How to fix incorrect rental depreciation

[brady1415]

An in-law suite in my house has been used as an Airbnb rental since 2019.

2022 was the first year I claimed depreciation on Schedule E, but Form 4562 did not accompany my return since I entered the actual in service date as 2019. Also, the depreciation amount/calculation was slightly low due to an incorrect land value being entered. I'm seeking advice on how to best fix the missed depreciation from 2019-2021 and the incorrect land value in 2022.

Should I...

a) Just enter the correct depreciation on my 2023 Schedule E and keep the in service date as 2019, knowing that I missed claiming a few years of depreciation? My understanding is that this really only matters when I go to sell the property. The depreciation "lost" isn't considerable - the room is only 13% sq ft of a $300,000 property purchased in 2018.

b) Amend my 2022 tax return Schedule E to correct the land value amount and enter 1/1/2022 as the in service date of the property? I assume this would generate a Form 4562 and I could move forward claiming the correct depreciation amount each year moving forward.

c) File a Form 3115 to correct the years that weren't depreciated and correct the land value. I assume this would permit me to claim the missed depreciation in 2023. If so, where do I enter this additional depreciation? Which DCN reason would I use for Form 3115?

Any suggestions or other ideas are welcome!

[Carl]

Because you have an asset that has been in service and you have't depreciated it for two or more consecutive years, the only proper way to fix this is to file IRS Form 3115 with your 2023 tax return. This is required by the IRS per IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf beginning at the bottom of page 13 of that document.
While the TTX program does include the form 3115, the program provides very little help with that form. It may look simple, but it's more complicated than some may think. I would highly advise you seek professional help this year to get this corrected. Especially if your state also taxes personal income. Doing the 3115 wrong can cost you, and it could be a double-whammy if your state also taxes personal income.

[ThomasM125]

The "a" option would be the simplest. You will have to add back (recapture) the depreciation missed to income to the extent you have a gain when you sell the property someday, but if the depreciation is minimal that may be better than the efforts necessary for the other options.

The "b" option of amending your 2022 return would allow you to deduct depreciation for that year that may have been missed. I'm wondering if you actually missed taking depreciation that year though, as you said you entered the property  for depreciation that year. Form 4562 may not be required if you didn't place the property in service that year, but the depreciation could still be deducted on your schedule E. You should look on schedule E, line 18.

Filing Form 3115 for change in accounting method would allow you to claim the missed deprecation in the current year. You would have to use the desktop version of TurboTax to do that. The deductions would show on line 19 of your schedule E.

If you decide to file Form 3115, be mindful that you can’t use this method for making a late section 179 expensing election, or to change the date an asset was placed into service, or to change the designated use of an asset.

On form 3115, you need to complete the entries on page 8 "Schedule E - Change in Depreciation or Amortization". In part I(a), the DNC code is "7", used to note a change in depreciation method from an impermissible method. You will need to complete the "Information for All Requests" on pages 1 to 3.

You can find the form by entering the form number in the "Open Forms" box you will find in the Forms Menu. Here is a link to an article that you may find helpful: Reclaim depreciation missed in previous years 

[brady1415]

Thanks! I ended up completing Form 3115 on the TT desktop version per the instructions at the link you provided. That seems to be the best solution to get this correctly fixed.

[AmeliesUncle]

It sounds weird, but you need to amend 2022 to REMOVE all of that depreciation.  You were not allowed to claim that without the 3115.

Then you file Form 3115 to claim all of the missed depreciation for the prior years and to allow yourself to start correctly claiming depreciation for the current year.