Over depreciation of a rental property

[sobermeiert]

We are closing this week on the sale of an office condo that we purchased in 2007.  At that time the CPA  preparing our taxes  inadvertently entered a purchase price that was higher than the actual purchase price.  (He included the office build-out, but the company renting the condo paid for that.)  When I took over the preparation of our taxes using TurboTax, I simply moved over all of the information from my previous tax return, not realizing that I had carried forward an incorrect purchase price.  I only discovered that when we decided to sell the unit and I had to find the original documentation.  Unfortunately, this error led to excess depreciation of the asset.  I changed the asset value in TurboTax, but really need to claim no depreciation for 2020 and 2021, not reduced depreciation, to resolve the issue.  TurboTax allows me to override depreciation, but then I can't file electronically.  I looked at form 3115 (not supported by TurboTax), but it didn't seem to apply to my situation.  I have tried to call the IRS and the state DOR but they do not offer tax solutions in advance.  Does anyone have advice for this situation?  Thanks.

[ThomasM125]

I think you mean that you want to claim no depreciation in 2020 and 2021 to make up for the excess depreciation you claimed in previous years. You are not allowed to do that, as the excess depreciation should be adjusted in the years that it was taken, by amending those tax returns. In 2021 you should claim the depreciation that is applicable to that year.

If you have a sufficient gain on sale of the property to absorb the excess depreciation, you could report that actual depreciation deducted when you report the sale of the business, as there is no practical way of going back fourteen years or so to amend returns. That way, you will add the depreciation as ordinary income in the year of sale and you will have accounted for the excess depreciation deducted.

Another option would be to amend the returns you can amend in TurboTax, going back three years, and report the excess depreciation for the other years when you report the sale of the property.

[Mike9241]

you may want to consult a tax pro. it really depends on how much excess depreciation has been taken.  normally the IRS has 3 years to audit and thus correct the depreciation taken but if it substantially affected the partners, taxes the IRS may be able to go back 6 years to make changes.  

[Sobermeier]

Thank you so much for your reply!  This was extremely helpful.