Thanks for the video. A clarification point for my understanding - I thought the 481a adjustment (i.e., the catch-up amount) was reported as Other expense on Schedule E (line 19), and not the Depreciation row (line 18).
That is correct, Jon. I recorded this video shortly before they updated Form 3115. I did update the written material on the blog , but videos are harder to edit. To clarify, the IRS did state 481a adjustments go on the other income line stating it is 482a. Originally the IRS was unclear so I took the approach I did. However, your attachment to the return with the depreciation breakdown will also clarify the adjustment.
thanks again, couple questions: 1- i completed the form 3115, i was told you must file 481a also, is that form is just all the calculation that you performed i will attach? 2- when i file my taxes i just attach 3115 and all the calculation and also must send a second copy of signed 3115 to a second location?
You are correct in thinking you need to attach a statement outlining your math. Include a copy of the cost seg and your 481(a) adjustments. Since this is an automatic change you just attach to your timely filed original return. No need to send a copy to DC.
Question regarding Form 3115, Section E, Question 7g) where it asks about whether any "Special Depreciation Allowance" is being claimed ... My question is: If I AM taking the "Bonus Depreciation", I AM taking the "special depreciation allowance", am I not ? Or, in other words, is the "special depreciation allowance" in this Question 7g) refers to the "Bonus Depreciation", or is it referring to something else ? Thanks in advance for any kind of commenting on this question !
Part III, Section E, Q 7(g) is telling you that an explanation needs to be attached to the return if you are electing out of Bonus Depreciation, same as you would on a return electing out where no 3115 is involved.
@@KeithTax Ah, so if I am NOT electing OUT of Bonus Depreciation (i.e., I am doing Bonus Depreciation), then I do NOT need to attach any explanation for this question. Is that what you are saying ?
Carrie, it depends on the CPA. Every firm sets their own fees. Several factors also come into play when when the fee is determined. The number of calculations play a role, for example. I recommend you do your due diligence. Make sure the CPA is familiar with Form 3115. Form 3115 has multiple uses so verify the CPA can handle your situation as it will be reported on the form. Inquire about fees.
Is a Cost segregation study/report something a cost segregation specialist provides or are you estimating how the $400k should be broken down between building, land, 5,7, and 15 year property? Hope you can help! Thanks!
The video and companion blog post use estimates that are similar to what I see in my office. I the real world you get your "real" numbers from the cost segregation report.
Thank you so much!!!! I've searched around for this and it;s been hard to find someone taking the time to walk through it. I wish I would've been able to hire you earlier than near the deadline of my extension- though I am a small business and many CPAs who know how to do this only work with big business.
Part IV is required. Line 25 should be marked Yes. Line 26 is the amount of additional accumulated depreciation you will take in the current year for the cost segregation study. Line 27 is dependent on any prior §481(a) adjustments (I suspect most taxpayers will have not anything here, but verify because there might be other §481(a) adjustments to consider.) Line 28 is Yes. Check the de minimis election if under $50,000 and the eligible acquisition transaction election for larger amounts. Line 29 is taxpayer specific. The accounting required is the same calculations illustrated in the text and in the video. All the IRS wants is an attachment showing how you arrived at your numbers.
@@KeithTax, part IV line 25 "Does published guidance require the applicant (or permit the applicant and the applicant is electing) to implement the requested change in method of accounting on a cut-off basis? ". . . . . . . . . . . . . . . . If “Yes,” attach an explanation and do not complete lines 26, 27, 28, and 29 below. ---Here is my question, based on line 25, if answer with yes, then attach an explanation without answer line 26 to line 29. Please verify it. Thanks;)
@@carrie4579 These kinds of questions require due diligence on the part of the tax professional. Facts and circumstance prevail. I don't know the details of your case. And I don't want to be guilty of Prescription before Diagnosis is Malpractice. You will need to consult a tax professional experienced in filling out and filing Form 3115.
taxpayer missed depreciation in the past. How to answer Part II line 7a? "Does audit protection apply to the applicant’s requested change in method of accounting? See instructions . . If “No,” attach an explanation.If “Yes,” check the applicable box and attach the required statement, 1. Not under exam.
These kinds of questions require due diligence on the part of the tax professional. Facts and circumstance prevail. I don't know the details of your case. And I don't want to be guilty of Prescription before Diagnosis is Malpractice. You will need to consult a tax professional experienced in filling out and filing Form 3115.
It should be DCN 7 not 8 unless the taxpayer elected out of bonus depreciation the year the original asset was placed into service. There are many references for this, but I like the "Cost Segregation Audit Technique Guide" document. See the section titled "Method of Accounting Issues Related to Bonus Depreciation".
I filmed this video before the IRS clarified. You are correct that the DCN should be 7 for most taxpayers. I did make the update in the blog post some time ago, but not everyone goes to the blog.
Is there a reason why the depreciation method for the 15 year property is 150% db/hy instead of SL/HY? I thought that SL should be used for residental rental
Only 27.5 or 39-year property are §1250. 15-year property is §1245 and therefor covered under MACRS (DD/HY). You can elect to use SL/MM (but why?), and for special situations ie. AMT.
I have multiple properties that I need to adjust the prior depreciation for (Due to Cost Segregation, and do Form 3115). Previously, there was a question posted asking about this issue, and your response was: ... If the cost seg is the only reason for Form 3115 you only need one per return per year ... OK, But, filing one Form 3115, how do I account for the different sets of changes to Depreciation per each properties, due to multiple Cost Segregation studies ? i.e., within ONE Form 3115, how do I, partition out such that for Property A, it's like this, and for Property B, it's like this, etc ??? ... Thanks very much for any kind of reply !
You need to attach a schedule of changes as outlined in the video. Each property is an added statement to the 3115. One 3115 with multiple attachments for multiple costs segs. The numbers from each attachment should coincide with the changes for each property on the tax return.
Hello Keith, Would you be kind to provide some guidance regarding Question 14, on Page 3 (Section II) of Form 3115 ? For a Cost Segregation, how should 14 b) and 14 c) be properly described ? 14 b) asks: "The applicant's present method for the item(s) being changed." and 14 c) asks: "The applicant's proposed method for the item(s) being changed." So, for a Cost Segregation, we are still using the same method of depreciation, i.e., Section 168 SL, MM, but we are separating out the assets that qualify for Bonus Depreciation from the ones that depreciate over 27.5 years (for Residential Rental) ... So, how should that be described in terms of .. What is the present method ? and What is the proposed method ? Any suggestions would be greatly appreciated ! Thanks
Hi, thanks for this video: I’m kind of confused, how do I report cost segregation for a property that has not been previously depreciated? I see form 3115 is to be filed if the property has been accumulated depreciation. I am not really getting information for a new property.. please help. Thank you
If you never depreciated the property to-date and then have a cost seg to apply, the same process is used. It's the same issue, underreported depreciation. The math is actually easier because there is no adjustment for depreciation already claimed. You will need to file Form 3115 and attach a statement to your return outlining your math. Calculate the depreciation to Dec 31 of the year you are filing. Use this number as your total depreciation per class life. Example: $1.2 million property: $1 million building and $200k land Cost seg, for example, says you have $300k of 7-year property. You bought the property 10 years ago so you know 100% of the $300k needs to be added to the current year. Let's say the remaining $700k has a 39-year class life. For easy math, let's say you bought the building exactly 10 years ago on the first day of the year. The math: $700,000/39 x 10 = $179,487. Since you never depreciated prior and want to fix the issue, you also get the $179,487 as a depreciation deduction. Do you see how I am doing this? All other rules, like passive activity rules, still apply. Hope this helps.
@@KeithTax oh wow! Thank you for your response! I will have to sit down to understand this.. I have never done this before, I have a client who wants to do this alongside qualified opportunity zones
Hey Keith - what's your thoughts on filing form 3115 for renovations PIS in 2023, where no cost segregation is being completed for the original building. i.e. they are breaking the renovation out by 5/15/27.5 lives but leaving the original building all at 27.5.@@KeithTax
@@petersuchcicki7130 You can apply cost segregation to additions without conducting a study on the original structure. The nice part is that the new addition components should be known from your receipts. Under the situation you mention Form 3115 is not needed since you are not changing the accounting method and depreciating appropriately from the get-go. All this assumes I understood your question correctly, of course.
If I already started depreciating the property in 2021, would i still be able to take advantage of the special depreciation allowance and deduct all of the 5 year and 15 year property in year 1? I was under the impression that I would have to depreciate over their respective recovery periods but others say that I still qualify for the 100% special depreciation.
Thanks for the great info. I have a residential property which was put in service in 22 with SL depreciation, for 23 want to take bonus depreciation , do I need IRS consent before I file 3115, or just file it with with 23 tax and attach the calculation? If my CPA is filing for me and the property is under LLC, who’s name goes on line one? Thanks
It might be easier to just amend the '22 return. You should even get a bit of interest on the tax savings, too. If you go the Form 3115 route, no IRS consent is needed as the change of accounting method is automatically accepted. If the property is on your personal return the LLC is disregarded, therefore, tour name goes on the top of 3115. If the LLC is a partnership or corporation, then the entity name goes on 3115.
thanks for this. I have a property i did a 1031 exchange into. so do i need to do this 3115 form I was told I have to and wondering if i need to do anything different than what you did in the video
Form 3115 is only necessary if you are changing your accounting method. Do a cost seg and apply correctly to first year property is in service and 3115 is not needed. 3115 is how you catch up back depreciation under the new method and going forward with the new method under the cost seg. As for a 1031: same rules apply. But only additional investment qualifies for a cost seg whether you did a cost seg on the replaced property or not. Math is handled the same as in this video for the amount under the cost seg study.
Oh i see thank you keith!! yeah i think it's because we forwarded the depreciation from old property to replaced property. so the new replaced property has to change rules because of the old back depreciation of the relinquished property. I think. right? @@KeithTax
@@greggmcleod7330 I'm on holiday while I answer this so after my first reply I realized I was not clear. So here is my longer, edited answer I hope is clearer. You can use the original cost seg because it is based on the purchase price. You can make the accounting change (Form 3115) anytime you want. If the cost seg was done last year and you didn't apply it to last year's tax return, you can make the change on this year's tax return. The depreciation adjustment (the extra depreciation deduction) applies to the year of the accounting method change. Passive activity rules apply unless you are a RE professional. If you were not a RE professional last year and did the cost seg but did not make the accounting method change, no worries. If you use the cost seg from a year ago to make the accounting method change this year and are a RE professional you have nonpassive losses that can be unused against other income without limit. File 3115 on the current tax return in this case. Be cautious with this. I am writing a new post with another video explaining what happens when you sell a property that had a cost seg study. The problem in short is: You depreciate at your ordinary tax rate, even if it is a low rate or even if zero. When you sell that depreciation gets recaptured. The gain on the property will all be LTCG, but the recapture is taxed at your then ordinary rate, capped at 25%. Something to consider. You don't want a deduction now at a low tax rate and pay it back at 25% later. And remember, the total gain on sale tends to bump tax brackets for that year. Hope this helps. Stay tuned for the new video on selling a property after a cost seg in the next 2-3 months.
Ivanov568, I actually did the opposite. If you already claimed the proper depreciation Form 3115 is unnecessary. A cost seg study often takes place after the property has been placed in service. You can amend prior returns if they are still in stat. However, after that you need Form 3115. That is where this video comes in. I outline how to break the cost seg numbers apart and where to adjust the return and properly file out Form 3115.
For Form 3115, you indicated that only pages 1, 2, 3 and 8 needed to be filled out. But isn't Part IV, the section that is titled: "Section 481(a) Adjustment", on page 4 ... isn't that where you actually put in the details of the *Actual* changes to the Depreciation amounts, and then the numbers here, in Section 481(a) get carried over to Form 1040 Schedule E ? I am confused why you are skipping Part IV (on Page 4) altogether ?? If you are not doing Part IV of Form 3115, then how do all the numbers of your calculations get carried over from Form 3115 to Form 1040 Schedule E ?
Form 3115 was changed slightly by the IRS since I recorded this video. The questions in Part IV do need to be answered on the current Form 3115. The most current Form 3115 was revised by the IRS in December 2022; this video was published September 2021. In another comment I outlined how you handle Part IV.
@@KeithTax Thank you for that reply, Keith ! You said: "In another comment I outlined how you handle Part IV" ... which comment exactly ? I looked thru all of the comments, and I cannot find a comment thread that talks about how to handle Part IV ? Thanks !
@@HungCLieu Sorry about that. It was on the blog where I responded. Here is the conversation from the blog: Keith, Thank you! You have done a great service by providing step by step guidance for a complex matter. In completing my 2022 Form 3115, I noticed a Part IV that wasn’t included in your example above as it may have been an earlier year. Do I need to complete this section and, if so, it asks for a summary of the computation. Any clarification would be greatly appreciated. Regards, Paul Reply author-avatar Keith Taxguy, EA February 20, 2023 at 04:06 PM Paul, Part IV is required. Line 25 should be marked Yes. Line 26 is the amount of additional accumulated depreciation you will take in the current year for the cost segregation study. Line 27 is dependent on any prior §481(a) adjustments (I suspect most taxpayers will have not anything here, but verify because there might be other §481(a) adjustments to consider.) Line 28 is Yes. Check the de minimis election if under $50,000 and the eligible acquisition transaction election for larger amounts. Line 29 is taxpayer specific. The accounting required is the same calculations illustrated in the text and in the video. All the IRS wants is an attachment showing how you arrived at your numbers.
Of course! It is much easier to apply the cost seg on a tax return the first year. No Form 3115 necessary and no math to prorate accumulated depreciation between class life. A cost seg is easily applied on the tax return if done the first year. Just use the cost to list each class life for the property and you are good to go.
@@KeithTax Ok one more question just to be clear. Instead of listing the property as a whole, I would separate it on the 8582 as listed on the analysis provided by the engineer. IE: plumbing $40,595 at 27.5, etc. and have the system calculate the depreciation that way? And for each item on the analysis do one form 8582??
There was a real need for a detailed handling of a cost segregation study. Since I deal with this often in my practice I felt I could add a useful tutorial. Thanks for watching. Glad it helped.
Depends on the software. Some software has a pulldown menu for creating and attaching the supplemental information. If not available, it must be done manually.
Keith, Quick question - property was place in service 2018 and did cost segregation in 2022. Can we take bonus deprecation for 5 year and 15 years property all in 2022?
@@KeithTax Thank you for your quick response. I will need to attach 3115 and override 5 and 15 years property current deprecation amount in tax software in order to claim 100 % bonus deprecation in current year (2022). Is that correct? As my software will not let me take bonus deprecation as the property was place in service in 2018 and not in 2022.
@@ruhishah5795 You will need to override the depreciation the software calculates. Be sure to attach the 3115 and your calculations for determining the correct depreciation under the cost seg.
You don't attach the pages that are informational. Only the couple pages with the breakdown, the cost segregation of the improvements, get attached to the tax return and sent to the IRS. It usually less than 5 pages.
If the cost seg is the only reason for Form 3115 you only need one per return per year. You will need to attach the cost seg study to the return along with your calculation. This report is where the IRS can see the apportionment between properties.
Question: So, for Form 3115, as of the latest revision (late 2022 ?), just pages 1, 2, 3, 4 and 8 need to be completed, correct ? Are there any other pages that need to be dealt with ? (for just doing a Cost Segregation and adjusting the 1st-year deduction)
There is more art than science on some of these codes. I've seen both 7 and 8 used and some accountants use both. I have a former employee who is now an IRS auditor (she only handles S-corporations). I asked her what the IRS expects. She said 8. However, some tax professionals disagree and use 7 or 7 and 8. I have used 8 for a long time without any issues.
Can the taxpayer still take bonus deprecation or section 179 if cost segregation is not taken in the first year of service and therefore have all segregated items fully deprecated? Or this is not permitted since first year has been passed?
S. Liu, first, if the cost seg is on a rental property §179 is not allowed. If it is business property it is. However, if you use §179 for business property and business use drops below 50% there are recapture issues. Bonus depreciation and the de minimis rules (elect to deduct any expense $2,500 or less) has made a big difference for rental properties. Also keep in mind a building you rent to your business is still a rental property. You can elect out of bonus depreciation by asset class. Section 179 allows more fine tuning. I think you are asking what you do if you have a cost seg on a building you owned for a while. The solution is simple. You file Form 3115 (Change of Accounting Method) and take all the depreciation you should have, including bonus depreciation, all on the current year. If §179 is available, you can use that depreciation as part of the change in accounting method as well. Also remember, current tax rules apply. If you use Form 3115 with a cost seg for 2022 you follow 2022 tax rules, not the rules from prior years.
@@KeithTax Thanks so much for replying to my questions! Taxpayer owns the commercial property and use it as business office within the same business( so no self-rental here).And 2022 is the second year of deprecation. So if the taxpayer wants to do cost segregation this year, we can file 3115 and claim bonus deprecation (even though we are in second year of service in 2022) and have all 5 year properties depreciated in 2022?
You have a choice. You can amend the one year and go forward or use the Change of Accounting Method for the current year and avoid the amend. Caution: The amend might generate some interest income. Double check to see which method gives the best results.
@@KeithTax I will definitely prefer filing 3115. Do we have to explain or put a description on 3115 that we would have choose bonus depreciation so all 5 years assets would be fully depreciated even though we are only in year 2 of service life?
Im trying to get this done on turbo tax with the help of a turbo tax professional. Ive had mixed responses from turbo tax professionals. Can I get this done on Turbo Tax? If not can you steer me in the right direction?
JGA, the TT software can handle a cost segregation study. The heavy lifting is done outside the software. The data entry is the easy part. Many tax professionals struggle with cost segregation studies (they are my largest readership/viewership). TT professionals are tax professionals looking for side work which means they are not always the most seasoned. The video and the linked blog post take you through the process step by step. I know it is late in the game, but for one year you need a tax pro to set this up correctly. You can then copy the depreciation schedule into TT next year. Here is a list of tax pros on my blog. I do not know how busy they are, but suspect they are up to their eyebrows so close to the finish line. www.wealthyaccountant.com/tax-professional-near-me/
Thanks for the video. A clarification point for my understanding - I thought the 481a adjustment (i.e., the catch-up amount) was reported as Other expense on Schedule E (line 19), and not the Depreciation row (line 18).
That is correct, Jon. I recorded this video shortly before they updated Form 3115. I did update the written material on the blog , but videos are harder to edit.
To clarify, the IRS did state 481a adjustments go on the other income line stating it is 482a. Originally the IRS was unclear so I took the approach I did. However, your attachment to the return with the depreciation breakdown will also clarify the adjustment.
thanks again, couple questions:
1- i completed the form 3115, i was told you must file 481a also, is that form is just all the calculation that you performed i will attach?
2- when i file my taxes i just attach 3115 and all the calculation and also must send a second copy of signed 3115 to a second location?
You are correct in thinking you need to attach a statement outlining your math. Include a copy of the cost seg and your 481(a) adjustments.
Since this is an automatic change you just attach to your timely filed original return. No need to send a copy to DC.
thank you so much for all your help, wish you a great holiday season
Just read your blog; thank you for producing such detailed content!
Question regarding Form 3115, Section E, Question 7g) where it asks about whether any "Special Depreciation Allowance" is being claimed ... My question is: If I AM taking the "Bonus Depreciation", I AM taking the "special depreciation allowance", am I not ? Or, in other words, is the "special depreciation allowance" in this Question 7g) refers to the "Bonus Depreciation", or is it referring to something else ? Thanks in advance for any kind of commenting on this question !
Part III, Section E, Q 7(g) is telling you that an explanation needs to be attached to the return if you are electing out of Bonus Depreciation, same as you would on a return electing out where no 3115 is involved.
@@KeithTax Ah, so if I am NOT electing OUT of Bonus Depreciation (i.e., I am doing Bonus Depreciation), then I do NOT need to attach any explanation for this question. Is that what you are saying ?
This is great, very helpful thank you. The only 2 forms that are used is 3115 and Schedule E?
Thank you for your time in preparing this. I know it's been a couple of years since it was done, but this just what I needed, especially the DCN.
FYI - it should be DCN 7.
How much does CPA charge for filing form 3115?
Carrie, it depends on the CPA. Every firm sets their own fees.
Several factors also come into play when when the fee is determined. The number of calculations play a role, for example.
I recommend you do your due diligence. Make sure the CPA is familiar with Form 3115. Form 3115 has multiple uses so verify the CPA can handle your situation as it will be reported on the form. Inquire about fees.
Is a Cost segregation study/report something a cost segregation specialist provides or are you estimating how the $400k should be broken down between building, land, 5,7, and 15 year property? Hope you can help! Thanks!
The video and companion blog post use estimates that are similar to what I see in my office. I the real world you get your "real" numbers from the cost segregation report.
Thanks @KeithTax ! So if we sold the property in the prior year (the year we're filing the 3115 for) would we use DCN code 107?
That is the DCN I would use.
Thank you so much!!!! I've searched around for this and it;s been hard to find someone taking the time to walk through it. I wish I would've been able to hire you earlier than near the deadline of my extension- though I am a small business and many CPAs who know how to do this only work with big business.
Does part IV Section 481(a) adjustment line 25 need to be answered? if so, Yes or No?
Part IV is required. Line 25 should be marked Yes. Line 26 is the amount of additional accumulated depreciation you will take in the current year for the cost segregation study. Line 27 is dependent on any prior §481(a) adjustments (I suspect most taxpayers will have not anything here, but verify because there might be other §481(a) adjustments to consider.) Line 28 is Yes. Check the de minimis election if under $50,000 and the eligible acquisition transaction election for larger amounts. Line 29 is taxpayer specific.
The accounting required is the same calculations illustrated in the text and in the video. All the IRS wants is an attachment showing how you arrived at your numbers.
@@KeithTax, part IV line 25 "Does published guidance require the applicant (or permit the applicant and the applicant is electing) to implement
the requested change in method of accounting on a cut-off basis? ". . . . . . . . . . . . . . . . If “Yes,” attach an explanation and do not complete lines 26, 27, 28, and 29 below.
---Here is my question, based on line 25, if answer with yes, then attach an explanation without answer line 26 to line 29. Please verify it. Thanks;)
@@carrie4579 These kinds of questions require due diligence on the part of the tax professional. Facts and circumstance prevail. I don't know the details of your case. And I don't want to be guilty of Prescription before Diagnosis is Malpractice.
You will need to consult a tax professional experienced in filling out and filing Form 3115.
thank you for the update. Could you read line 25 on the form? It clearly states itself, if answer yes, then do not fill in anything on lines 26-29.
This was awesome! Thank you!
taxpayer missed depreciation in the past. How to answer Part II line 7a? "Does audit protection apply to the applicant’s requested change in method of accounting? See instructions . .
If “No,” attach an explanation.If “Yes,” check the applicable box and attach the required statement, 1. Not under exam.
These kinds of questions require due diligence on the part of the tax professional. Facts and circumstance prevail. I don't know the details of your case. And I don't want to be guilty of Prescription before Diagnosis is Malpractice.
You will need to consult a tax professional experienced in filling out and filing Form 3115.
It should be DCN 7 not 8 unless the taxpayer elected out of bonus depreciation the year the original asset was placed into service. There are many references for this, but I like the "Cost Segregation Audit Technique Guide" document. See the section titled "Method of Accounting Issues Related to Bonus Depreciation".
I filmed this video before the IRS clarified. You are correct that the DCN should be 7 for most taxpayers. I did make the update in the blog post some time ago, but not everyone goes to the blog.
Is there a reason why the depreciation method for the 15 year property is 150% db/hy instead of SL/HY? I thought that SL should be used for residental rental
Only 27.5 or 39-year property are §1250. 15-year property is §1245 and therefor covered under MACRS (DD/HY). You can elect to use SL/MM (but why?), and for special situations ie. AMT.
Thanks for the prompt response! I wasn't sure if SL was required or there was an option to use either or. Thanks again for the knowledge.@@KeithTax
I have multiple properties that I need to adjust the prior depreciation for (Due to Cost Segregation, and do Form 3115). Previously, there was a question posted asking about this issue, and your response was: ... If the cost seg is the only reason for Form 3115 you only need one per return per year ... OK, But, filing one Form 3115, how do I account for the different sets of changes to Depreciation per each properties, due to multiple Cost Segregation studies ? i.e., within ONE Form 3115, how do I, partition out such that for Property A, it's like this, and for Property B, it's like this, etc ??? ... Thanks very much for any kind of reply !
You need to attach a schedule of changes as outlined in the video. Each property is an added statement to the 3115. One 3115 with multiple attachments for multiple costs segs. The numbers from each attachment should coincide with the changes for each property on the tax return.
This is great! Much needed information. Thanks so much Keith!
Hello Keith, Would you be kind to provide some guidance regarding Question 14, on Page 3 (Section II) of Form 3115 ? For a Cost Segregation, how should 14 b) and 14 c) be properly described ? 14 b) asks: "The applicant's present method for the item(s) being changed." and 14 c) asks: "The applicant's proposed method for the item(s) being changed." So, for a Cost Segregation, we are still using the same method of depreciation, i.e., Section 168 SL, MM, but we are separating out the assets that qualify for Bonus Depreciation from the ones that depreciate over 27.5 years (for Residential Rental) ... So, how should that be described in terms of .. What is the present method ? and What is the proposed method ? Any suggestions would be greatly appreciated ! Thanks
Hi, thanks for this video:
I’m kind of confused, how do I report cost segregation for a property that has not been previously depreciated?
I see form 3115 is to be filed if the property has been accumulated depreciation.
I am not really getting information for a new property.. please help. Thank you
If you never depreciated the property to-date and then have a cost seg to apply, the same process is used. It's the same issue, underreported depreciation. The math is actually easier because there is no adjustment for depreciation already claimed.
You will need to file Form 3115 and attach a statement to your return outlining your math. Calculate the depreciation to Dec 31 of the year you are filing. Use this number as your total depreciation per class life.
Example: $1.2 million property: $1 million building and $200k land
Cost seg, for example, says you have $300k of 7-year property. You bought the property 10 years ago so you know 100% of the $300k needs to be added to the current year.
Let's say the remaining $700k has a 39-year class life. For easy math, let's say you bought the building exactly 10 years ago on the first day of the year. The math: $700,000/39 x 10 = $179,487. Since you never depreciated prior and want to fix the issue, you also get the $179,487 as a depreciation deduction.
Do you see how I am doing this?
All other rules, like passive activity rules, still apply.
Hope this helps.
@@KeithTax oh wow!
Thank you for your response! I will have to sit down to understand this..
I have never done this before, I have a client who wants to do this alongside qualified opportunity zones
Hey Keith - what's your thoughts on filing form 3115 for renovations PIS in 2023, where no cost segregation is being completed for the original building. i.e. they are breaking the renovation out by 5/15/27.5 lives but leaving the original building all at 27.5.@@KeithTax
@@petersuchcicki7130 You can apply cost segregation to additions without conducting a study on the original structure. The nice part is that the new addition components should be known from your receipts.
Under the situation you mention Form 3115 is not needed since you are not changing the accounting method and depreciating appropriately from the get-go.
All this assumes I understood your question correctly, of course.
If I already started depreciating the property in 2021, would i still be able to take advantage of the special depreciation allowance and deduct all of the 5 year and 15 year property in year 1? I was under the impression that I would have to depreciate over their respective recovery periods but others say that I still qualify for the 100% special depreciation.
Bonus depreciation still applies.
Thanks for the great info.
I have a residential property which was put in service in 22 with SL depreciation, for 23 want to take bonus depreciation , do I need IRS consent before I file 3115, or just file it with with 23 tax and attach the calculation?
If my CPA is filing for me and the property is under LLC, who’s name goes on line one? Thanks
It might be easier to just amend the '22 return. You should even get a bit of interest on the tax savings, too.
If you go the Form 3115 route, no IRS consent is needed as the change of accounting method is automatically accepted.
If the property is on your personal return the LLC is disregarded, therefore, tour name goes on the top of 3115. If the LLC is a partnership or corporation, then the entity name goes on 3115.
@@KeithTax thank you very much for a quick response, wish you great holiday.
Great Video! very informative. at 11:19, the 250.65 * 6 = 1503, not 2502. 🙂 everything else was great!
thanks for this. I have a property i did a 1031 exchange into. so do i need to do this 3115 form I was told I have to and wondering if i need to do anything different than what you did in the video
Form 3115 is only necessary if you are changing your accounting method. Do a cost seg and apply correctly to first year property is in service and 3115 is not needed. 3115 is how you catch up back depreciation under the new method and going forward with the new method under the cost seg.
As for a 1031: same rules apply. But only additional investment qualifies for a cost seg whether you did a cost seg on the replaced property or not. Math is handled the same as in this video for the amount under the cost seg study.
Oh i see thank you keith!! yeah i think it's because we forwarded the depreciation from old property to replaced property. so the new replaced property has to change rules because of the old back depreciation of the relinquished property. I think. right? @@KeithTax
Good night. Would you be available for a 10-minute call tomorrow Eastern standard time (NY)?
No.
Understand. Question. If you become a real estate professional 1 year after cost seg study must you file Form 3115 on the subsequent tax return?
@@greggmcleod7330 I'm on holiday while I answer this so after my first reply I realized I was not clear. So here is my longer, edited answer I hope is clearer.
You can use the original cost seg because it is based on the purchase price. You can make the accounting change (Form 3115) anytime you want. If the cost seg was done last year and you didn't apply it to last year's tax return, you can make the change on this year's tax return.
The depreciation adjustment (the extra depreciation deduction) applies to the year of the accounting method change. Passive activity rules apply unless you are a RE professional. If you were not a RE professional last year and did the cost seg but did not make the accounting method change, no worries. If you use the cost seg from a year ago to make the accounting method change this year and are a RE professional you have nonpassive losses that can be unused against other income without limit. File 3115 on the current tax return in this case.
Be cautious with this. I am writing a new post with another video explaining what happens when you sell a property that had a cost seg study. The problem in short is: You depreciate at your ordinary tax rate, even if it is a low rate or even if zero. When you sell that depreciation gets recaptured. The gain on the property will all be LTCG, but the recapture is taxed at your then ordinary rate, capped at 25%. Something to consider. You don't want a deduction now at a low tax rate and pay it back at 25% later. And remember, the total gain on sale tends to bump tax brackets for that year.
Hope this helps. Stay tuned for the new video on selling a property after a cost seg in the next 2-3 months.
Thank you. I really appreciate it!
Its not hard, what he did not mention is the majority of this video applies to people who have already claimed depreciation on a property
Ivanov568, I actually did the opposite. If you already claimed the proper depreciation Form 3115 is unnecessary.
A cost seg study often takes place after the property has been placed in service. You can amend prior returns if they are still in stat. However, after that you need Form 3115. That is where this video comes in. I outline how to break the cost seg numbers apart and where to adjust the return and properly file out Form 3115.
For Form 3115, you indicated that only pages 1, 2, 3 and 8 needed to be filled out. But isn't Part IV, the section that is titled: "Section 481(a) Adjustment", on page 4 ... isn't that where you actually put in the details of the *Actual* changes to the Depreciation amounts, and then the numbers here, in Section 481(a) get carried over to Form 1040 Schedule E ? I am confused why you are skipping Part IV (on Page 4) altogether ?? If you are not doing Part IV of Form 3115, then how do all the numbers of your calculations get carried over from Form 3115 to Form 1040 Schedule E ?
Form 3115 was changed slightly by the IRS since I recorded this video. The questions in Part IV do need to be answered on the current Form 3115.
The most current Form 3115 was revised by the IRS in December 2022; this video was published September 2021. In another comment I outlined how you handle Part IV.
@@KeithTax Thank you for that reply, Keith ! You said: "In another comment I outlined how you handle Part IV" ... which comment exactly ? I looked thru all of the comments, and I cannot find a comment thread that talks about how to handle Part IV ? Thanks !
@@HungCLieu Sorry about that. It was on the blog where I responded. Here is the conversation from the blog:
Keith,
Thank you! You have done a great service by providing step by step guidance for a complex matter. In completing my 2022 Form 3115, I noticed a Part IV that wasn’t included in your example above as it may have been an earlier year. Do I need to complete this section and, if so, it asks for a summary of the computation. Any clarification would be greatly appreciated.
Regards,
Paul
Reply
author-avatar
Keith Taxguy, EA
February 20, 2023 at 04:06 PM
Paul, Part IV is required. Line 25 should be marked Yes. Line 26 is the amount of additional accumulated depreciation you will take in the current year for the cost segregation study. Line 27 is dependent on any prior §481(a) adjustments (I suspect most taxpayers will have not anything here, but verify because there might be other §481(a) adjustments to consider.) Line 28 is Yes. Check the de minimis election if under $50,000 and the eligible acquisition transaction election for larger amounts. Line 29 is taxpayer specific.
The accounting required is the same calculations illustrated in the text and in the video. All the IRS wants is an attachment showing how you arrived at your numbers.
@@KeithTax OK. Thank you.
Hi Keith, can cost seg. be taken on the first year of placing the rental on the market?
Of course! It is much easier to apply the cost seg on a tax return the first year. No Form 3115 necessary and no math to prorate accumulated depreciation between class life.
A cost seg is easily applied on the tax return if done the first year. Just use the cost to list each class life for the property and you are good to go.
@@KeithTax Ok one more question just to be clear. Instead of listing the property as a whole, I would separate it on the 8582 as listed on the analysis provided by the engineer. IE: plumbing $40,595 at 27.5, etc. and have the system calculate the depreciation that way? And for each item on the analysis do one form 8582??
you are a Saint brother! May God bring you many blessings! thank you so much for sharing this
Thank you so much! Absolute life saver
There was a real need for a detailed handling of a cost segregation study. Since I deal with this often in my practice I felt I could add a useful tutorial.
Thanks for watching. Glad it helped.
Where do you find the "Supplemental Information" form?
Depends on the software. Some software has a pulldown menu for creating and attaching the supplemental information. If not available, it must be done manually.
Keith, Quick question - property was place in service 2018 and did cost segregation in 2022. Can we take bonus deprecation for 5 year and 15 years property all in 2022?
You can take bonus depreciation. Bonus was 100% in 2018 so that is what you use.
@@KeithTax Thank you for your quick response. I will need to attach 3115 and override 5 and 15 years property current deprecation amount in tax software in order to claim 100 % bonus deprecation in current year (2022). Is that correct? As my software will not let me take bonus deprecation as the property was place in service in 2018 and not in 2022.
@@ruhishah5795 You will need to override the depreciation the software calculates. Be sure to attach the 3115 and your calculations for determining the correct depreciation under the cost seg.
GREAT VIDEO, DO YOU SEND ALL THE PAGES FROM THE STUDY TO IRS OR JUST THE FRONT PAGES ? THANKS
You don't attach the pages that are informational. Only the couple pages with the breakdown, the cost segregation of the improvements, get attached to the tax return and sent to the IRS. It usually less than 5 pages.
Do I need to fill out a Form 3115 for each property? For example, I have multiple rental homes I need to change the accounting method on.
If the cost seg is the only reason for Form 3115 you only need one per return per year. You will need to attach the cost seg study to the return along with your calculation. This report is where the IRS can see the apportionment between properties.
Question: So, for Form 3115, as of the latest revision (late 2022 ?), just pages 1, 2, 3, 4 and 8 need to be completed, correct ? Are there any other pages that need to be dealt with ? (for just doing a Cost Segregation and adjusting the 1st-year deduction)
Hello, thank you for the video. Are you available for consultation? I have very specific questions and I believe it should be quick. Thank you.
Appreciate the content! Why is this filed as a DCN #8? I would have expected a DCN #7 because the 27.5 SL is impermissible for 5 and 15 yr property.
There is more art than science on some of these codes. I've seen both 7 and 8 used and some accountants use both.
I have a former employee who is now an IRS auditor (she only handles S-corporations). I asked her what the IRS expects. She said 8.
However, some tax professionals disagree and use 7 or 7 and 8. I have used 8 for a long time without any issues.
@@KeithTax That's good to know, thank you for the info!
Thank you!
As a Cost Segregation Specialist would rather not venture into completing a Form 3115 for my Clients. Anyone willing to do so for us? Thx
Can the taxpayer still take bonus deprecation or section 179 if cost segregation is not taken in the first year of service and therefore have all segregated items fully deprecated? Or this is not permitted since first year has been passed?
S. Liu, first, if the cost seg is on a rental property §179 is not allowed. If it is business property it is.
However, if you use §179 for business property and business use drops below 50% there are recapture issues.
Bonus depreciation and the de minimis rules (elect to deduct any expense $2,500 or less) has made a big difference for rental properties. Also keep in mind a building you rent to your business is still a rental property.
You can elect out of bonus depreciation by asset class. Section 179 allows more fine tuning.
I think you are asking what you do if you have a cost seg on a building you owned for a while. The solution is simple. You file Form 3115 (Change of Accounting Method) and take all the depreciation you should have, including bonus depreciation, all on the current year. If §179 is available, you can use that depreciation as part of the change in accounting method as well.
Also remember, current tax rules apply. If you use Form 3115 with a cost seg for 2022 you follow 2022 tax rules, not the rules from prior years.
@@KeithTax Thanks so much for replying to my questions! Taxpayer owns the commercial property and use it as business office within the same business( so no self-rental here).And 2022 is the second year of deprecation. So if the taxpayer wants to do cost segregation this year, we can file 3115 and claim bonus deprecation (even though we are in second year of service in 2022) and have all 5 year properties depreciated in 2022?
You have a choice. You can amend the one year and go forward or use the Change of Accounting Method for the current year and avoid the amend. Caution: The amend might generate some interest income. Double check to see which method gives the best results.
@@KeithTax I will definitely prefer filing 3115. Do we have to explain or put a description on 3115 that we would have choose bonus depreciation so all 5 years assets would be fully depreciated even though we are only in year 2 of service life?
@@syinbaby The explanation is listed on Line 1. You use DCN 7 or 8. I prefer 8. No deeper explanation is necessary.
Im trying to get this done on turbo tax with the help of a turbo tax professional. Ive had mixed responses from turbo tax professionals. Can I get this done on Turbo Tax? If not can you steer me in the right direction?
JGA, the TT software can handle a cost segregation study. The heavy lifting is done outside the software. The data entry is the easy part.
Many tax professionals struggle with cost segregation studies (they are my largest readership/viewership). TT professionals are tax professionals looking for side work which means they are not always the most seasoned.
The video and the linked blog post take you through the process step by step. I know it is late in the game, but for one year you need a tax pro to set this up correctly. You can then copy the depreciation schedule into TT next year.
Here is a list of tax pros on my blog. I do not know how busy they are, but suspect they are up to their eyebrows so close to the finish line.
www.wealthyaccountant.com/tax-professional-near-me/
Great video