Questions about Form 3115

6 Replies

I have a foreign rental property that's been in service since 2013. I recently found out I could claim depreciation for it. I contacted a CPA and he said I would need to amend my forms from 2015 on since that's within the 3 year amendment period; he didn't mention anything about the missed depreciation prior to 2015. I did some research on my own and it seems like I can claim that depreciation as well since when I sell the property, the IRS is going to assume that I claimed it whether I actually did or not. However the form/procedure is quite confusing so I was wondering which of the below would be the better alternative:

1. Amend the 2015-2017 forms and either claim the missed depreciation from 2018 on or when I sell the property (assuming its allowed)? Or will I miss the opportunity to claim the missed depreciation because of rules around "changing accounting procedure" etc. (I went through the instructions but found them hard to follow)

2. Skip the amendments for previous years and file a form 3115 along with the 2018 tax form by the due date and claim the depreciation from 2018 onwards?

Thanks.

@Account Closed No need to amend your tax returns (contrary to your CPA's opinion). Not only that, by filing form 3115, which is change of depreciation method, you can claim previous years' depreciation. That's right, not only from 2018 onward.

One important thing to note regarding foreign properties; although you can claim depreciation deductions, they are on what's called Alternative Depreciation System (ADS) for which properties are depreciated over 40 years as opposed to 39 or 27.5 years. When doing accelerated depreciation using ADS, the 5-year property depreciates over 9 years and 15-year property over 20 years.

Yonah,

Thanks for your reply.

1. For the 2nd choice I didn't word it correctly but I think I understand. Basically I pool together the unclaimed depreciation from previous years, add (and subtract) the depreciation for successive years starting from my 2018 return onwards. If any depreciation remains in the pool when I sell the property (say in 5 years), I get a step-up in tax basis by the amount of unclaimed depreciation

2. Once I file the 3115, do you know if I can go back and amend the older returns since now technically I have signaled for a change in accounting method?

3. I did mention the ADS system for foreign properties since I believe the IRS publication talks about it; my CPA was of the opinion that 27.5 yrs is the standard time frame and so we should just do that. Will have to revisit that assumption. I presume I have a choice between straight-line and accelerated depreciation?

@Account Closed

Foreign investors may be required to depreciate items using ADS instead of MACRS. You may want to reach out to your accountant for verification.

Also form 3115 is complex in nature - I would definitely leave the completion of the form to a professional. 

Is the accountant that you currently have the one that missed the depreciation since 2013?

The foreign rental real estate is depreciated over 40 years using the straight line method. You can not amend to take catch up depreciation after you have filed 2 years of returns using an impermissible (ie none) method of depreciation accounting. The good news is that you can file for an automatic accounting method change to deduct the catch up depreciation on your 2018 returns. You will take a dediction on Schedule E and then continue to take an annual depreciation deduction every year in the future while you own the property. Upon sale, you will have to pay tax on the 1250 gain (depreciation) regardless of whether deducted it or not. As mentioned above, you should have a qualified experienced tax professional prepare Form 3115 as it is complicated.

He didn't miss the depreciation; I wasn't aware of it myself. He agreed to amend the form after I reached out to him. However he never mentioned form 3115 to catch-up depreciation; I found this through self-research. He also didn't mention if I can or can't amend the returns after more than 2 years of using a non-approved accounting method (as the previous post has said). 

Thanks.

@Account Closed I'd recommend talking to a CPA who is familiar with Form 3115 and foreign real estate as it appears yours may not be, or depending on the specifics of the property having a cost segregation study done. Some firms will include Form 3115 with the study. Amending the returns is not a recommended method of fixing the depreciation and you can only amend back 3 years. Amending will also increase your audit risk. 

Really the only and best way to get all the depreciation you missed is with Form 3115, no amended returns required.