Correcting the COST Basis of a residential rental property

[dazzydeb]

In 2020, the first year I had the rental property.  I entered an incorrect cost basis on my property and I understated the cost, so the depreciation is not enough. I did not catch the error until I was working on my 2024 taxes. Can I just do amended returns for 2020, 2021, 2022, and 2023? or do I have to complete a form 3115. The method of depreciation was correct on the amount I did take. I do not want to change the accounting method only the incorrect amount. I have not filed my 2024 taxes yet.

[Mike9241]

some years can not be corrected by filing an amended return because they are closed years. You need to file form 3115.  This form is not simple so you may want to use a pro for 2024.  Failure to correct this error will cost you when you sell. The tax law requires you to recapture as section 1250 gain, the depreciation you should have taken but didn't. 

[AmeliesUncle]

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@dazzydeb wrote:

I entered an incorrect cost basis

the method of depreciation was correct ... I do not want to change the accounting method 

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It is only corrected by amending.  Form 3115 does not apply because you are not changing the accounting method (using an incorrect Basis is a "mathematical or posting error", not a method of accounting).

[dazzydeb]

How do you correct the 2020 and 2021 tax returns since you can only amend the previous 2 years? Will the irs still accept an amended return for 2020 and 2021?

[DoninGA]

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@dazzydeb wrote:

How do you correct the 2020 and 2021 tax returns since you can only amend the previous 2 years? Will the irs still accept an amended return for 2020 and 2021?

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If taxes are owed there is no time limit for when an amended tax return can be filed.

[AmeliesUncle · Accepted solution]

There is no time limit to amend.

The time limit for refunds (or for the IRS to assess tax) is three years, not two.   That means 2021 can still be amended and get a refund.

For 2020, you won't be able to get a refund.  However, in the event the rental had a loss and that loss was suspended due to the Passive Loss rules, then you can amend 2020 to carry the increased Passive Loss Carryover to 2021.

[Mike9241]

@dazzydeb the others are correct a miscomputation cannot be corrected by filing form 3115.  you can amend open years. You can do nothing for closed years until the property is sold. see this thread which explains what you can do, 

https://msatp.org/fixing-the-error-how-do-we-solve-depreciation-mistakes/ 

[AmeliesUncle]

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@Mike9241 wrote:

You can do nothing for closed years until the property is sold.

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Nothing can be done when the property is sold either.  Form 3115 would still not apply.

[dazzydeb]

Thank you