A quick list of clues that might be noticed when reviewing a landlord’s tax return that might indicate a depreciation error or multiple errors. These don’t all necessarily mean that there is an error, but that there may be an error.

1. No depreciation done.
2. Depreciation basis of the rental property equals the buy price.
3. Depreciation basis of the rental property equals the initial mortgage balance.
4. Depreciation basis of the rental property equals the total number on the closing disclosure or ALTA statement. Meaning that loan costs
and/or other costs that don’t get added to basis, were added to basis.
5. No land basis present on the depreciation schedule.
6. From the depreciation schedule, if land value plus initial depreciation basis equals the buy price.
7. No de minimis election.
8. High repair costs, but no items added to the depreciation schedule. Particularly if this happens for multiple years.
9. Depreciation basis, plus land basis is way lower than purchase price. Even a little lower might be a red flag. This can legitimately
happen, but not common now. For a converted property (primary to rental) the depreciation basis should be the lower of adjusted basis or
Fair Market Value at time of conversion. One example: If the property was bought before the great recession and put into service during
the great recession, then the FMV may have been substantially lower than the purchase price.
10. Nice even numbers. Even without seeing the purchase price, if we see something like $180,000 for depreciation basis and $20,000 for
land basis, it is almost certain that basis was determined incorrectly.
11. If land basis is exactly 20% or 15% of the total land basis and building depreciation basis combined. There is no IRS approved or tax
code approved or court approved universal thumb rule for allocating basis to land. This is typically an indicator of lazy, incorrect,
or ignorant tax preparation. Often a combination of the three.

Disclaimer: This is a list of red flags that there might be a depreciation error and it is not 100% complete and most of the focus is on the building depreciation.