tax preparer.  Client now coming back trying to add detail of 2012 improvements made that did not appear to have been included in the depreciation detail before.  I know darn well that client is trying to reduce their tax liability though the detail looks reasonable.  At the moment I'm not comfortable with this.  Have any of you been in a situation like this?  Thanks-jl!

[TaxGuyBill]

If you believe it, go for it.   But you will need to file Form 3115 to 'catch up' on the missed depreciation (and charge the client a hefty fee for doing so).

If you don't believe it, ask for more documentation until you believe it, or don't do the tax return.

[jblynch]

Thanks for responding as the 3115 and catchup that would really be a boomerang as the property was sold so any presumed "catch-up" would then also become a recapture on the sale-a big added and complicated net zero....though I may be missing something so will also consider all of that and a thanks for bringing it up!-jl

[TaxGuyBill]

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@jblynch wrote:

would then also become a recapture on the sale

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There will be gain due to the depreciation whether you claim it or not.  Depreciation that is "allowed or allowable" reduces Basis, so even if you don't claim the depreciation, it will be taxed.  File 3115 or you are wasting a deduction because it will be taxed whether it is claimed or not.

[ljr]

once you explain to client that the expense for the "missed" improvement will be netted or offset against the depreciation recapture you might not really have any effect on the return, and that you will have to charge them for form 3115 - they might suddenly remember that the original number is correct 

[judys3]

Without knowing the scope of what they are trying to add would it have been something that was just expensed in prior years?  And now they are wanting to add to basis of sale?

[TaxGuyBill]

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@judys3 wrote:

 would it have been something that was just expensed in prior years? 

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Excellent point.  That should be the first thing to check.

[jblynch]

The presented character of the $188K listed would be initial property improvements needed to bring it to rentable condition.  Prior to what will be discussion with the client, I had taken the pdf manual list into excel and then compared that detail with items that have been listed from 2012 forward. It appeared to be that about $28K had been included in prior filings.  If correct, it would mean that $160K was not-the reasons for this not being clear at all.