Missed Out on Two Years of Depreciation Deductions on Rental Properties

[texasbevo2]

As a longtime TT user and a real estate investor,  I'm about to prepare my 2024 tax year and notice that no depreciation deductions are carried forward to 2024 schedule E.   This is a big red flag as far as TT software defect is concerned.  I decided to go back to review my 2023 and 2022 scheduled E, OMG there was no deductions taken.  In short, it looks like as if I did not take any depreciation deduction in 2022 and 2023 tax year for my rental properties.  I was making the assumption all these years that the depreciation deductions would carry forward each year in TT for as long I still own the property (27.5 yrs) and run the import from prior year tax return into the current year TT. Unfortunately, this import feature failed to calculate depreciation deduction for the past 2 years.  As a consequence, I missed out over $36K of deductions on 3 properties. 

Appreciate if someone can assist to recoup these deductions?  

[whodiini]

I was also hit by this same bug in TT.  What I learned from this issue is before you start your taxes for the new year, run the prior year's TT, update the software, open the last year's file, save it and only then import the new saved file.  A few years ago, 2021 if I recall, there was a bug that did not populate the depreciation correctly for entry to the following year, so the same thing happened to me.  They fixed the bug after I submitted my return, but I never updated my TT for the prior year.   That is why you should update the prior year TT and run the prior year file before you import it.   (try to find that hint anywhere!)  You need to amend the prior years.  You can only amend the last 3 years and get a refund. Start with the first year (oldest one) that is wrong and amend that.  Then use that info in the first amended year and amend the next year until you get to the current year.  I sent those in and waited a bit for them to be received before I sent in the current year's return using the prior year's amended return.  Good luck!  I ended up amending 3 years of federal and 3 years of state returns.  It was a rather painful lesson.

[DianeW777 · Accepted solution]

Yes, you can recover those deductions in the current year.  It is used often and the steps below will help you take care of it on 2024 without needing to amend any prior year.

For the prior depreciation you have not used.  

• You can use the following form to correct the depreciation for your rental property. Take any amount not previously expensed on prior returns, as an expense on the current year tax return as 'Other Expenses'.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2024 tax return.

• 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 expense the missing depreciation.
  • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
• You must use the TurboTax Desktop ‌ to complete this form. TurboTax doesn't help you with this form. And your return must be mailed because this form is not supported through e-file.

This must be completed and filed with the return on time.

You can change to TurboTax Desktop if you choose.

• How to switch from TurboTax Online to TurboTax Desktop?

For the years you need to calculate here is the chart for 27.5 year residential rental property.

@texasbevo2 

[texasbevo2]

a. I need clarity where to file the 2024 federal income return with the attached original form 3115 (without signature).  According to TTD, can you confirm that I should mail to this address since I'm a Texas resident?

Department of the Treasury

Internal Revenue Service
Austin, TX 73301-0002

b. Can you confirm the below mailing address of the IRS to file the signed the copy of form 3115?

Internal Revenue Service

Ogden, UT 84201

Attn: M/S 6111

[DavidD66]

Since you are correcting depreciation you should be filing Form 3115 under Automatic Change Procedures.  You will file a copy (duplicate) of the signed Form 3115 in one of these ways:

Mail
Internal Revenue Service
Ogden, UT 84201
Attn: M/S 6111

Private delivery
Internal Revenue Service
1973 N. Rulon White Blvd.
Ogden, UT 84201
Attn: M/S 6111

Fax
Follow temporary procedures to fax automatic consent Form 3115

If you are including a payment with your tax return, mail it to:

Internal Revenue Service
P.O. Box 1214
Charlotte, NC 28201-1214

If you are NOT including a payment with your tax return, mail it to:

Department of the Treasury
Internal Revenue Service
Austin, TX  73301-0002

You don't have to sign the Original Form 3115 sent with your return, but I would go ahead and sign it.