How do i correct over stated depreciation on sale of rental property

[Shemmy2]

In 2004 I inherited 50% of rental property appraised at $1,275,000   (63% structure, 37% land) = $11,878 in depreciation. 

For whatever reason, I have been using a different value for depreciation:  $1,500,000 (70% structure 30% land) = $19,091 in depreciation.

We sold the rental property in July 23, 2019 for $1,999,999.

What do I need to do address my over deducted depreciation?  

Since I am recapturing the depreciation and paying tax on the larger accumulated depreciation, does it matter?  Or, do I owe some back taxes, interest, and penalties?

[tagteam]

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@Shemmy2 wrote:

What do I need to do address my over deducted depreciation?  

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You should definitely consult with a tax professional prior to reporting this transaction on your 2019 income tax return. If you are told to file a Form 3115, find another tax professional because that is likely not the correct approach (you did not use an impermissible method of accounting, you simply misreported the correct amount of depreciation due to a basis error).

At this point, probably the only correct approach would be to amend the previous returns that contained incorrect depreciation deductions. However, a tax professional could have an entirely different opinion on the matter, including the approach you mentioned in your post.

[Carl]

I see nothing wrong here - unless you also "inherited" the prior depreciation.  Now that would be a problem that would require professional help. When you inherit property, your cost basis is the FMV of the property on the date of passing of the deceased person you inherited it from, and you don't inherit the depreciation taken by the deceased. Basically, all that prior depreciation just "goes away" from your perspective.

Then if you started depreciating it on a 70%/30% split between structure/land, you're fine. There is nothing to fix here.

More than likely and depending on when the deceased person originally purchased the property, they paid much less for the property than your cost basis was when inherited. So you would start 27.5 years depreciation all over again from day one on the date you actually took legal ownership of the property. What depreciation was taken and what the split was prior to your inherited ownership is irrelevant and just doesn't play into this at all.

[tagteam]

What is "wrong here" is the taxpayer inherited rental property appraised at a certain date of death fair market value and then proceeded to use a much higher value as the basis for depreciation. As a result, the depreciation deductions for each year were inflated and thus inaccurate.

Frankly, if I, personally, had made this error and subsequently sold the property, I might tend to simply report the sales price and (incorrect amount of) accumulated deprecation and call it a day. However, that is not technically the correct approach to the ameliorate the error.