How far back can I amend my returns if I never took depreciation expense on my rental property?

You can amend your previous tax returns for up to three years.

 

• You can file back to 2020, but you must file it by 04/15/2024
• You can also file 2021 and 2022, but you have at least a year to do it.
• However. If you owned a depreciable asset before 2020 you must calculate the earlier years depreciation.
  • You will not be able to take advantage of the pre 2020 depreciation.
  • You will still have to claim it upon sale as depreciation recapture.

Thank you! Follow up quick question…do I also first have to complete Form 3115 for change in method of accounting (no depreciation to depreciation)? Or can I just go back and amend each of the last 3 years returns? I also have filed already for 2023. As such, am I still able to amend 2020 return?

I have rented the property since July 2017 (10 years prior to that, it was my primary residence). I realize now that I am not able to “correct” those years 2017-2019.  I incorrectly thought by not claiming depreciation, I could avoid the depreciation recapture when I eventually sold it. Not true however, and I am trying now to go back to do what I can do. 

With rental property, if you did not depreciate, or if you used an improper method for "2 or more consecutive years", then amending is not an option. You have to file IRS Form 3115 with your current tax return in order to fix this.

IRS Publication 946, https://www.irs.gov/pub/irs-pdf/p946.pdf page 13:

The following are examples of a change in method of
accounting for depreciation.
• A change from an impermissible method of determin-
ing depreciation for depreciable property

if the imper-

missible method was used in two or more consecu-

tively filed tax returns.

• A change in the treatment of an asset from nondepre-
ciable to depreciable or vice versa

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@CubsCarol wrote:

…do I also first have to complete Form 3115 for change in method of accounting (no depreciation to depreciation)? Or can I just go back and amend each of the last 3 years returns? 

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You need to file Form 3115; you cannot amend at this point.

Form 3115 will need to be filed with your return. You will need to use TTD to file the form with your return. If you choose to file the form 3115 separately, there is a fee. You will need to make adjustments to your tax return for the missed depreciation.

You will have to compensate for the missed depreciation by adding it as a misc expense, sec 481a- missed depreciation and then add it back as rental income. If it is less than $50,000, you can take it all on this year. Otherwise, it is spread over a 4 year period.

 

In addition, you will receive more mail to allow the IRS to open or keep open all affected periods due to the 3115 change. You may have to pay a late fee since you did not file the first year after missed depreciation.

 

Our live agents can do this for you if you want to switch to letting us prepare your return. I would strongly recommend it for this situation. Otherwise, see About Form 3115, Application for Change in Accounting 

 

 

Subtracting depreciation

 

Adding adjustment

 

Claiming the income if $50,000 or less

 

Thank you ALL for your very helpful advice! Given that I have not taken depreciation expense for past 6 years, I now understand I MUST file Form 3115 with my current 2023 Tax Form., correct? However, I have already filed for 2023. Ugh. Do I AMEND my 2023 form now and send in Form 3115 with amended form? Thank you!!!

Additionally, with the depreciation expense included, my property net is a loss the past years. This would have increased my refund each year. 

@CubsCarol 

 

You can file the form with your 2024 tax return if that's more convenient.

Yes, however my advice would be to do it as soon as possible so that it's in by April.  

• Attach the original Form 3115 to the filer's timely filed (including extensions) federal income tax return for the year of change. The original Form 3115 attachment does not need to be signed.  
• About Form 3115, Application for Change in Accounting

And as tagteam included you can wait to file with your 2024 return.

• Instructions: What should I do if I didn’t take depreciation on my rental property?

I must make a disclaimer only in respect of the tax law. This has been tax law for many years, however it can always change without warning.

 

@CubsCarol 

[Edited: 02/19/2024 | 1:13 PM PST]

I have a few comments regarding this issue:

• Since you have already filed your 2023 tax return, I would pause and address this in 2024.
• Amending your return for something like this could cause confusion on the part of the IRS; especially if it is done too close to the filing of the original.
• While the filing of the form 3115 provides for an automatic change, there is certain language and statements that need to be included as well as the computation of the Section 481(a) adjustment.
• In addition to including the form 3115 with your tax return, you will also need to file a 2nd copy with the IRS National Office no earlier than the first day of the year of change and no later than when Form 3115 is filed with the federal income tax return for the year of change.  This copy MUST be signed.  As a result, I would just make a copy of the signed copy and include that with the tax return copy.
• As a result of the above, I would strongly recommend you handle this post tax season with a tax professional.  The form will then be completed and ready when you prepare your 2024 tax return; I wouldn't sign it until you are actually ready to send it in.

I am planning to sell my rental property this summer…as such, I would like to address with 2023 tax year. 

I understand and since you are selling the property this summer, I am inclined to agree with Rick19744 because you have the time to get it right, have it all ready to go with the 2024 tax return without rushing to get it done now.  It may even be easier to handle the sale and the change in accounting all at once in the year of sale.  

 

I also recommend a tax professional to assist with the change in accounting (Form 3115). Keep in mind that TurboTax Desktop must be used for this if you do plan to do it on you own.

 

Whatever you decide, it's your call.

 

@CubsCarol 

Again, thank you ALL for your input! Very helpful in determining my options! Guess it’s in my best interests to meet with a tax professional now to discuss next step by April,  and how that will impact me moving forward. Thanks again!

• A taxpayer is also generally prohibited from filing an amended return to change a method of accounting. Regs. Sec. 1.446-1(e)(2)(i) states that "a taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner." Regs. Sec. 1.446-1(e)(3)(i) adds that "to secure the Commissioner's consent to a taxpayer's change in method of accounting the taxpayer must file an application on Form 3115 [Application for Change in Accounting Method] . . ."

https://www.thetaxadviser.com/issues/2020/aug/cares-act-previo[product key removed]ns.html

Edit: ugh. the forum is chopping that link above. Here is a short url that should redirect to it.

https://shorturl.at/bszHV

 

https://www.wealthyaccountant.com/2021/09/20/form-3115-cost-segregation-study/

@AmyC I have a missed depreciation of about $80k (never claimed it) of a rental property that I also sold in 2023. My tax advisor chose to compensate via 3115...but in the full amount, not $50k over multiple years as you are suggesting in your post. Could you please clarify: is the 50k de minimis option a choice or a requirement? If it is a choice - what would be the criteria I should look at to decide. Thank you very much for this helpful post of yours! 

My tax advisor chose to compensate via 3115...but in the full amount, not $50k over multiple years as you are suggesting in your post.

Because line 28 is for a positive adjustment which is not what you want. When you miss depreciation you make a negative adjustment. Your tax advisor handled it correctly.

One more clarification question: my dad has 7 years of unused depreciation from 2017-2023 on a room for rent, totaling $15k. He did NOT rent at all in 2024, and then sold in 2024. He is declaring that untaken $15k as depreciation "allowed or allowable" for schedule D (entered on line 30 of the home sale worksheet in TurboTax), and will file a form 3115 to correct the accounting for that $15k.

Since he doesn't have any rental income to offset from this year, he can't include it on line 19 of schedule E as suggested here. Should he instead list the -$15k on his schedule E as a passive loss carryover?

On a sale of rental property, any unused depreciation must be accounted for. Since he didn't rent the property in 2024, he can't offset the depreciation against rental income for that year. Instead, he should report the depreciation as "allowed or allowable" on Schedule D, which will adjust the basis of the property and affect the capital gains calculation.

 

Regarding the passive loss carryover, unused depreciation is not treated as a passive loss carryover. Instead, it is recaptured when the property is sold and is taxed at ordinary income

 

Filing Form 3115 is the correct approach to correct the accounting for the missed depreciation. This form allows your dad to make an adjustment for the missed depreciation and ensure that it is properly accounted for in the year of sale.

Thanks so much, @DaveF1006 ! So given that my dad has a negative 481(a) adjustment for all of the un-taken depreciation, and that he's not filing a schedule E this year (he stopped renting the room last year), where then does that 481(a) adjustment go? Is there a place he can list it on his tax return, ideally to offset the depreciation recapture for depreciation he never claimed?

https://ttlc.intuit.com/community/business-taxes/discussion/where-to-enter-my-section-481-a-adjustment-for-unclaimed-depreciation/00/2885350

Yes, he can enter the adjustment as other expenses on a Schedule E.  Since he is not filing a schedule E this year, he will need to amend last year's return to report the adjustment.  He will also need to file form 3115 and include that with the return. Here is how to amend if you used Turbo Tax to file your 2023 return.

 

To amend your return using Turbo Tax Online.

1. Log into Turbo Tax
2. Select Scroll down Your tax returns & documents in your landing page.
3. Select Amend (change) 2023 return.  

To amend using the 2023 Desktop Software, go to:

1. Federal Taxes
2. Other Tax Situations>other tax forms
3. Amend a return

 

 

 

 

 

 

Thanks so much! I really appreciate all your help. When we ran the numbers, it turned out that redoing his 2023 or even 2022 tax would not actually make a difference—he just didn't make enough income to offset the loss. 

 

The take home lesson is, take all the depreciation you are supposed to take when renting a property!

 

On the plus side, the final depreciation ended up being lower than his initial estimate based on past tax returns. Total rental time was lower than he remembered, 20% land cost needed to be excluded from basis, and the room for rent was only a fraction of the property. That combined with his low tax bracket meant that it only added about $200 to his taxes—better than the $2000+ we originally feared.