Mistake in Rental Property Depreciation Carried Forward for Several Years

[PCMarmot]

While taking a closer look at the sheets view for a rental property, we realized our property depreciation chart did not match the entered deduction. 

After reviewing the last five years of filings, we found the problem originating from an entry on our 2020 tax return. When trying to understand what happened, we remembered that our 2019 tax return software file was corrupt, so we had to rebuild it in the software for the 2020 return by using our PDF copy of our 2019 return. 

To be more specific, we accidentally took the rental property entry for "previously depreciated" off the 2019 return and entered it as-is on the 2020 return for "previously depreciated." (This was inaccurate: we should have entered a larger number that represented the previous 2019 depreciation + the 2019 depreciation amount to figure out the correct entry for the 2020's previously depreciated number.) 

To complicate matters, a new line item appeared starting in 2020 "AMT Adjustment" for ~$150. We are unclear if we made this entry in error or if the software made it in an attempt to correct/adjust for not matching the asset depreciation sheet. This extra deduction amount has stayed static dollar wise through each tax return since.

Net Result: We have taken more depreciation than we are supposed to. 

How do I fix this for past returns and this year's return? 

To make this more complicated, I only realized this issue when I tried to take the one big house depreciation line item and split it into two separate 27.5 year depreciation buckets -- house building depreciation and house HVAC depreciation. This should have been straightforward as you can enter the old in-service date and it auto-populates for 2024. I expected the two new line items to equal the previous larger line item and it didn't. That's when I knew something wasn't right. 

If you are wondering why I was trying to separate the original HVAC out from the building, it is because I replaced the HVAC system in 2024 and I should be able to write off $1,200 if I can retire the original HVAC. You can't, however, retire it unless it is a separate line item from the building. 

[DavidD66]

There are two ways you can correct your accumulated depreciation and the depreciation expense take in prior years.  The first would be to file an amended return for each year the depreciation expense was incorrect.  The other method is to file Form 3115, Application for Change in Accounting Method.  This method will allow you to correct the depreciation on your current year's tax return.  Either way, if you are not already I strongly recommend you use TurboTax Desktop.  This will allow you to view and make changes on the Asset Worksheet in Forms view.  You can file Form 3115 using TurboTax, but it's not the most simple of tax forms.  You might want to consider getting the help of a local tax professional or use TurboTax Live to assist you.

[AmeliesUncle]

Amending can fix it.  Form 3115 does NOT apply.

Any chance your rental has had losses each year and the passive losses were not allowed (carried forward on Form 8582)?  In other words, if it had been done correctly, would it have changed your taxable income?

If it wouldn't have changed your taxable income, I would just forget about it and adjust/correct things on your 2024 return as if it had been done correctly (including adjusting the passive loss carryover).

If it would have changed things, technically, you should amend.  However, if the change was minor, it could be a consideration to just change things on the 2024 return, including changing the "prior depreciation" to what was ACTUALLY taken (the too-much amount).

[grandpadave]

I have always assumed it was correct, so I imagine there is a good chance mine are wrong also. I feel like this is a bug in the software that they are responsible for fixing and they should not be making us file extra forms and explanations, or pay additional for help.