EdwardK
Level 7

Investors & landlords

If you are filing amended tax return(s) and did not report depreciation on your prior year tax return(s), then you should leave the box blank (TurboTax may automatically enter zero). You may verify the prior year depreciation reported by selecting the Where can I find this? link on the same screen.

Furthermore, you should not "accept their numbers for the other 2 years" because TurboTax automatically calculates the depreciation amounts you may have taken since you began using the asset for your rental. If you did not report depreciation, the TurboTax calculation would be inaccurate. Thus, you would enter the depreciation amount from the prior year amended tax return you are planning on filing and each subsequent year, you would have to ensure you entered the accumulated depreciation amount on the Confirming Your Prior Depreciation screen (not just the prior year depreciation amount).

As you may already know, depreciation reduces the owner’s basis in the property. When depreciable property is sold or disposed of, depreciation that was allowed or allowable on that property must be taken into consideration. In other words, even if no depreciation deduction was taken, the net profit or loss on the disposition of the property must be computed as if depreciation was actually taken.

If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. If you are not allowed to make the correction on an amended return, e.g. deadline for filing amended return has passed, you may be able to change your accounting method to claim the correct amount of depreciation.

You would have to calculate the final depreciation adjustment outside TurboTax and/or create dummy tax return(s) to help calculate the depreciation adjustment then manually enter a section 481(a) adjustment in the respective section(s), e.g. Schedule C, Schedule E, etc.

You would also have to file Form 3115, Application for Change in Accounting Method, which is available as print only (not e-file) in TurboTax CD/Download. You would have to switch to Forms Mode Mac and on the left panel, at the top, select the Open Form icon and Search or Browse for “3115” and select the Open Form button. For specific mailing instructions, please review Instructions for Form 3115, page 2.

Please feel free to review the following for more information, IRS Publication 946, How to Depreciate Property, page 13: How Do You Correct Depreciation Deductions?

Section 481(a) adjustment. If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as “other expenses.” A positive section 481(a) adjustment results in an increase in taxable income. It is generally taken into account over 4 tax years and is reported on your business tax returns as “other income.” However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $50,000. Make the election by completing the appropriate line on Form 3115. If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero.

Of course, this would not be a simple calculation/process, thus you may want to seek a tax professional for additional guidance.

Please review the following link(s) and the link(s) embedded on the webpage(s) for more information:

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‎June 1, 2019 5:20 AM
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