How do I calculate depreciable asset for rental home? Didn't do this in past several years - amend?

Question

I hadn't calculated depreciation for my small rental home in years. I guess my previous tax software missed that. I do remember taking it when I used a CPA and a tax preparer in the past, though.

How do I calculate the depreciation? How do I enter that in FreeTaxUSA? What happens if I depreciate my property - does that reduce the amount of taxes owed? By about how much?

Since I didn't take depreciation for several years, what happens? Should I go back and amend as many tax returns as allowed? How far back can I go to amend it?

MatthewD · Answer

Hello,

Yes, if you started renting you property over 27.5 years ago, it would be fully depreciated. The only situation where you could depreciate it more is if you made some improvements that have not been fully depreciate, like a new roof, addition or other improvement.

I suggest you enter the asset, even if it was fully depreciated. That way a record of it is kept.  I suggest you keep the depreciation records and complete them.

jules · Answer

It looks like my home started getting rented out over 27.5 years ago, so I can't get it depreciated any more. Is that correct? Are there any circumstances when we can or should take depreciation if it's been over 27.5 years since it started getting rented out?

I filled out a little about the depreciation in FreeTaxUSA, and I'm not sure if everything I put in there is correct. If it's been over 27.5 years, can we skip the depreciation part? I see an additional 2 pages at the end of my Schedule E about the depreciation, but can I avoid that if it's already been over 27.5 years? Is that useless and won't affect the rest of my taxes or tax return?

How do I remove the part about depreciation in FreeTaxUSA? I already entered some info, and now I can't remove the depreciation part. It's making me enter required info if I want to move forward with my tax return on FreeTaxUSA.

kiarab · Answer

Hello,

So the amount of depreciation you can claim depends on the method of depreciation you use, the useful life of the asset (which is your home), and how much your home cost. Most homes have a useful life of 27.5 years. Often, there is a statement that shows the deprecation for the asset, including how much you have claimed up to that point.

Our software includes that statement and calculates your depreciation for you. When you depreciate your assets, it does reduce the amount of rental revenue you had, which often reduces the amount of taxes owed. For example, say you received 10,000 in rent. Your share of depreciation for that year might be like 3,000. So then it would reduce the taxable amount of 10,000 in rent to 7,000 (which could be reduced further by your other rental expenses like utilities). The amount depends on the amount of the depreciation you can claim.

I would recommend going back and amending your prior year returns. You are supposed to claim it every year and it is the best way to figure out the amount of depreciation you are supposed to claim this year. Our software goes back to 2016. You can amend through us even if you didn't file your original returns first. You will need to enter your original tax information first, and then once that is finalized, you can proceed with the amendment. (If you search amendment in our software, it should provide more detailed instructions, or you can contact support for help).

You can go back quite a ways and amend, but you will only be able to claim a refund for returns 2020 (2020 is only until the filing deadline) and later.