Tax Advice, long-time tax platform user depreciation basis adjustment

[Laura Kreinbring]

This property is in the north end of Wisconsin. I used to live in this duplex and I moved out to convert it to 100% rental and refinanced. Other topics I have researched about changing the basis include "you don't transact closing costs as an expense in the tax year, it changes the entire basis"....and I have been trying to use a tax platform that I have been using for about 10 years. 

What do you think about what the platform professionals told me:

"

I understand you have a duplex and that previously you lived in half and rented out the other half (I am assuming a 50/50 area split). You have now converted the portion you used to live in to also be a rental property. Let's call the half you have rented out in the past Property A and the portion converted to a rental property in 2023 Property B. Although this is technically one single property, for tax reporting purposes, we will treat them as though they are two totally separate assets because they have experienced different use in their history. See "Renting Part of Property" in IRS Publication 527:

https://www.irs.gov/publications/p527#en_US_2023_publink1000... this situation, you have not disposed of Property A. Property A is still used 100% for rental purposes and its basis for depreciation is half of the total basis of the combined property at the time it was placed in service as a rental property. In other words, you have indicated the total basis of the combined property was $75,000, so that means the basis of Property A is still $37,500, it was still placed in service in 2019, and it will continue to be depreciated over the remainder of its depreciable life.

However, you have placed a new property in service in 2023, Property B. Property B will have its own separate depreciable asset record, as it was placed in service in 2023. The basis of depreciation for Property B will be the lesser of the Fair Market Value of the property on the date it was placed in service OR the cost of the property (plus any additions and improvements -- not repairs, but substantial improvements, such as additions or renovations). See IRS Publication 527, "Figuring the Basis" under "Basis of Property Changed to Rental Use" for more information:

https://www.irs.gov/publications/p527#en_US_2023_publink1000... the loan on a property does not change its basis (the FMV or the amount originally paid for the property), although as previously stated, you may have deductible expenses related to obtaining the refinanced loan.

Regards,
Carter, EA
Pro Support

"

[Benjamin Weinhart]

Hi Laura, I agree with what their assessment was and I would handle it the same way myself. Keeping the properties separate is mostly for the different depreciable lives and it wouldn't matter a whole lot when you eventually go to sell the property. It's also just easier administratively. You will still receive the same depreciation deduction per year since 27.5yr property is a straight line basis, just that the timings are a little different is all. Lower of cost or market for determining the basis is also the correct way to treat a personal use asset being placed into service for business purposes.

[Michael Plaks]

Quote from @Laura Kreinbring:

What do you think about what the platform professionals told me:

So you use experts from one free forum to validate the expert from another free forum?
He is correct.

[Laura Kreinbring]

Yes, that's right. I'm paying for the support feature, but yes. Also, I'm trying to vett if the platform has enough features for real estate tax law. This is the first time I heard the refinance cost deductions are not spread out via increasing via increasing the basis aka the loan amount/purchase price.

[Laura Kreinbring]

This is a very complicated subject and I have learned so much trying to do this, more or less, on my own. Learned that I am a real estate professional, etc. However, the more I learn the more I feel like I can't even finish my taxes on my own and question everything I am doing with depreciation and the way I have categorized costs. The extremely proper English is due to describing math equations and needing to be precise. Orginally I didn't think I would need a filing extention.
Also, does the following apply to me? It looks like I am required to file an amendment after filing first. 

Changing Your Accounting Method

Generally, you must get IRS approval to change your method of accounting. You must generally file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

• A change from an impermissible method of determining depreciation for depreciable property if the impermissible method was used in two or more consecutively filed tax returns.
• A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
• A change in the depreciation method, period of recovery, or convention of a depreciable asset.
• A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance.
• A change from claiming a 50% special depreciation allowance to claiming a 100% special depreciation allowance for qualified property acquired and placed in service by you after September 27, 2017 (if you did not make the election under section 168(k)(10) to claim a 50% special depreciation allowance).

Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.

• An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.
• A change in use of an asset in the hands of the same taxpayer.
• Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). If you elected not to claim any special depreciation allowance, a change from not claiming to claiming the special depreciation allowance is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.
• Any change in the placed in service date of a depreciable asset.

See sections 1.446-1(e)(2)(ii)(d) and 1.446-1(e)(2)(iii) of the regulations for more information and examples.

[Benjamin Weinhart]

Quote from @Laura Kreinbring:

This is a very complicated subject and I have learned so much trying to do this, more or less, on my own. Learned that I am a real estate professional, etc. However, the more I learn the more I feel like I can't even finish my taxes on my own and question everything I am doing with depreciation and the way I have categorized costs. The extremely proper English is due to describing math equations and needing to be precise. Orginally I didn't think I would need a filing extention.
Also, does the following apply to me? It looks like I am required to file an amendment after filing first. 

Changing Your Accounting Method

Generally, you must get IRS approval to change your method of accounting. You must generally file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

• A change from an impermissible method of determining depreciation for depreciable property if the impermissible method was used in two or more consecutively filed tax returns.
• A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
• A change in the depreciation method, period of recovery, or convention of a depreciable asset.
• A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance.
• A change from claiming a 50% special depreciation allowance to claiming a 100% special depreciation allowance for qualified property acquired and placed in service by you after September 27, 2017 (if you did not make the election under section 168(k)(10) to claim a 50% special depreciation allowance).

Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.

• An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.
• A change in use of an asset in the hands of the same taxpayer.
• Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). If you elected not to claim any special depreciation allowance, a change from not claiming to claiming the special depreciation allowance is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.
• Any change in the placed in service date of a depreciable asset.

See sections 1.446-1(e)(2)(ii)(d) and 1.446-1(e)(2)(iii) of the regulations for more information and examples.

 You are not required to file form 3115 as you're not correcting a previous error or otherwise changing accounting methods. It seems like you're getting caught up in the weeds of things too much and overly complicating things for yourself. If you truly want professional advise to confirm what the other forum is telling you, or to assist with your own research, I would suggest paying for a consultation with a CPA rather than relying on that of a free/public forum. 

It also sounds to me that you may want to extend just so you get a better understanding of everything before you file. Do note that if you extend, if you would owe any tax on your return, that would still be due by April 15th. An extension is just an extension of time to file, not to pay. I would still suggest enlisting the services of a professional, however, as someone with more in-depth knowledge of your situation would be able to give a much more personalized and tailored answer for you.

EDIT: I can only think of one reason off the top of my head where amending a previous year's return is the correct way to do something that you couldn't otherwise do when filing an original return. This isn't that, so there should be no reason to do so.

[Laura Kreinbring]

I took that information from Pub 946 (2023)
https://www.irs.gov/publications/p946

Anderson Advisors said that the most commonly audited are the small single members that file on schedule c and schedule e, so that is making me cautious.

There is a cpa that I have been meaning to get a consult from, but I was trying to make sure I had all the questions I had listed before wasting time on just the basics. 

The tax code probably changes year to year enough that it creates alot of variety in information. I actually gave feedback on a google search result yesterday, saying it was inaccurate and citing the irs.

[Laura Kreinbring]

Yes, you’re right about the “weeds”

It’s tax code weeds! lol

Us investors would throw the book right back the irs if there weren’t enough benefits for us to learn it.

Lawyers specialize in it, crazy level.

[Benjamin Weinhart]

Quote from @Laura Kreinbring:

Yes, you’re right about the “weeds”

It’s tax code weeds! lol

Us investors would throw the book right back the irs if there weren’t enough benefits for us to learn it.

Lawyers specialize in it, crazy level.

It's a phrase that my old boss used when I was with my large public firm that stuck with me. It can describe certain things in this world pretty well. And you'd be throwing the "book" back at Congress :)

 Us CPAs/EAs do as well (some more than others), I personally have a Master's degree in the field with a focus in tax on top of my CPA if that tells you education levels required. I've also written/helped write several various legal documents for the IRS/courts. It's not even possible to become a CPA without having at least an equivalent of a bachelor's in accounting (some minor exceptions). Many people who have taken both that I've spoken with also say that the CPA exams are harder than the BAR exams if that gives you perspective. Plus the pass rates are lower for the CPA exams in a large majority of states compared to the BAR. Lawyers do get a little more education time-wise though, so it's all relative.

[Laura Kreinbring]

Quote from @Benjamin Weinhart:

Quote from @Laura Kreinbring:

Yes, you’re right about the “weeds”

It’s tax code weeds! lol

Us investors would throw the book right back the irs if there weren’t enough benefits for us to learn it.

Lawyers specialize in it, crazy level.

It's a phrase that my old boss used when I was with my large public firm that stuck with me. It can describe certain things in this world pretty well. And you'd be throwing the "book" back at Congress :)

 Us CPAs/EAs do as well (some more than others), I personally have a Master's degree in the field with a focus in tax on top of my CPA if that tells you education levels required. I've also written/helped write several various legal documents for the IRS/courts. It's not even possible to become a CPA without having at least an equivalent of a bachelor's in accounting (some minor exceptions). Many people who have taken both that I've spoken with also say that the CPA exams are harder than the BAR exams if that gives you perspective. Plus the pass rates are lower for the CPA exams in a large majority of states compared to the BAR. Lawyers do get a little more education time-wise though, so it's all relative.

WOW I didn’t realize that. Granted, this was 20 years ago, but I studied office at a tech school and took common classes with accounting program students. I was under the impression that they could become CPAs.  Wait, no you just jogged my memory because I recall that they could then transfer into 4 year institutions to then pursue a CPA. Yes yes yes.

And this spring I went very far “into the weeds” or “down the rabbit hole” trying to understand what needed to be done.

[Bruce D. Kowal]

Quote from @Michael Plaks:

Quote from @Laura Kreinbring:

What do you think about what the platform professionals told me:

So you use experts from one free forum to validate the expert from another free forum?
He is correct.

 Agree.  I can't imagine a divorce attorney, as an example, simply giving away free advice to complete strangers.  Especially based upon incomplete facts.  If you want professional, solid tax advice, you need to pay for it.  Otherwise, you know, you get what you paid for.  Which tempts me to tell everyone to put their real estate into S Corps, because you might save on the Health Insurance portion of SS taxes.  :)