3115 at the sale of rental property?

[Possi]

Clients sold a rental property that had been depreciated at $192k, which was a tax assessment value and not the true basis. They were new to me last year, and I followed the prior returns for depreciation. This didn't come up until they sold it. The real basis should have been $232K purchase price plus $6856 closing costs at purchase.

I believe to correct this, I must do the 3115. But I want to know if there is an adjustment I can make on the tax return in the year of sale (2017) without the 3115.

 

[Richcpaman]

Possi:

I do not believe that you need a 3115.  Could the difference be Land?  When its time to populate the 4797, add an item for land, and include the purchase closing costs to it as well.

If they had not sold it in 2017, you might file the 3115 to get the depreciation right this year. 

Rich

 

[Possi]

Thanks! The land was in there. Property assesses for much less than purchase price, and has nothing to do with FMV, either. So the original preparer really did these people an injustice. I would never have known, just following the prior returns.

[Gail in Virginia]

By any chance, was the property originally bought for personal use and later converted to business use?  And was the depreciation based on FMV at the time it was converted to business use from personal?

[Lee B]

If you discover allowable depreciation that was never deducted then a 3115 is the right solution.

[SaraEA]

I would do the 3115.  Missed depreciation is an automatic acceptance so no need to fill out all 100 pages.  The reason is that they should have taken more depreciation in prior years, so claimed higher income than they should have.  In the year of sale you have to deduct depreciation allowed or allowable from basis, so they will pay higher cap gains even though they never got the benefit of the higher depreciation.  Missed depreciation can be taken on Sch E all at once, so their income will be reduced in the year of sale.