I have a new client who came to me for her 2011 tax return. She owns a commercial rental purchased in 1985 which was depreciated under 31.5 yrs. In 1996 her husband passed away and her accountant entered the stepped-up basis of 200,000 in the depreciation schedule again as a 31.5 year property. (Probably because the original building in 1985 was under 31.5 years for depreciation.) Is this correct? Should not the stepped-up basis have been classified as 39 year property as it was after 1986? If yes, how do I correct this? Do I have to submit a Form 3115 and wait for IRS approval? I think it would fall under the "automatic" approval classification. And how is the over-depreciation taken since 1996 accounted for? I have looked at the Publication for Depreciation and the instructions for Form 3115 and did not find anything for over taken depreciation only for under (that you can take either the first year or spread out over four years).
It seems to me like you have to find an amended return to correct for the year of steppep-up basis. As I researched on the Publication 534 as follow:
You must continue to figure your depreciation under ACRS for property placed in service after 1980 and before 1987. For property you placed in service after 1986, you must use MACRS, discussed in chapter 3 of Publication 946.
Hope this will be helpful.
The original building has fully depreciated before the stepped up basis applied. No problem there as it was purchased in 1985.
The stepped-up basis was in 1996 (for this building) and the question was since the actual building was acquired at the time of ACRS and thus depreciated over 31.5 years, should the stepped-up basis (even if occuring during MACRS time - 1996 - use the same depreciation period as originally used for this building or not). The previous accountant seemed to think it should and used 31.5 yrs. Is this right and I continue? Or do I have to submit a Form 3115 and correct? I cannot file an amended 1996 as you suggest (first you can only amend open years and what happens with the previous in-between years?)
The argument, it would seem from your research on Publication 534 would be that the actual property - the building - was placed in service before 1987, regardless of the stepped-up basis date. In that case the previous CPA was correct in his treatment and I do not have to do anything. I will look into the Publication 534 too.
Thank you, Mark, you might have given me the solution. I really appreciate it. Posted by Ellen on 02/26/2012 @ 5:06 PM
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
The Best EA CPE
Try Our FREE Enrolled Agent CPE
Learn more about FFA's Quality Enrolled Agent Continuing Professional Education.