Wrong depreciation method on US taxes for rental property

joe_canuck100 · Post by **joe_canuck100** » Thu Jan 10, 2013 12:58 am

I'm a Canadian citizen working in the US for over 15 years now.

When I submitted my US taxes the first year I was here, I used an accountant and he set up the property's depreciation method using the 27.5 year term for my rental property in Canada.

Since that time I've probably had 3 other accountants and have been using TurboTax the last couple of years and no one's caught this problem.

This year, TurboTax caught the error (apparently they just fixed it in their software) when I put the property's country as Canada and advises to correct with IRS before filling in 2012 taxes.

However - I'm really concerned as this has gone on for many years now and only now am I finding out that it's wrong - ie: foreign properties are depreciated on a 40 year method, not 27.5.

So, I'm worried about opening a can of worms and having to fix 15 years of tax years?

I assume I'd have to pay back the difference for each year's depreciation but what about fines, etc?

Thanks for any advice.

nelsona · Post by **nelsona** » Thu Jan 10, 2013 10:56 am

I would not worry about this. Fix this years and move on. Since depreciation is recaptured at sale, you will simply have bigger recapture.

Not something to worry about.

joe_canuck100 · Post by **joe_canuck100** » Mon Jan 14, 2013 2:33 pm

Nelson.

Thanks for the reply.

However, when I first had the issue with TurboTax, it stated in so many words, that assets located inside the US may use accelerated methods of depreciation whereas outside the US, you must use a slower Alternative Depreciation System (ADS). Certain customers who purchased and placed assets into service for rental properties in a foreign country in a year before 2011, may have filed an incorrect tax return.

It then states that you may have underpaid your taxes. You may need to file a Form 3115 to change your depreciation method.

When I look at form 3115, it basically says it's something the IRS has to agree to before filing new taxes - and for me as mentioned with the number of years it effects - that's my concern.

So when you say to fix this year's, do you mean to not bother with the 3115 and just go on. I know TurboTax won't allow it, so I'd have to get an accountant to do it or do it myself manually.

Finally - well after I return to Canada, I was expecting to sell the properties so as not to pay the depreciation back to the US (saw this in another thread you had responded to), so would that compound the problem?

Thanks again Nelson. I'd like to do as you say but just wanted to be sure I'm not digging a bigger hole, and how to just change the depreciation starting this year without IRS looking for a form 3115.

nelsona · Post by **nelsona** » Mon Jan 14, 2013 2:55 pm

I wouldn't worry what turbotax allows or doesn't allow. If you want to correct your past returns go ahead. if you only want to do this years, simply adjust your turbotax settings and move on. It sounds like you think turbotax monitors your past returns, It doesn't. If you want to start using another depreciation, just do it.

joe_canuck100 · Post by **joe_canuck100** » Mon Jan 14, 2013 3:17 pm

Thanks Nelson.

shsamardar · Post by **shsamardar** » Mon Mar 11, 2013 12:29 am

Dear Nelsona

I found the same issue , wrong depreciation method for property in canada, 27.5 years versus 40 years.

In your reply, you were mentioning to just change it from now on and don't bother for changing prior years, it is a relief not going back and fix several years of filings

but in IRS website
http://www.irs.gov/publications/p527/ch02.html

in several places it says:

"Once you make this election, you cannot change to another method."

Is IRS referring to something else?

Thanks

shsamardar · Post by **shsamardar** » Mon Mar 11, 2013 12:03 pm

Nelsona

Regarding my comment in prior posting and also your comment about not amending prior tax returns and continue with 40 years depreciation instead of 27.5 years, shouldn't we file
Form 3115, Application for Change in Accounting Method
this year to notify IRS?

Thanks

shsamardar · Post by **shsamardar** » Tue Mar 12, 2013 10:47 am

While I am waiting for someone to jump in this discussion and help, I did more research on form 3115.

there are two ways mentioned in the form. one is automatic change request and the other one is advanced concent request.

because the change impacts last 8 years of filings, I don't know whether we need ot file under automatic or advanced. Advanced filing requires a user fee that is around $4000 for filing.

nelsona · Post by **nelsona** » Tue Mar 12, 2013 12:23 pm

I belive I have given my opinion on this subject.

ND · Post by ND » Wed Mar 13, 2013 4:06 pm

http://www.irs.gov/pub/irs-pdf/p527.pdf may make you nervous. See PDF pg6/25 that says: You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it.

shsamardar · Post by **shsamardar** » Thu Mar 14, 2013 10:22 pm

Thank you for your reply

This doesn't apply to my situation. the depreciation I took are way less than total cost .

nelsona · Post by **nelsona** » Fri Mar 15, 2013 8:36 am

That is what ND is sayig: If yoy took less depreciation than you should have, you may still need to recapture (ie pay tax on) the correct amount.

shsamardar · Post by **shsamardar** » Fri Mar 15, 2013 9:36 am

I am sure you are trying to mention an important point but it is not clicking for me.

My numbers based on 2011 , last year is:

depreciable basis: 121k

total of depreciations took based on 27.5 years in last 8 years : 30k ( I reported )

total of depreciations took based on 40 years in last 8 years : 21k ( if i was reporting but i didn't )

for 2012, this year, I am starting to report based on 40 years: that means this year it willl be 2700 ( based on nelsona comment that continue with right number from now on )

please help me to understand How these numbers match with your postings?

thanks

nelsona · Post by **nelsona** » Fri Mar 15, 2013 10:32 am

You said you took "way less" than the cost. I mistook this to mean you took "way less" than you should have.

Of course you can't depreciate more tahn the cost, that is a given.

What I take the earlier passage to mean is that if you "underappreciated" for whatever reason,ie took the 40 instead of 27.5 or forgot to depreciate in some years, you would still need to recapture the entire amount which you should have. In otherwords, when you sell, the IRS will do a simple cost vs depreciation vs years calcualtion and come up withe the recapture figure, regardles of what you did year-by-year. They don't want to look thru all your past returns.

If you have depreciated more than you should have, then you will ned to recapture more. This will be indicated by a lower than expected depreciation basis on your previous return.

shsamardar · Post by **shsamardar** » Fri Mar 15, 2013 1:09 pm

Thank you a lot for your reply

I already depreciated more than what I should

Based on your advice, I am not going to change prior years.
I will start with 40 yrs from this year

you mentioned :
"If you have depreciated more than you should have, then you will ned to recapture more. This will be indicated by a lower than expected depreciation basis on your previous return."

does recapturing happen when i sell it? I am not planning for selling it now

My understanding from your comment is that what i depreciate until selling it, will go against my base, therefore bigger profit to report on selling time.

I am still reading your comment in the way that I don't need to revise any last years and just start with new amount from now on.

Is this correct

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