I neglected to take depreciation during the 10 year rental period prior to selling it in March 2022. Any advice, can TurboTax help?

[Critter-3]

You will need to file a form 3115 with the 2022 return to correct this error and it is NOT a DIY form so either use a local tax pro or upgrade to a LIVE version of the TT online program.   If you don't you will pay more in taxes than you need to. 

[Carl]

Basically, when you sell the property (as I understand, you sold it in 2022) you are required to recapture the depreciation taken, or the depreciation you "should" have taken, and pay taxes on that recaptured depreciation. I am assuming the property was still classified as a rental at the time of the sale, meaning that you will report the sale on SCH E of your 2022 tax return you will complete next year.

Instead of dealing with the 3115 on your 2021 return (assuming you have not filed it yet) when you report the sale on your 2022 tax return the program will automatically figure the depreciation you "should" have taken. Then that depreciation will be recaptured and taxed in the year of the sale.

Weather you file the 3115 or not, you will recapture the depreciation and pay taxes on it. Two things to keep in mind about depreciation recapture.

1) Recaptured depreciation is added to, and increases your AGI in the year of sale. This has the potential to bump you into the next higher tax bracket (depends on the numbers and a number of other factors) as well as change any tax credits you may or may not qualify for.

2) Recaptured depreciation as taxed as the "ordinary" income tax rate anywhere from 0% to a maximum of 25%.

[Anonymous_]

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@Carl wrote:

Weather you file the 3115 or not, you will recapture the depreciation and pay taxes on it. 

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As @Critter-3 stated, Form 3115 needs to be filed. A Section 481(a) (catch-up) adjustment will be made which will entirely offset the depreciation recapture (from the foregone depreciation).

[ron-rutherford]

Thanks for the info. So tell me, why would I bother doing either form if there is no cap gains savings?  If I misunderstood, please elaborate. 

[Anonymous_]

For example, if you should have taken $100,000 in depreciation deductions over the course of the rental period, there will be $100,000 of unrecaptured Section 1250 gain (depreciation recapture). It does not matter that you failed to take the deductions each year.

Filing Form 3115 allows you to offset the $100,000 worth of recapture with a Section 481(a) adjustment. The net effect would be $0 recapture. 

You will most likely need to seek guidance from a tax professional with respect to preparing Form 3115.

[Critter-3]

Since you did not take the depreciation deduction in the past you never got the tax break so now you will have to recapture the depreciation you never took and pay the taxes now without the prior year benefit.  It is in your favor to complete the form 3115 to get the deduction you missed now  to offset the recapture but it is not a requirement ... the IRS will be happy if  you overpay your tax bill. 

[fanfare]

IRS does not have the resources to audit your tax return.

@ron-rutherford 

[Anonymous_]

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@fanfare wrote:

IRS does not have the resources to audit your tax return.

@ron-rutherford 

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I am not sure how that is particularly relevant to the fact pattern outlined by @ron-rutherford.

If this transaction were entered into TurboTax, there would be depreciation recapture but no offset without Form 3115.