Preserving Depreciation

A problem I've run into and I think is fairly common is the preservation of depreciation information for future use.
For example:
TP rents his vacation home out for a few months per year for a couple of years but never again and then sells it 10-15 years later. There will be some unrecaptured section 1250 gain but it doesn't carry forward in the tax returns after those rental years and the chances that the TP will preserve that information or that a future preparer will know about it are nil.

How do you preserve that information, preferably so that it carries forward with future tax returns?

UT has a method to report the activity as INACTIVE for the year.
Not sure if it keeps rolling depreciation which would make a larger recapture.
I often wonder if the IRS tracks this as well for a rental property that goes out of service for a period of time before it's sold.

Drake does not have a way to preserve this information in the software and have it print out annually with the return. At least, that I'm aware of.

I would likely just save the most recent year's depreciation schedule for which the rental was active to PDF and file that as a carryforward file in the client's Caseware file. It will contain in-service dates, tax basis, and A/D of all assets used in the rental activity.

But... that's just the way I would do it and it doesn't alleviate your primary concern. However -- if the client gets a new preparer 10-15 years down the road and sells the property, I think the onus is in the new preparer to ask the right questions at that time and to reach out to you if possible.

I think the onus is in the new preparer to ask the right questions at that time and to reach out to you if possible.

That really doesn't work. I picked up a client after his long-time big box preparer dropped dead at his desk. This client had a condo he lived in and rented out sporadically over a period of 20+ years. When he sold it neither of us had any idea of prior depreciation, dates or anything related to the rental periods. He didn't even know if his preparer ever claimed depreciation.
I'd like to make it easier for the next guy.

Howard, hence the "if possible", because I understand things happen, and once in a while a sole practitioner gets hit by a bus.

But now we're discussing business continuity plans and not really documentation aren't we?

It's on the client to maintain adequate documentation over the decades, and often, merely keeping a copy of all prior as-filed tax returns is sufficient. Tell clients to go ahead and destroy the source documentation and workpapers after 7 years, but keep the returns. If the client fails to do that, then the current preparer and the client are really at the mercy of all former preparers' documentation effectiveness and continuity plans.

You can lead a horse to water...

ManVsTax, Drake added that feature a year or two ago. There is a field for "date out of service if not sold" on the 4562 screen. The asset stays as part of the file but no additional depreciation is computed. That way you have it when you need it because the asset was sold.

There are at least one or two new features every year, but not much is done to point them out. Its a little like looking for Easter eggs. You have to look around the screens and see what's different.

Drake sounds like just what is needed.
I'll add it to my list of TaxACT probably-will-be-ignored program improvement suggestions.

I think the onus is in the new preparer to ask the right questions at that time and to reach out to you if possible.

That really doesn't work. I picked up a client after his long-time big box preparer dropped dead at his desk. This client had a condo he lived in and rented out sporadically over a period of 20+ years. When he sold it neither of us had any idea of prior depreciation, dates or anything related to the rental periods. He didn't even know if his preparer ever claimed depreciation.
I'd like to make it easier for the next guy.

Guess what, neither does IRS track that linked to a property address linked to taxpayer ID to match up when a sale is reported

There is a field for "date out of service if not sold" on the 4562 screen. The asset stays as part of the file but no additional depreciation is computed. That way you have it when you need it because the asset was sold.

Hmm...it does stay as part of the preparer's Drake return file, but the asset doesn't show up on a depreciation schedule in following years as the asset is no longer part of an activity on the return. i.e. there is no depreciation schedule included in following years' returns that "rolls forward" the A/D and basis of the asset.

Am I doing something wrong or does that match your understanding/experience?

In Lacerte you can just change the asset code to 99 which is land. This keeps the asset on future depreciation schedules but doesn't accumulate any new depreciation. That's what I do in these situations.

I assume you can do the same thing in Drake or other software products.

I think most professional tax prep software have a depreciation report that shows what you need. Some accountants do NOT provide their tax clients a copy of the depreciation report, I know this from personal experience. I always provide the client a copy of the depreciation schedules. As a matter of fact when a client is disengaged for any reason, I always make sure I tell them to save the depreciation schedule for the next tax preparer, because If I have to provide another copy it will be an added charge.

They seem to get that point real good

I think most professional tax prep software have a depreciation report that shows what you need.

Except Drake, unfortunately. Again, the asset needs to be attached to an "active" activity to generate a depreciation report, at which point you can choose to include said depreciation report in the client's PDF.

Merely listing a date in the "date taken out of service if not sold" box does not continue to generate a depreciation report for tax years after the year of removal if the associated activity also ceases to exist. The asset merely continues to exist "behind the scenes" in the preparer's Drake software filing, which the client never sees and a successor preparer will most likely not receive. Thus, it wouldn't solve the problem we're discussing.

That's my analysis after trial and error. If I'm doing something wrong, I would love for someone to tell me, as continuing to keep track of and include basis and A/D year after year in a client's return PDF would be invaluable.

Some accountants do NOT provide their tax clients a copy of the depreciation report, I know this from personal experience. I always provide the client a copy of the depreciation schedules.

As do I. It's in the PDF year after year. In case I get hit by a bus, or we mutually agree to part ways, the depreciation schedules their new preparer will need are right there in last year's PDF file.

I believe there is a Depreciation Listing in the Reports Menu. Also you can go to the Fixed Assets module and print out.

True ATSMAN.

I guess this could be manually printed and combined with the return PDF each year, and that's the best solution that Drake can provide for this "issue".

Thank you for responding.

You are welcome!

I give them a hard copy or pdf whatever they prefer.

I may have found a work around.
Keep generating schedule E for the rental with 365 days personal use, 0 days rental use.
A 4562 will still be generated showing full depreciation before vacation home limits are applied, so to work around this I change the business use of the house to .00001%.
This keeps the asset on the depreciation schedule without adding further depreciation.

Question is: Is the 4562 supposed to show depreciation before vacation home limits are applied or is this a bug?

I may have found a work around.
Keep generating schedule E for the rental with 365 days personal use, 0 days rental use.
A 4562 will still be generated showing full depreciation before vacation home limits are applied, so to work around this I change the business use of the house to .00001%.
This keeps the asset on the depreciation schedule without adding further depreciation.

Question is: Is the 4562 supposed to show depreciation before vacation home limits are applied or is this a bug?

Why go through all these hassles and workarounds when the property has been taken out of service and not active as a business asset.

Just run the depreciation report and file in it your software document/return archives. You can give it to your client for use by the next accountant!

You can give it to your client for use by the next accountant!

10 years from now my client will not remember receiving the report, where it could be stored...if anywhere or get an accountant who will ask for it.
This way, it's always there and as long as I don't forget to do it each year, it takes just 3 minutes.
Helping my fellow pros.

10 years from now my client will not remember receiving the report, where it could be stored...if anywhere or get an accountant who will ask for it.

You must be a better accountant than I am because frankly I can't be concerned today, if one of my ex clients loses stuff that I told them is important after 10 years! What am I a repository for all their tax records?