Amending returns to correct depreciation and reporting the Installment Sale of the same property

[cdgbaker]

My client owns 50% of a non-residential rental building with a tax assessed value of $695,650 and depreciated using the SL method for 39 years.  The land value was not determined and was included in the depreciation.

In November 2019, the 50% ownership was sold for $325,000 with a Letter of Intent to purchase in 4 payments and to go to settlement within 45 business days of the signing of the Letter of Intent.  In 2019, three payment totaling $100,000 were made.  No payments were made in 2020. In 2021, 2 payments totaling $8,000 were made.

Questions Do I go back and amend the 2016-2019 returns to recalculate the correct depreciation minus the land value?  Since the installment sale has not been completed, will the carryover passive losses will continue until the sale is completed?  What happens if the final sale does not go through?

Thanks for any solutions.  I know this is complicated.

[TaxGuyBill]

---

@cdgbaker wrote:

Do I go back and amend the 2016-2019 returns to recalculate the correct depreciation minus the land value? 

Since the installment sale has not been completed, will the carryover passive losses will continue until the sale is completed? 

What happens if the final sale does not go through?

---

You could amend, but I don't think I would.  You use the greater of the depreciation that should have been taken and the depreciation that actually was taken.  So in your case you would just use the amount that actually was taken.

The carryover passive losses should be proportionately released each year based on the Installment Sale percentage.  See §469(g)(3).

Don't worry about the sale not going through unless it actually happens.  Take one day at a time.  If/when that happens, if you need help you can come back and ask any questions.

[abctax55]

"....with a tax assessed value of $695,650"

This is completely irrelevant - unless by chance it's the same as the cost.

You start with cost, then deal with backing out the land cost to recompute the correct depreciation.

[cdgbaker]

Thank you TaxGuy Bill for your reply.  I was unaware that I received a response so I apologize for my delay as I am preparing my client' 2020 return.  Her last minute tax property document indicated that the land has ab assessed valued of 60% or higher than the building.  Since the prior depreciation was taken on the total value, would an amendment be in order?   I will advise my client of her options.  Thank you.

[qbteachmt]

As noted, this is meaningless to you: "Her last minute tax property document indicated that the land has ab assessed valued of 60% or higher than the building."

You need to get her Initial Purchase info. Not Later info and not Assessed info.

Her initial purchase, then compute the land value separately from the improvements, and since you stated it is a 50% owner, both owners would be using that same info. The only "later" would be taking improvements into consideration.

[TaxGuyBill]

Are you saying that if you amend to correct it, you can claim a larger depreciation deduction?

If so, you can give the client the option to amend.  But you should also tell them your fee to amend.  It might not be worth it.