Knowledge Base

15007: 1040 - Note 135

1040 Individual

Why am I receiving note 135 on this 1040 return? 

Note 135 states:

CHECK OWNERSHIP PERCENTAGE FIGURES FOR RENTAL. A Schedule E contains an ownership percentage by which the program multiplies the revenues and expenses for Schedule E. If any depreciable items on Form 4562 relate to this rental property, enter the items with the pro-rated cost correlating to the ownership percentage. For example, a 1/3 ownership in a $300,000 triplex would be entered with a cost of $100,000.

This note generates when there is an ownership percentage entered for Schedule E, Supplemental Income and Loss. It warns preparers to review data entry on screen 4562, Depreciation Detail. The business use percentage on the 4562 is not the same as ownership percentage on the Schedule E. If you want to allocate 50% of the ownership to each individual, you will need to pro-rate (or divide) the depreciation and the sale of the asset between the two owners. Then enter only the portion owned by this taxpayer on the 4562 screen. If the asset has been sold, the IF SOLD section should be completed showing the sale of the asset. If the preparer uses the Business % use field on the 4562 screen in an attempt to allocate the ownership percentage, it will cause the program to think that the asset was partially used for personal rather than business use and take the personal portion of the sale to Form 8949 and Schedule D.*  The ownership percentage is dealt with by pro-rating the amounts and manually entering them on the 4562 screen for each individual involved. 

​*This applies to 2016 and prior years only.  In 2017 we have included a checkbox under the IF SOLD section for Do not carry personal portion to 8949. This will prevent the personal portion from carrying to the 8949 and Schedule D.

In this example, a building originally cost $200,000 and each owner has a 50% interest. Each owner would be allocated $100,000 of the cost. On the taxpayer's 4562 for this asset, the Cost / Basis would be entered as $100,000 with nothing entered in the Business % use box since all of the building that the taxpayer owned was used for the business, even though they only owned half of the building. This allows the taxpayer to take depreciation on their portion of the asset without indicating that any part of the building was used for personal use. When sold, if the sale price is $400,000, each owner would be allocated $200,000 of the sale price. In the If sold section of the individual 4562, a Sales Price of $200,000 would be entered so that only the amount related to that taxpayer is recorded and reported on the return. (If there are odd amounts involved, there may be rounding issues.)

Note: The sale of the asset can also be entered on the 4797 screen, properly allocated between all owners. To enter a sale in this manner, on the 4562 screen, enter Date Sold to stop depreciation at the point of sale, but leave Business % use blank (default is 100%). Then complete the 4797 screen as applicable. 

If there were income and expenses from the rental of an asset recorded on the 4562 screen, those are entered on the E screen, Rent and Royalties. Make sure to choose E in the FOR box and enter a MFC at the top of each 4562 that relates to the rental property. On the Schedule E screen, on the the Property Info / Income tab, the preparer would type the Ownership percent (such as 50 for 50%). Note: the ownership percentage box may also be used to enter a tenancy in common (TIC) situation.

The total rental income is entered on line 3. The preparer may use the Expenses 5-19 tab to enter the total expenses, such as advertising, repairs, taxes, utilities, etc. The software will prorate the income and expenses based on the ownership percentage entered so manual calculations are not required. 

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