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How do I arrive at the cost basis of a rental property that was purchased in 1996 but never depreciated in order to calculate the capital gain after an insurance settlement due to a fire?

Co180
Level 2

How do I arrive at the cost basis of a rental property that was purchased in 1996 but never depreciated in order to calculate the capital gain after an insurance settlement due to a fire?

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11 Replies 11
TaxGuyBill
Level 15

COST Basis is just that; cost.  Purchase price plus cost of improvements.

ADJUSTED Basis is usually the Cost Basis MINUS the depreciation.  In this case, it is the depreciation that SHOULD have been taken.

You probably need to separate out the land from the total cost, so you get the Basis of the building itself.

 

Form 3115 needs to be filed to "catch up" on the missed depreciation.

Just wanted to add that when Form 3115 is filed (i.e. the change of accounting method is effected), the catch-up depreciation (prior years') is a deduction line item under "other deductions" on Sch E.  The current year depreciation is deducted on the "depreciation" expense line.  The accumulated depreciation, and thus adjusted cost basis, will then be all caught up.  

 

If NO Form 3115 is filed, the adjusted cost basis would still be the same - because the recaptured depreciation is the higher of the "allowable" and "allowed" amount.  Just that by filing Form 3115, the tax benefit of the "allowable" depreciation - the prior years' - can be realized in one (the filing) year, instead of being lost in the vacuum. 

BobKamman
Level 15

How do you get around  doing it after June 30?

Application for Change in Accounting Method, generally must be filed within 180 days after the beginning of the taxable year in which the proposed change is to be made. Regulations Section 1.446–1(e)(3)(i).

(Answer:  This might have been waived by IRS in 2015, and they might not have unwaived it since then.)

If this taxpayer didn't know about depreciation, does he know about involuntary conversions ?

 

0 Cheers

1.  Where does it say anything about 180 days?  Which line in the current Section 1.446-1(e)(3)(i)??

 

2.  Even if it was the rule, the info discussed herein is based on an implied and understood "IF APPLICABLE" basis.   IF applicable, means the asker would need to make sure to cross the T's and dot the I's for his/her/its/their case. 

 

3.  Joshua barks based on the questions asked and the facts given.  For example, even if your point (regarding the 180-day rule) was valid, the answer to your question could possibly be:

3.1  The TP files on a fiscal year basis.

3.2  The TP will make the election for the year 2022.

 

4.  Here is an excerpt from Journal of Accountancy, in the issue dated March 31, 1998 (!!).  Yes, 1998.  See https://www.journalofaccountancy.com/issues/1998/apr/grimes.html

EXECUTIVE SUMMARY
THE IRS ISSUED PROCEDURES, TERMS and conditions for obtaining the IRSs consent to an accounting method change. Many of the previous complex rules have been eliminated.
USUALLY, AN ENTITY FILES FORM 3115 in the year of change. Under the old procedure, the time for filing was the first 180 days of the tax year. The IRC section 481-a adjustment period in general, is four years, beginning with the year of change for both positive and negative adjustments.

The current requirements for timely filing Form 3115 are in the instructions.  NO mention of the 180-day rule.

That said, regardless, in case missing the 180-day rule is Mea Culpa (I know the spelling of this term because I use it a lot), bear in mind that the responding post generally stated: "IF NO 3115 was filed.... then...." 

Again, the Asker has to do his/her/its/their due diligence.  To me, it is the basic understanding of this forum.   This is actually the main point of this posting.

That said, for the 180-day rule, correct me (still thinking it isn't applicable) if I'm wrong. 

Meanwhile, I'm nursing an urge of finding myself a DeLorean, setting the clock to 1997, stepping on it and pumping it to 88 miles per hour, to see if I could go back to experience the 180-day rule.   

IRonMaN
Level 15

"Again, the Asker has to do his/her/its/their due diligence.  To me, it is the basic understanding of this forum."

You must be new here.  98.315671867789999111 percent of the folks asking questions want a yes or no answer............ and they want it now.  Due diligence?  Surely you jest.  😁

ACME Taxes, Tattoos, Tires and Tasmanian Devils - one free devil with every return.

You forgot to mention that

96.46433172 percent of statistics are made up on the spot....

IRonMaN
Level 15

Sorry, they updated that statistic yesterday.  It has now dropped down to 96.46433171

ACME Taxes, Tattoos, Tires and Tasmanian Devils - one free devil with every return.
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BobKamman
Level 15

@joshuabarksatlcs  Yes, 1998!  Back when the Journal of Accountancy and Motorcycle Maintenance didn't provide links to the "procedures, terms and conditions" referenced in their articles.  Had they done so, it would have been to Temporary Regulations here:

https://www.govinfo.gov/content/pkg/FR-1997-05-15/pdf/97-12514.pdf

Of course, some Temporary Regulations remain that way for decades.  Somewhere, though, these may have been made permanent, maybe with changes.  The way I read them, they say:

For any Form 3115 filed on or after
May 15, 1997, application for
permission to change the method of
accounting employed shall be made on
Form 3115 and filed with the
Commissioner during the taxable year in
which the taxpayer desires to make the
change in method of accounting.

So that doesn't even allow 180 days after the close of the year.  Or does it?  

The very last sentence of the current Reg. 1-446-1(e)(3)(i):

For any Form 3115 filed on or after May 15, 1997, see Section 1.446-1T(e)(3)(i)(B).

The referenced Temp Reg is no long there. 

True, you may say 3(i) could use some updating.  Call 60 Minutes.

 

That said, see Reg 1-446-1(e)(3)(ii):

(ii) Notwithstanding the provisions of paragraph (e)(3)(i) of this section, the Commissioner may prescribe administrative procedures under which taxpayers will be permitted to change their method of accounting. The administrative procedures shall prescribe those terms and conditions necessary to obtain the Commissioner's consent to effect the change and to prevent amounts from being duplicated or omitted. The terms and conditions that may be prescribed by the Commissioner may include terms and conditions that require the change in method of accounting to be effected on a cut-off basis or by an adjustment under section 481(a) to be taken into account in the taxable year or years prescribed by the Commissioner.

 

My take is that administrative procedures prescribed by the Commissioner over the years are clearly outlined in the applicable sections of the CURRENT Form 3115 instructions.  The referenced Temp Reg is by now passé.  So is the pdf you cited. 

I listed the JoA article to give a taste of the timeline of the key change. 

Over the years, a lot of water under the Form 3115 bridge.  Why do I worry about the taste of that water? 

I'd just go by the CURRENT Form 3115 instructions and march forward.    

dkh
Level 12

My Oh My.... you gentlemen are getting all fired up in the details of answering a question for an OP that will probably never return to read any of this.   

 

So true.  Yet, don't forget, I come here only for kicks and drama.  So, I'm okay with it.

 

@dkh: Your comment reminded me of an old joke.  Little boy walked into the kitchen and asked, "Mom, what's sex?"

 

Mammy sat him down, started with bird and bees and butterflies...  A good twenty minutes later, little boy interrupted her and asked, "How can I put all that in the little boxes - one box says M, the other says F?"