Here's a synopsis based on what I can figure out from all the information provided.
-Property purchased in 2007 for $245,000
-Property placed "in service" as a rental in 2016 using a cost basis of $249,000 for depreciation.
The problem at this point, is that in the year of conversion to rental, the cost basis for depreciation is the "lower" of a) what you paid for it when originally purchased or b) It's FMV on the date of conversion. So an incorrect and invalid cost basis was used in 2016 upon converting the property to a rental. It's not really a lot. Normally, I wouldn't be concerned with it. However, the hosing market tanked starting in the 2008-2009 time frame. So having used a higher cost basis "may" stick out with the IRS for all I know.
The statement, "A couple of units sold in 2017 for $190K" supports my statement that a significantly lower cost basis "should" have been used in 2016 when the property was converted to a rental. But it wasn't. So it is what it is. In my opinion (and we all know what opinions are like) this needs to be corrected and fixed.
Next is the statement "an IRS agent told us that you can't depreciate furniture"
There was probably a miscommunication between you and the IRS, as the IRS agent's information is wrong, and while not impossible, I would not think an actual employee of the IRS would have told you that in the context presented in your post. But then, I've heard stories of worse, more inaccurate information coming directly from the IRS.
At this point, I would highly recommend you seek professional help. Especially since the filing deadline is almost just around the corner. The proper way to fix this situation is to include the IRS Form 3115 - Change In Accounting Method form with your 2020 tax filing, to correct the depreciation. While this form is included with the TurboTax program, it's not simple by any stretch. Especially since you have depreciation mistakes on multiple assets. (property and furniture). On top of that, if your state taxes personal income this "could" turn into a double-whammy.
A tax professional in your local area can help you "make things right" and may be able to keep your back taxes if any, along with any penalties and fines that may be assessed for incorrect reporting in the past, to a minimum. For all we know, they may be able to eliminate fines/penalties entirely. Therefore it's my recommendation you seek professional help on this and have a professional that is well experienced with tax laws not just at the federal level, but at the state level also.
When you go this route, once all is said and done make sure the professional provides you with a complete copy of your return, to include all worksheets and calculation forms. You will need the data for your 2021 taxes next year, if you decide to use TurboTax. You can't import from whatever the tax professional may provide you. So you'll have to enter any and all historical date (if it applies) manually, yourself.
