I have had a rental property since 2016. I don't think I ever depreciated it, unless Turbotax does this automatically? What are my options now?

[PatriciaV]

Yes, TurboTax will calculate and report depreciation expense each year on all assets that you have added to your rental property.  Check your prior year return to see if you have a Depreciation Report. Or look on Schedule E Line 18 to see if you claimed depreciation expense.

If not, you can add your assets this year. After you provide the basic information, TurboTax will give you an estimate of the total depreciation you should have taken since you first placed the asset into service. Accept this value and continue to save your work. Current year depreciation expense will be reported on Schedule E for this property.

You will also need to file an application to change the accounting method for these assets (Form 3115). Because Form 3115 is not supported by TurboTax Online in the interview, you may need to switch TurboTax Desktop, where the form is available in Forms Mode. This is a complex and tedious process, and you may consider upgrading to TurboTax Live. This online service provides step-by-step guidance from a tax expert whenever you need assistance, either over the phone or by screensharing.

Additional Information:

• How do I handle capital improvements and depreciation for my rental?
• What should I do if I didn’t take depreciation on my rental property?
• How do I switch from TurboTax Online to the TurboTax software?

[d_flewelling]

thank you, it currently shows a 0 in Schedule E line 18.  If I understand correctly, the depreciation is not on the property itself but only on the assets?  I.E. appliances?  Do they only need to be new appliances that you purchased for the property since renting it out?  or existing ones?  

[PatriciaV]

Yes, the rental residence should be reported as the main rental asset for depreciation. 

The converted basis of this asset is the lesser of Fair Market Value or the Adjusted Basis, which includes the purchase cost plus any additions/improvements (including appliances, carpet, furniture) that were added BEFORE you began using the property as a rental. The basis does not include the cost of the land.

Any additions you make (new or used) after you list the property for rent would be entered as separate rental assets. You can combine all assets placed in service on the same date.

See this article for an extended list: How do I handle capital improvements and depreciation for my rental?

Additional Information:

• IRS Basis of Property Changed to Rental Use

[d_flewelling]

thank you.  What happens if I don't depreciate?  Can I somehow recoup that when I sell the property?

[CatinaT1]

No, you want to depreciate because when you sell, you have to recapture the depreciation allowed or allowable. This means if you don't take depreciation, you were allowed to, so even if you chose not to depreciate, you still have to recapture the depreciation you were allowed to take. 

Tax Deductions for Rental Property Depreciation - TurboTax

[d_flewelling]

Sorry, what do you mean by "recapture"?  You mean I'd have to amend my returns for the previous years to account for depreciation?  I put my property on the market in 2016.  That's how far back I'd have to go.  I've already filed my returns for 2024, but could amend them to include depreciation, but I know it will not be straight forward as some other complicated form is required if you're including past years?  

[ThomasM125]

You don't need to amend a return to report the depreciation recapture. That will be handled when you report the eventual sale of the property. All it means is that you will deduct the depreciation allowable from the cost of the property when you calculate the gain on it's sale. So, you should have taken a deduction for the depreciation each year and then when you sell it you add all of that back into income. If you didn't deduct it, when you add it back it basically means you forfeited the deduction. Also, to the extent your gain is more than the accumulated depreciation, you pay ordinary tax up to 25% on that portion of the gain, as opposed to the sometimes more favorable capital gains tax rates.

[d_flewelling]

thank you, but if I'd like to claim back depreciation retroactively, do i need to amend my returns from 2016 until now, or just last year's?  Is it normally better to depreciate each year than to take it at the end?  I am still confused, is there a way to take it at the end (when the property is sold) or does it get forfeited and not recaptured?

[PatriciaV]

There are two ways to claim prior depreciation:

1. File an amended return: This only works if you didn’t deduct depreciation on your rental assets for one year. Go back and amend the return to reflect the missed depreciation. Note: You can only go back one year to claim a possible refund for missed depreciation (this is an IRS rule).

2. Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to claim all the missing depreciation.

If you have not claimed depreciation before you sell the asset, it's too late to take advantage of the expense. You would still need to report ordinary income equal to the full amount of depreciation you should have claimed.

It's better to claim depreciation each year that you own the asset, as you reap the benefit of the expense over the asset's useful life. Reporting the catch-up depreciation this year will reduce current year income for this activity.

Additional Information:

• What should I do if I didn’t take depreciation on my rental property?
• IRS Instructions for Form 3115 Schedule E -- Change in Depreciation or Amortization
• IRS Pub 544 Depreciation Recapture Section 1250 Property
   

@d_flewelling