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

[stevef4571]

• 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/

[b87lar]

@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! 

[M-MTax]

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.

[JamieTT]

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?

[DaveF1006]

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.

[JamieTT]

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?

[M-MTax]

https://ttlc.intuit.com/community/business-taxes/discussion/where-to-enter-my-section-481-a-adjustme...

[DaveF1006]

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

[JamieTT]

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.