Attorney overrides my draft return with a turbo tax draft

Technical topics regarding tax preparation.
#1
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My client sold a house and the basis is very complicated. It includes a couple of step ups and rental activity.

I agreed to provide a draft to my client's attorney (I'm billing for the time accordingly and it's a good client, with a great attitude, so I don't mind).

The attorney was very helpful in providing a workbook with a timeline of events for me to calculate basis.

But when I submitted my draft tax return to them, he came back with a tax return, that he did on turbo tax, with no 4797 and seemingly no adjustments or inclusion of allowable depreciation.

Before I respond and make a fool of myself, I want to make sure that we need a 4797.

The 121 exclusion applies, but the property was clearly held out for rent for many, many years, though the owner also lived in part of the property for the entire period.

You can't just throw it on a D, correct? 4797 is needed here?
 

#2
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It sounds like the attorney is ignoring the business use portion of the asset sale here.
It might be easier to ask the attorney if they are aware of the depreciation recapture, before making a big deal of anything.
I would think a 4797 is necessary, personally.
 

#3
Nilodop  
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Maybe lawyer is saying the rental is not a trade or business so goes on 8949, all cap gain, though some at higher rate, as in section 1(h)(1)(E).
 

#4
Joan TB  
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Look at IRS Pub 523. It has some good calculations and workpapers about calculating the exclusion and gain for mixed use residence. It discusses circumstances when you can "ignore" the rental, which may or may not apply to your TP.
 

#5
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You essentially have two buckets of assets. One bucket is personal. One bucket is investment or T/B.

Allocate or apportion gross sales proceeds and selling expenses between the two. You should already be tracking basis between the two.

The Sec 121 exclusion applies to the first bucket. The second bucket is taxable and should show up on the 4797 or 8949, and some of the LTCG should be recategorized as 1250 gain. "Allowed or allowable".
 

#6
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ManVsTax wrote:You essentially have two buckets of assets. One bucket is personal. One bucket is investment or T/B.

Allocate or apportion gross sales proceeds and selling expenses between the two. You should already be tracking basis between the two.

The Sec 121 exclusion applies to the first bucket. The second bucket is taxable and should show up on the 4797 or 8949, and some of the LTCG should be recategorized as 1250 gain. "Allowed or allowable".


Yes, this is what I did. My software even shows the applicable 121 exclusion on the 4797, and it does not exclude the 1231 gains.

Thanks, I'll be super patient and professional about it. I won't be like, "well you do his taxes then," etc.

As suggested, I'll start with asking him if he is familiar with 1231 gains and that a rental is considered trade/business, etc. Maybe I'll send him a couple of links to read.
 

#7
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ManVsTax wrote:You essentially have two buckets of assets. One bucket is personal. One bucket is investment or T/B.

Don't we need to determine if the rental is within the living area? If so, then we do not need to separate the rental and personal (but need to capture of the depreciation allowed or allowable). The IRS says in pub 523 (https://www.irs.gov/pub/irs-pdf/p523.pdf):

Exceptions. The following situations of business or rental usage don’t affect your gain or loss calculations.

• Space within the living area. If the space you used for business or rental purposes was within the living area of the home, then your usage doesn't affect your gain or loss calculations. Examples of spaces within the living area include a rented spare bedroom and attic space used as a home office. In contrast, business or rental spaces not within the living area affect your gain/loss calculations. Examples of space not within the living area include a first-floor storefront with an attached residence; a rented apartment in a duplex; or a working farm with a farmhouse on the property.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#8
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My guess is that the return the attorney prepared has significantly less tax liability. If so, I suggest you be completely passive. Just sit back and let it happen. Your alternatives all suck.
Steve
 

#9
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For the case where you rented part of a primary residence, I believe the first step is to determine if the rental is within the living area (e.g. rented a room) or not (e.g. rented a separate apartment in a duplex).

If within the living area, no form 4797 nor separate calculation needed, except adding back the depreciation as 1250 gain (or more correctly speaking reduce the basis by the accumulated depreciation).

If not within the living area, then the primary residence and business should be computed separately as if they were two separate properties.

Let me know if you agree with the general ideas. I am perplexed that a conclusion reached to treat the rental and personal as two separate assets without determining if the rental is within the living area. Thanks!
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#10
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Assuming all depreciation was straight line and there is no recapture as ordinary, then as long as the gain attributable to depreciation is treated as nonrecaptured 1250 gain I don't think there is anything wrong with only using 8949 / Schedule D
Because on T.A. ten was the most you were allowed
 

#11
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Tenletters: thanks for your response! I would suggest the moderator to change the subject, because the topic is not whether an attorney should or should not override a accountant's draft return; I would also suggest the original poster to clarify his issue as I see depending whether the rental space is within the living area, the treatment is different. If it is within the living space, I cannot see how it can be treated as two separate assets even if you want to when the rental portion kept changing over the years. For example, the taxpayer rented one room in a year, rented two rooms in another, and so on.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#12
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puravidatpt wrote:Don't we need to determine if the rental is within the living area? If so, then we do not need to separate the rental and personal (but need to capture of the depreciation allowed or allowable).


You're right. For some reason I thought we were dealing with a duplex, but upon re-reading the thread, it's pretty vague.

It would be helpful to know exactly what transpired.
 

#13
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gatortaxguy wrote:I suggest you be completely passive. Just sit back and let it happen.


There's a general concept that we can't ignore what we know. We would also have to advise on the ramifications of filing the other tax returns if they do not reflect what actually happened. e.g. penalty, interest, potential statute of limitations expanding. Always in writing, file it away.

If one does that, most often it makes the client's choice very easy. They go with our returns.

Then there's the ethical problem. If you have explained the options available (which probably don't include the attorney's draft) to the client and the client understands them, and the client chooses the attorney's return anyway the client is more likely than not crossing his/her fingers when he/she executes the jurat and one needs to strongly consider if they're going to dismiss this client from their firm.
 

#14
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Hello.

The rental is a cottage and a fully separate standing structure.

Perhaps I also wrote the OP poorly in that I should have put more emphasis on that the attorney's draft did not include any gains (non excludable / basis adjustment) for allowable depreciation. That was my biggest beef with it.

As it turns out, after a short discussion, the attorney agreed to include 4797 and to include the allowable depreciation as a basis adjustment that increased the taxable gain, so no ethics issues, but now I'm running into an issue in that the attorney is rather "ineffective".

After asking him, he verified that we are all set and I delivered a completed return. Then he came back with several additions and changes.

Then I again asked the attorney to verify all of the changes, which he did, and I delivered a revision.

Now he has more changes again and I will have to provide another revision. It's things like legal fees for title changes and such increasing the basis.

Of course I am charging the client for each redo, but I can't really charge him "enough" and expect to keep him. It's creating a lose/lose situation.

I saw it coming.
 

#15
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Back in 1979 when I took my first college level business class the instructor said "never let an attorney do your taxes". In the years that followed, I came to understand what he meant.
Because on T.A. ten was the most you were allowed
 

#16
BTJig  
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Tenletters wrote:Assuming all depreciation was straight line and there is no recapture as ordinary, then as long as the gain attributable to depreciation is treated as nonrecaptured 1250 gain I don't think there is anything wrong with only using 8949 / Schedule D


Unless the gain would have been properly reported as a 1231 gain on the 4797, and the taxpayer had 1231 losses in the prior 5 years. 1231 gains are recaptured at ordinary rates, to the extent of the 1231 losses taken in the prior 5 years. Highly unlikely, but it comes up from time to time.
 


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