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Form 8825 CPA comments on Rental Property 2012 Tax Court Case | Rental Property Depreciation

I’m a Form 8825 CPA with a virtual office to accommodate my long distance rental property clients. Discussion of this case appeared in the Journal of Accountancy, July 2012.

A Partnership bought a $10.25 Million housing complex. They should have depreciated the rental property over 27.5 years: ($10.25 Million / 27.5) = $372,727 per year. Instead they listed more than 1,000 building components and depreciated them over 5 and 15 years. So their Form 8825 showed over $1 Million of depreciation per year before the IRS challenged it. The IRS also thought the Partnership was depreciating items it didn’t own.

The Partnership tried to separate 12 categories of assets for its special depreciation claims:

  • Site preparation.
  • Water distribution.
  • Sewer.
  • Gas line.
  • Electric.
  • HVAC.
  • Carpentry.
  • etcetera

The IRS and tax court found the majority of the thousand or so depreciated items were structural components of the building and had to be depreciated over 27.5 years.

Why does a Form 8825 CPA follow tax court cases on Rental Property? Well, my extended family owns rental property. It pays to stay current on Form 8825 issues. While this tax court case merely affirmed well established basic depreciation rules, some court cases foreshadow changes in the tax code. Remember, if your neighbor uses a gray area in the tax code, it’s a loophole. If you use it, it’s tax reform.

I’m a rental property CPA that prepares Form 8825, Schedule E, Form 1120-S, Form 1065 and Form 1120. There are dozens of rental property postings on this site. For a free phone consult, please call (910) 399-2705.

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