Correcting Depreiciation Error on Rental RE after 3 Years

[tom496]

What is the name of your state (only U.S. law)? Missouri

Hello,

My wife and I bought a house to live in in 2003 and lived in it until 2004, when we rented it out and moved abroad. We moved back into the house in 2006. An accountant prepared our returns for 2003, 2004 and 2005. In preparing my 2006 return, I reviewed the previous returns and noticed for the first time that the accountant erroneously used the '03 purchase date as the "placed in service" date (and began treating it as rental property, including taking depreciation) rather than the '04 date when we converted it to rental property. We are past what I understand to be the the three-year-after-filing statutory period for filing a 1040X for '03 and '04, but it has been (just barely) less than three years since the '05 return was filed. We've not yet filed for 2006.

I assume the miscommunication with our accountant that resulted in the erroneous "placed in service" date constitutes a "mathmatical error" or "posting error". Thus, it appears I can file a 1040X for 2005, but not for 2003 OR 2004. Having misseed the deadline to amend depreciation for 2003 and 2004, my reading seems to indicate I need to file form 3115 to set the record straight for those years. However, the instructions for form 3115 at "Schedule E - Change in Depreciation or Amortization" states "Do not file Form 3115 ... to change the placed-in-service date." Thus, I do not understand the appropriate way to correct the depreciation information for 2003 and 2004.

I should add that, on the 2005 1040X and 2006 returns, we plan to allow ourselves the passive losses on the rental property under Form 8582 Special Allowance for Rental Real Estate with Active Participation. Our accountant dissallowed the passive losses for rental real estate on the 2003, 2004 and 2005 returns.

Any assistance or guidance would be greatly appreciated.

Thanks,
TomWhat is the name of your state (only U.S. law)?

 

[tranquility]

You need to see a tax professional to review your facts. Changing your placed in service date is not a mathmatical or posting error. From your facts it seems as though you did depreciate the building:

I reviewed the previous returns and noticed for the first time that the accountant erroneously used the '03 purchase date as the "placed in service" date (and began treating it as rental property, including taking depreciation)

and I don't think you would get an accounting method changed as it would hurt the interests of the government--even if the instructions didn't specifically deny you the ability.

You have a problem you want to change for your benefit now. I absolutely believe you. However, it may be a done deal and you will have a very high hill to climb to change things. We specialize in real property taxation, and I barely know where I'd start on this. It would take research to even come up with a plan. See the guy. Pay him money. Accept you may be disappointed.

 

[LdiJ]

You need to see a tax professional to review your facts. Changing your placed in service date is not a mathmatical or posting error. From your facts it seems as though you did depreciate the building:
and I don't think you would get an accounting method changed as it would hurt the interests of the government--even if the instructions didn't specifically deny you the ability.

You have a problem you want to change for your benefit now. I absolutely believe you. However, it may be a done deal and you will have a very high hill to climb to change things. We specialize in real property taxation, and I barely know where I'd start on this. It would take research to even come up with a plan. See the guy. Pay him money. Accept you may be disappointed.

I agree. This is absolutely not a DIY project.

I also don't know how you could claim active participation when you were residing abroad.

 

[tranquility]

Active participation seems defined by the negative and not the positive. An absent owner can easily be an active participant. Here, as long as the person is a direct owner (not through an entity) and holds some amount (I think it's 10%), if they do anything, we figure they're an active participant. I guess if the facts started getting close, like it was a lease or something, I might look into it. But, we don't find active participation usually a problem.

Are you thinking of the material participation of a real estate professional?

 

[davew128]

A couple thoughts here, and I'll try to keep the technical language and citations out of it.

1) Active participation under the passive activity rules is the default classification for all rental real estate. Material participation and making it a non-passive activity is much higher threshold.
2) There is plenty of IRS guidance on the matter of correcting incorrect previous depreciation. Off the top of my head, I believe there is something relatively recent that allows one to correct in the current year without a change of accounting method, but I would defer to the OP's preparer to do the requisite research to get the details right.