Rental property has had the wrong basis for depreciation since 2006, is the 3115 used for this type of thing?

[Just-Lisa-Now-]

Client went to a new preparer this year, they filed an extension for her (not sorry to see her go, she lives far from me and claims to be sick and dying and every year its huge crying dramatic scene) but is now claiming that the basis for deprecation on her rental that she bought back in 2006 is not right.

I didn't have her as a client until 2014 or 2015, so I have no clue how the basis was determined.  She was a client of my boss that retired, he had her for a client since the late 80's I think.

I did make an error on basis for a new rental she bought in 2016 (I failed to account for the land value!) I fixed them and sent her amended returns for 2016 & 2017 for those errors.

Client wants me to fix this 2006 error in basis....isn't this something her new preparer can do on the current year return with the 3115?  or how does this get fixed?

Her last email to me threatened me with an attorney for this 2006 basis error and making the mistakes in 2016 and 2017....I feel like I've corrected my mistake to the best of my ability told her Id cover any penalties related to those mistakes I amended for, and have no intention of helping her any further at this point, but for my own curiosity, how would you fix that 2006 basis error?

[TaxGuyBill · Accepted solution]

You can't fix it, other than amending the 'open' years to fix those years.

Using an incorrect Basis is not a changing in accounting method (it is a "mathematical or posting error"), so Form 3115 can't be used (some people say it can be used in the year of the sale, but I'm still not convinced of that).

The new preparer can use the correct Basis on the current return without needing to do anything special.

If the Basis was too high (and therefore too much depreciation), it is probably not a big deal.  The taxpayer has been benefiting from the 'extra' depreciation all of these years, and when the property is eventually sold, will need to pay the Unrecaptured Section 1250 Gain  on that.  Hypothetically if they have always been in the same tax bracket, they will 'break even' (or even end up better off due to being limited to 25% for the Unrecaptured Section 1250 Gain).  If the taxpayer still owns the property when she dies and it gets a step-up in Basis, then she really did good by taking too much depreciation.

If the Basis was too small (and therefore not enough depreciation), yeah, its a bummer for the taxpayer.  But the taxpayer has been signing these tax returns for the last 12 years, including 2006 that showed the Basis on her 4562.

P.S.  I just noticed that this was you, Lisa.  

[Just-Lisa-Now-]

The basis is too small, I think its a triplex and she lives in one of them, but the basis looks like it is only about 1/3 of the purchase price, not the 2/3 that's being rented, so its completely possible that my old boss had it wrong from the beginning .     

So I can fix that for her on the 2016, 2017 amended returns (she hasn't mailed them yet)...that extra depreciation on this 2006 property should make up for the flub I did on the other with the land value and she may even end up with a refund!   

Yes, she's been a huge PITA client every year, but Id like to get rid of her on a positive note, rather than a negative.

[TaxGuyBill]

Because it is a triplex and is only using about 1/3 of the cost, it MIGHT be able to be fixed with Form 3115.  The new tax preparer could say that the depreciation taken was for the ONE unit, and that the SECOND unit was NOT depreciated at all (which DOES qualify for 3115).  So if the numbers match up for that, that would definitely have the best result.  Has the 2018 tax return been filed yet?

[abctax55]

:+1:

[Just-Lisa-Now-]

The figures on the asset entry worksheet don't match up exactly 1/3, but seems close.    For some reason I have it in the back of my head that she may have had family living in one of the units at some point, so it may have been changed back then and never changed back when she started renting both out again.   The last year my boss did her  (I think it was 2014) return he had it majorly screwed up  (when someone drops a mixed up pile of crap off, that can happen), she called the office screaming and cursing, I had her mail back everything and I redid it all.

If I can amend both 2016 and 2017 to grab that missed depreciation, and show this new basis correctly going forward, I think this should satisfy her.

[TaxGuyBill]

I would not amend unless you talk to her and/or her new tax preparer first.  By amending, you will void the ability to use Form 3115 *IF* they were to choose to go that route.

[Just-Lisa-Now-]

thanks!

[Just-Lisa-Now-]

ahhh, after digging through her file, its a 4plex, she lives in one, family lives in one and 2 are rented out....so the basis should be 50% of the purchase, not this weird almost 1/3 number that doesn't match anything.....could have been as simple as a bad keystroke on the adding machine that he just grabbed the wrong amounts from the get go.

I can fix this!   LOL      Thanks for the help!

[abctax55]

She can't *sue* you for an error SHE didn't find for 12 years....sheesh

I would fix my mistake for 16-17, and send her on her way.  There is NO way you'll ever make her happy.

[itonewbie]

Furthermore, it was not Lisa's practice back then when the 2006 return was prepared and Lisa only inherited her as a client.

[Just-Lisa-Now-]

"There is NO way you'll ever make her happy."

OMG, no truer words have ever been spoken!

I fixed the errors I made on the depreciation, mailed her the amended returns 2 weeks ago...I get an email yesterday....suddenly she says the property taxes, insurance and repairs are all wrong too and wants me to pay for her to have someone else fix them.  

I'm SO done!  

[IRonMaN]

I would have been nice to her initially, but once she threatened me with that attorney crap, my niceness would have disappeared quickly.  I'm sure for $50 you could find someone to cut the brake line on her car.  Wait a second, I know I can't talk like that on a public forum.  However, I can come up with other "solutions" to the problem if you want to e-mail me

[Just-Lisa-Now-]

:joy:

[abctax55]

She has balls....but that being said, get RID of her !
I assume the "wrong" taxes, insurance etc numbers were her fault?
Edit - I could look up the number for Guido & Garcia in my files if you want me to.

[Just-Lisa-Now-]

I have no idea whos fault they were...she was right here in the office when I prepared the returns, she gave me all the figures.  She couldn't even tell me what it they were suppose to be, just that they were wrong and I should have the correct figures  LOL    I didn't even bother to pull up the scanned copies of her stuff, I'm over it!

[Just-Lisa-Now-]

So I just got an email for a seminar:

Depreciation Basics and Form 3115 - How to Report a Correction in Depreciation

The basics of depreciation of assets and Form 3115 how to correct depreciation errors, from not depreciating the assets correctly over the correct life or correcting basis of assets. We will also cover the time frame in which to submit the correction in order for it to be processed properly to IRS.

So I guess you CAN use 3115 to correct basis!

[TaxGuyBill]

I have my doubts.  Although there isn't anything clear-cut in print that says if correcting Basis is a change in method of accounting, somebody on TaxAlmanac/TalkProTalk called the lawyer at the IRS that wrote that Revenue Procedure.

The IRS lawyer said he gets asked that all of the time, and wrong Basis is NOT a change in method of accounting.  As a mathematical or posting error" it would not qualify for Form 3115.

Out of curiosity, who is putting on that seminar?

[Just-Lisa-Now-]

CSTC - California Society of Tax Consultants   

Not sure how I wound up on their mailing list, I've never done any business with them.

[jkshull]

I know this is an old thread, but maybe you can help me. I discovered the same thing. My new client has a rental property that has a cost basis that includes the land value. It has been depreciated since 2012. Do I just change the amount of depreciation to the correct amount in the current year, or am I stuck with the cost basis that was filed for originally? The IRS gets their taxes back when the house is sold, so I don't think I need to amend prior year returns. Since form 3115 can't be used, I'm not sure what that means.... any help is appreciated.

[esa6334]

I just ran into this too. Residential rental was depreciated with low basis. They sold in 2020. 3115 in year of sale would be nice but sounds unlikely.

[raynam7]

Hi,

I made a similar error.  I made an error in depreciation for 2018, 2019, 2020.  Does this mean I can amend those three years?  I heard about form 3115 being needed if a change needs to be made prior to 3 years.  I then hear about the "2 year rule".  I am confused as to when the 3 years back start.  Essentially, I did it incorrectly for 3 years straight and was wondering if I need form 3115 or it is just a simple amendment?

Thank you.

[TaxGuyBill]

---

@raynam7 wrote:

I made an error in depreciation for 2018, 2019, 2020. 

---

What exactly was the error?

Was the asset "placed in service" in 2018?

[mdtao31]

LISA,sometimes its not possible to leave on

agood note,its not something to beat

yourself up.you went above and beyond

what most of us would have done

regards,LARRY

stay safe

[raynam7]

Hi, this asset was placed in service in 2009.  It is a rental property.  From 2009 to 2017, I was doing everything correctly but in 2018, I transferred to using turbotax to do my taxes.  Unfortunately, I entered in the WRONG basis in 2018, 2019, and 2020 thus triggering a WRONG depreciation expense for those three years (too much depreciation for each year).  I discovered it just now.  My confusion is whether I can 

a) Amend those three years and then move forward

b) Do a form 3115 because I messed up for 2 or more years

c) Something I don't know

I will note that I sold this property (well, 1031 exchange) in 2021 so I am wanting to fix this.  I now heard that since I sold it in 2021, I could correct everything for that tax year.  It is so confusing ... just not sure what to do.  

Thank you.

[TaxGuyBill]

Amend.

[raynam7]

Thank you.

So I don't need to do form 3115?

I did not "change the depreciation schedule" but I read that the IRS treats it as a change if you made a depreciation error two years in a row.

[joshuabarksatlcs]

Just when I had a side issue about Form 3115, someone took that GMC DeLorean and cranked it to 88 mph to bring this thread back to the present.  Hello, Lisa. 

I didn't even looked at the original post date(s) and gave @TaxGuyBill  kudos when I read his comment:

Using an incorrect Basis is not a changing in accounting method (it is a "mathematical or posting error"), so Form 3115 can't be used (some people say it can be used in the year of the sale, but I'm still not convinced of that).

I totally agree with the comment.  Thus the kudos.

My burning question is, does statute of limitations work here, thus invalidating my kudos?

RE: I did not "change the depreciation schedule" but I read that the IRS treats it as a change if you made a depreciation error two years in a row.

The only comment I could make about the statement : I don't doubt you read that. 

Have a fantastic Sunday!!

[TaxGuyBill]

---

@joshuabarksatlcs wrote:

My burning question is, does statute of limitations work here, thus invalidating my kudos?

---

It can offset any negative Kudos, but unfortunately if it is past the Statute of Limitations I won't be able to received any additional Kudos.   😂

[joshuabarksatlcs]

Good thing that we both spelled it correctly.  One time when bourbon was at work, I typed

Statue of Limitations

The Bob jumped right in and squashed me.  But he was kind.  No purple font or all caps....

[raynam8]

Thank you all for the lively discussion.  I will *attempt* to call the IRS and report back.

[qbteachmt]

"I will *attempt* to call the IRS and report back."

Not Here, please.

"From 2009 to 2017, I was doing everything correctly but in 2018, I transferred to using turbotax to do my taxes."

This is not a TurboTax Community.

@raynam8 

You seem to be lost on the internet.

You’ve come to a Peer User community for Intuit Income Tax Preparation products supporting tax preparation professionals using ProSeries, Proconnect and Lacerte Tax Preparation programs, and you may be looking for support as an individual taxpayer using TurboTax. Please visit the TurboTax Help site for support.

And try this screen, for the various topics (subforums): https://ttlc.intuit.com/community/discussions/discussion/03/302

Your sign in user info here is the same one you can use over at the TurboTax forum.

Thanks.

[Terry53029]

@TaxGuyBill @Just-Lisa-Now- Bill just was reading about rev procedure 96-31 it is quite a bit of reading, but it seems you can now use this procedure to claim deprecation that you missed, and didn't claim all of the deprecation you should have. I guess you still file 3115, but it is automatically approved, but you have to state you are filing under rev prod 96-31. Here is a excerpt:

.01 Application of this revenue procedure. Except as provided in sections
3.02 and 3.03 of this revenue procedure, this revenue procedure applies to
any taxpayer changing to a permissible
method of accounting for depreciation
for any item of property that: (1) under
the taxpayer’s present method of accounting, the taxpayer has not taken
into account any depreciation allowance or has taken into account some
depreciation but less than the depreciation allowable (hereafter, referred to as
claimed less than the depreciation
allowable);

[TaxGuyBill]

---

@Terry53029 wrote:

@TaxGuyBill @Just-Lisa-Now- Bill just was reading about rev procedure 96-31 it is quite a bit of reading, but it seems you can now use this procedure to claim deprecation that you missed, and didn't claim all of the deprecation you should have. I guess you still file 3115, but it is automatically approved, but you have to state you are filing under rev prod 96-31. Here is a excerpt:

.01 Application of this revenue procedure. Except as provided in sections
3.02 and 3.03 of this revenue procedure, this revenue procedure applies to
any taxpayer changing to a permissible
method of accounting for depreciation
for any item of property that: (1) under
the taxpayer’s present method of accounting, the taxpayer has not taken
into account any depreciation allowance or has taken into account some
depreciation but less than the depreciation allowable (hereafter, referred to as
claimed less than the depreciation
allowable);

---

A bit above your bold statement says "applies to any taxpayer changing to a permissible method".

[JJKO]

Hi, were you able to find out how to deal with the situation you described?  I just ran into basically an identical situation where my client used the land value resulting in too much depreciation for several years.  Would appreciate any guidance!

[raynam7]

No resolution yet.  Sorry. Looks more like just amending one by one, years back.

[jkshull]

I am not an expert, but I would argue that it is a change in accounting method to reduce the depreciable property by the land value amount. Depreciating land is an incorrect method.

Therefore, I would file a 3115. I didn't end up filing this return, since I didn't have the professional software to submit it that year.

Here are my sources

https://www.msatp.org/fixing-the-error-how-do-we-solve-depreciation-mistakes/

https://www.eisneramper.com/knowledge-center/coronavirus-knowledge-center/depreciation-accounting-me....

https://bradfordtaxinstitute.com/Content/Fixing-Depreciation-Errors.aspx