Rental property bought in 2003. Incorrect c/b entered for asset and accountant did not depreciate every year. Now selling and c/b is wrong. How do I fix this? Help

[dianejhart]

The cost basis originally entered for the asset in 2003 is incorrect. The previous acct did not depreciate it every year  and I don't know why. But now I'm trying to enter it and the c/b is wrong. She is selling it this year. How do I fix this?

[jeffmcpa2010 · Accepted solution]

I have seen a situation where the difference is material, where a 3115 was filed to correct the Cost Basis, and to calculate the depreciation which should have been taken.

The Depreciation difference (Under or Over reported...sounds like under in this case) was then reported as  an expense in the year of the correction as a current expense. (in the case I saw, it was the year before the sale).,

The Sale was then reported as if everything had been done correctly from the start. I have no experience as to the final outcome, as this was a recent filing. 

[dianejhart]

Thank you!

[dkh]

Could the cost basis difference be an allocation for the land ?   

[TaxGuyBill]

1. Verify that the Basis is wrong, including determining if "land" part part of the wrongness.
2. Enter the correct Basis on the tax return you are preparing.
3. For the "prior depreciation", enter the larger of (a) the amount of depreciation actually claimed or (b) the amount of depreciation that SHOULD have been claimed.
4. Determine if amending prior years is worthwhile.

[dianejhart]

And a 3115 also?

[TaxGuyBill]

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@dianejhart wrote:

And a 3115 also?

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If it was strictly using an incorrect Basis, no, form 3115 does not come into play.

If it was something like land being depreciated, not depreciating improvements, or some other incorrect method, that is when Form 3115 applies.

[GPBurdell]

Which section of form 3115 is used to correct an error for the cost basis of land?

[jeffmcpa2010]

For cost basis of LAND - (which should not include any incorrect prior year tax effects)

I would just correct the basis. I don't think a 3115 would be required, as there was no change in accounting method - merely correction of an error with no prior tax effect.

[GPBurdell]

Which form do you recommend using to correct just the land basis, having no effect to prior years?  

[abctax55]

@GPBurdell  - Did this under/overstatement of land value also impacted value used for any related depreciable improvements?

[GPBurdell]

The land's original basis was allocated due to the intention to subdivide the land into 4 lots. Due to unforeseen circumstances, that never took place and the property is now being sold as one parcel. Expenses on the entire parcel had been taken for the entirety of the rental period due to the land never officially being subdivided. Expenses being only property taxes, which are minor at best for the unused portion of the land. 

[GPBurdell]

Any improvements made to the land were only to the portion where the building went in. So no the understatement did not impact the value used for related depreciable improvements.

[jeffmcpa2010]

If it's an individual return, just change it in your records.

1065 or other business return it would be an "other adjustment" in the equity reconciliation section. (don't have a form in front of me so I can't give you a section / line number.