Depreciation of property used in business with no rents rcvd

Technical topics regarding tax preparation.
#1
Noobie  
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I have a client who purchased a commercial condo unit in an LLC to rent to their S Corp business. Well, somehow they never charged themselves rent as far as I have seen. And if they have, they never reported this rental on a Sch E before the current year. In the current year, they did charge a tenant a couple thousand in rent.

Well, skip forward 9.3 years from the purchase, and they sell the commercial condo unit to purchase a larger one. When selling the condo, it has become a rental in current year whether or not facts prove it as a rental in prior years. The property is put on the depreciation schedule with an in service date of 2007, so we get 43k in depreciation. Well, that kicks off a need to fill out a 3115 to change the method of accounting for the depreciation from an impermissible method to a permissible method in the year of disposal, so 107 is the code we are doing it under

What I want to make sure of is that this is the correct thing to do.

They have a loss on the sale of the bldg, even after the depreciation. So, not worried about depreciation recapture.

When you sell the bldg, you must deduct from basis depreciation allowed or allowable.

I argue that the 43k of non deducted depreciation was allowable, since the bldg was used in a business for the entire time since it was purchased in 2007.

Thank you for the help.
 

#2
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Noobie wrote:I argue that the 43k of non deducted depreciation was allowable, since the bldg was used in a business for the entire time since it was purchased in 2007.


From what you've shared, this is not an argument, but stating facts.
~Captcook
 

#3
Noobie  
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I just wanted to see if other people agreed with me.

Thank you.
 

#4
BTJig  
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Did the tenant pay expenses related to the building owned by the LLC? Are they in Florida? Can you see where I am going?

To your point, the NATP put out a white paper statement on exactly your issue, it appears to support your conclusions.

https://www.natptax.com/TaxKnowledgeCen ... iation.pdf
 

#5
Noobie  
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Is there any problem with them not "treating it as a rental"? They did not file Schedule E. They did not charge themselves rent.
 


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