Change rental investment depreciation method

[atatarokh]

Hi there,

Last year, I hired a CPA to help me with my tax return because I discovered that depreciating rental property is a requirement, and I wasn’t familiar with the process. Here’s what the CPA did for my two rental properties:

- For the property I acquired in 2014, the CPA used the straight-line depreciation method over a 27.5-year period. However, they set the prior depreciation to 7 times the depreciation per year amount because I hadn’t depreciated this property in the past.
- For the property I acquired in 2020, the CPA also used the straight-line depreciation method over a 27.5-year period. The prior depreciation was set to zero, but they applied bonus depreciation at a rate of 3 times the depreciation value per year.

I’ve recently learned from the Intuit community that for real estate investments, the Modified Accelerated Cost Recovery System (MACRS) is a more appropriate depreciation method. Additionally, I believe that Form 3115 should have been submitted with my tax return since it represented a change in accounting method. However, my CPA did not include Form 3115 in the 2023 return.

Now, I’m wondering what my options are. Should I continue using the same straight-line depreciation method or should I have my CPA rectify the mistakes made in the previous year’s return? I would appreciate your advice on this matter.

[MindyB · Accepted solution]

Straight line depreciation is correct for residential rental real estate. I am assuming you are referring to 2 rental properties, and not improvements or other personal property. Thus, 27.5 years straight line is appropriate, please see: IRS Publication 527. Bonus depreciation is also not applicable to 27.5 year residential rental property, but certain improvements depreciated over shorter periods would have allowed this (in year of purchase or via accounting method change).

A 3115 should have been filed last year. Adjusting the prior year depreciation without taking any expense will not correct the error.  As well, since there is no bonus depreciation allowed for 27.5 year property, manipulating that figure was also not correct.

You will need to file a 3115 for 2024, since the deadline to file the 3115 for 2023 has passed.  You can calculate the difference in depreciation and prepare the 3115 in a Desktop version of TurboTax.