Trying to determine if I should amend my taxes from 2013 and 2014 because my husband and I did not list for our rental property that we were active participants.

[Anita01]

The issue for you is not one of depreciation but rather the carryforward of passive losses.  If you were an active participant in a prior year, you could have taken a deduction for up to $25,000 of any losses, against other income, rather than carrying it forward to future years to be used when you sell the property.  This rule only comes into play if your other income is less than $150,000.  Between $100,000 and $150,000 in other income,. the $25,000 deductible amount is phased out to end up at zero .  

It is too late for you to amend 2013 and receive a refund, but not for 2014.  You can always amend, you just cannot receive a refund beyond a certain time limit.

So, the real answer is that, if your other income exceeded $150,000 in 2014, you would not benefit from an amendment.  If less than $150,000 and you had a loss in 2014 on this property, then you could still receive a refund up until 4/15/2018.  

The bigger issue then becomes any loss you're allowed in 2014 means your carryforward loss changes and you would have to amend all your returns from 2014 on to end up with a correct cumulative loss amount.  Even though changing the cumulative carryforward would not change prior years when you claimed active participant, you do need the correct cumulative number.

All this assumes you did not already sell the property and claim  cumulative loss against your income in the year of the sale.

[jtax · Accepted solution]

As long as your error was a good-faith mistake (i.e. you tried to meet your obligations but make a mistake), you are not required to amend.

However, you may want to amend in order to claim a refund or, if you owe taxes, to stop possible interest or penalties should the IRS assess additional tax.

Additionally there maybe an issue upon sale of a business/rental property wherein you are required to reduce your basis in the rental property by the deprecation that you could have taken ("allowed or allowable"). That is complicated and you should have a CPA, Enrolled Agent, or Tax Attorney assist.

In anycase, I would recommend that you redo your 2014 taxes to see if including the rental property would give you a refund. If so, then I would recommend you file. If not, you can seek additional guidance.

Be careful to do this in time. Your 2013 return is now beyond the statue of limitations period, so you cannot amend it. [To claim a refund you have to file within three years from when you filed or two years from when you paid the tax, whichever is later. An early filed return counts as being filed on 4/15. So your 2014 amended return may need to be filed by 4/15/2015 + 3 yrs = 4/15/2018.]