Incorrect cost basis on a rental property for 10 years. Didn't separate out the cost of land, and depreciation taken has been tad high per year. What is best solution?

[mcato3]

Is it better to just let this continue on, and then deal with any additional tax liability when I sell it.  I would rather fix the amount I am depreciating every year to reflect the amount still available to depreciate for the remaining 17.5 years, but amending 10 years of tax returns doesn't sound appealing either.  I just don't want to over depreciate.  I still have about 13.5 years before that would happen.  Looking for the most straightforward and logical solution - and least painful.  Could I fill out a form 3115, but not amend any returns?  Any help is much appreciated.     

[Anonymous_]

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@mcato3 wrote:
Could I fill out a form 3115, but not amend any returns? 

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See https://www.irs.gov/publications/p946#en_US_2020_publink1000107386

A change in the cost basis of the asset is really not a change in the method of accounting for depreciation.

[ErnieS0]

Yes. You can fill out Form 3115 and not file any amended returns. If you file Form 3115, you will have a one-time “catch-up” adjustment for incorrect deprecation and will then claim the correct amount going forward.

About Form 3115, Application for Change in Accounting Method

[Anonymous_]

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@ErnieS0 wrote:

You can fill out Form 3115 and not file any amended returns.....

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@ErnieS0 Do you have a cite for this proposition?

I do not believe that using an incorrect cost basis would be considered an impermissible method of accounting for which Form 3115 could be used.

See Section 1.446-1(e)(2)(ii)(d), the relevant language of which states the use of Form 3115 is appropriate for a change in the treatment of an asset from nondepreciable to depreciable or vice versa and a change in the depreciation method, period of recovery, or convention of a depreciable asset.

@AmeliesUncle ?

[AmeliesUncle]

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@Anonymous_ wrote:

I do not believe that using an incorrect cost basis would be considered an impermissible method of accounting for which Form 3115 could be used.

@AmeliesUncle ?

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I agree that using an incorrect Basis would not qualify for Form 3115 (it is a "mathematical or posting error"). 

However, in this specific circumstance it sounds like they were taking too much depreciation because they did not take out the value of the land.   That could possibly be viewed as they were depreciating the building with the correct Basis AND depreciating the land with the correct Basis.  *IF*  that were to be the case, Form 3115 could be used because they were impermissibly depreciating land and Form 3115 would reverse the land depreciation.

[Anonymous_]

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@AmeliesUncle wrote:
*IF*  that were to be the case, Form 3115 could be used because they were impermissibly depreciating land and Form 3115 would reverse the land depreciation.

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Thank you, @AmeliesUncle. 

That exactly fits the criteria specified in the Reg in terms of changing from a depreciable asset to a nondepreciable asset (land - which would result a downward adjustment rather than a "catch-up").

[mcato3]

Thanks for the input everyone!  Assuming I can use the form 3115 to change from a depreciable asset to a non-depreciable asset (the land portion I shouldn't have been depreciating), how would I make the change in TurboTax on form 4562.  It doesn't seem like any of the figures on this form are adjustable.  If I deleted the asset and re-input the asset, how could I input all prior depreciation, etc. not to mention how the program would calculate the remaining 13.5 years correctly?  

Also, some online info pointed to a 481(a) adjustment in addition to filling out form 3115, and I'm not sure if this is a form similar to the form 3115 or just a term for the adjustment which is made either positive or negative in terms of being favorable or non-favorable to the IRS.   

I am weighing how complicated this is Vs. just leaving my current depreciation schedule as is, and then just accepting I will pay more in recapture tax at the higher tax rate when I sell the property. 

[Anonymous_]

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@mcato3 wrote:

I am weighing how complicated this is Vs. just leaving my current depreciation schedule as is....

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It is fairly complicated and I doubt anyone would strongly recommend that you try to prepare this form with your return without guidance from a tax professional.