Rental property - entered in incorrect cost basis a few years ago and thus have an incorrect depreciation for a few years ... what to do?

[Carl]

Since land is not a depreciated asset, on your 2021 tax return change the COST to 289,000

In the COST OF LAND box, enter 139,000.

The program (not you) will do the math in the background where you don't see it, and will subtract the COST OF LAND from COST, leaving a structure value of $150,000. So the depreciation for 2021 prorated up to the closing date of the sale will be correct, and there will be no change to prior year's depreciation.

Now you can report the sale and the math will be right.

Keep all your paperwork on your original acquisition of the property, as I fully expect you will need it. I don't know what the chances are the IRS will audit you on this with a letter about 2-3 years down the road. Most likely they'll be asking you to provide "proof" of your cost basis along with an explanation of why the change in the year of sale. The explanation will be easy. It's the "proof" that can shaft you, if you can't provide it.

[pjblouin]

Thank you, very helpful.

[dazzydeb]

What is the statue of Limitations on an amended return for an incorrect cost basis?

[KrisD15]

According to the IRS:

"Generally, to claim a refund, you must file an amended return within 3 years after the date you filed your original return or 2 years after the date you paid the tax, whichever is later. If you filed early, count from the April tax deadline."

[ITGnyus]

A Form 3115 would be the correct route to make this adjustment for the prior 3 years!