Failure to take depreciation when a rental property is what the IRS refers to as an improper accounting method. To correct this form 3115 must be included with any original or amended return.
here's a link to see the form and decide if you want to use a pro or do it yourself. also, read the instructions for the filing requirements and completion of the form
https://www.irs.gov/site-index-search?search=3115&field_pup_historical_1=1&field_pup_historical=1
when you sell the property, depreciation recapture kicks in before the home sale exclusion. Depreciation recapture is the larger of the depreciation you actually took on the property or if you took less than the minimum permitted by law the recapture would be the minimum allowed. If you do not file the form then you recapture the minimum allowed but can't take a correcting deduction for the missed amount
so you have a $400K house + $40K in improvements less the depreciation you should have taken while it was a rental. This is your tax basis
your gain is the sales price less the selling expenses less your tax basis.
your gain consists of
first depreciation recapture. section 1250 gain which is not tax free.
then any remaining gain is eligible for the $500K home sale exclusion
in TurboTax on the asset worksheet for the property you should have entered $400K for the cost and then there's a line for the land value for which you should have entered the $100K. this would result in $300K being depreciated. also as a separate asset you'll now have the improvements.
in TurboTax you need to allocate the selling price and selling expenses among the components
do the form 3115 is require
