Rental Property Depreciation - Correcting cost basis and depreciation for 9 years

[helpmeplease194]

I discovered that I had the wrong cost basis in my rental property depreciation since 2008.  This resulted in not enough depreciation and would result in fewer carryover losses to count against my cost basis (recapture).  I know I can amend my 2014-2016 tax returns and at least get the normal depreciation for those three years.  But, is there a way I can regain all of my depreciation?

[TaxGuyBill · Accepted solution]

No, sorry.  Using a wrong Basis for depreciation can only be corrected by amended returns, and you can only amend up to the 3 prior years.  Sorry.

When entering the asset in TurboTax and it asks for "prior depreciation", you need to enter the amount that you could have taken (if you leave it blank, I think it automatically calculates that).

For any other readers, if the property was not depreciated at all, there is a way to correct that (Form 3115, and I would recommend going to a tax professional for that), but that can not be used if you were just depreciating the wrong amount.

[Nevada-Dave]

TaxGuyBill:  I have a similar situation where basis was not entered correctly and building was $50+K below what it should have been in TurboTax causing depreciation to be low.  Besides correcting for 3 years prior, a preparer friend suggested another simple way would be to increase the land value to make up for this difference and continue to depreciate on the low building figure.  His argument was this would also allow for an increased basis upon sale.   Not sure that's the correct way, but is it really an option?  Form 3115 does not appear to be an option nor does entering additional new building to catch up.  

[TaxGuyBill]

You can't arbitrarily say the land value is higher than it really was.  That would be intentionally lying on a tax return to give you a more favorable result (also known as tax fraud).

[Nevada-Dave]

Thanks.  That is what I was thinking when he said that about adjusting land only.  Is Form 3115 an option if both land and building basis were not correct?  I am seeing some people argue it is, but I can also easily see it being seen as just a math or posting error and thus just the option to correct via amended returns.

[TaxGuyBill]

No, Form 3115 can't be used.  I know somebody that called the IRS lawyer that wrote the rules about 'catching up' on the depreciation via Form 3115, and the IRS lawyer said he gets the question frequently, and said 'no, that is a mathematical or posting error'.

[Nevada-Dave]

Thanks.  This is very helpful and was the same conclusion I was arriving at,  I really appreciate your replies.  I think my friend was just suggesting a simple solution, not the right solution.  

[TaxGuyBill]

You are welcome.  I just wish I had better news to tell you.   

[Nevada-Dave]

One followup Bill:  As indicated above, the land basis was incorrectly calculated and was overstated by $9K and building was understated by $60K.  I see some argue in other online threads that this is a reason (incorrect land) for filing 3115.  I still get back to math/posting error doesn't qualify and amending returns is the only option. I assume you concur?