Wrong basis transferred into TT on rental property back in 2013. Sold the property in 2024 and now the numbers are all wrong

[RentalsForMe]

Setup rental property in TT in 2009 with the asset correctly defined (180K total with 40K land value implying 140K building value) and depreciated accordingly. Had taxes done professionally due to complexity in 2012 and the asset was depreciated accordingly. For 2013 I transferred the values into TT but messed up in setting up the asset indicating it was 140K total value when I meant 140K as building value, so the asset was setup as 100K building value with 40K land value instead of 140K/40K. I didn't notice the reduced depreciation so it has been depreciated at a lower rate since then. In 2024 I sold the property and I'm trying to compute capital gains but the numbers are wrong, of course.

I need to fix this but I'm not sure what the correct fix is. This doesn't seem to be a Form 3115 type correction, but that is not clear. I can change the numbers in the asset definition in TT but that doesn't seem correct either. Would disposing of the current asset and create a new one (same dates of service, same previous depreciation value, corrected basis) be a solution?

Any guidance would be welcome.

[RentalsForMe]

From poking around it looks like I need to amend my last three years of returns correcting my return from 2021 forward by increasing the asset values appropriately. The others before 2021 I won't get to claim the depreciation although that depreciation we be assumed to have been taken when I sell the asset in 2024. Does this sound accurate?

Do I need to remove the old asset and create a new one with all the same information (corrected)? Or can I simply correct the old asset in TT?

[AmyC]

1. You will need to file Form 3115 to claim the depreciation you didn't take. You can file it for 2024 and you won't amend the other returns.

2. Selling the asset, you will put the entire amount you should have taken. 

3. You will continue with the asset as you have been - don't replace it.

The laws around Form 3115 changed and there is now a fee to file it separately from your return so you really should submit it with your return. For more instructions and information, see another post of mine from last year. 

A year later, I want to add that if you are using the online version, you can switch to live help, because the 3115 is challenging to fill out. If you want to do it yourself, you will need to switch to the desktop version. See How do I switch from TurboTax Online to the TurboTax software?

[RentalsForMe]

Thanks for the information. However, that doesn't fix all the problems I have. The asset has the wrong "improvements" value which affects everything else (Capital Gains), including the state returns where the house was located. The asset must have its original basis corrected. I understand I need to recapture all the depreciation I should've taken (delta is $20K). However, this is a math error, not a change in accounting method. The house was always depreciated since it was put into service. I messed up transcribing values from my tax return in 2012 to TT2013 resulting in this problem. Thus I'm not sure Form 3115 is actually needed. Can you point to where it specifically says it is required in this context?

It seems that I need to fix the asset with the correct values as a first step. If I want to capture the depreciation I could've applied to 2021, 2022, and 2023 I'd need to file amended returns. There'd be no more tax owed as that property operated at a loss, so only the carry-forward loss would increase. If I forego that loss and simply fix it in in 2024 (by fixing the asset values, letting TT compute the depreciation), then it all will resolve correctly.

I now understand why a CAM (Change in Accounting Method) Form 3115 is required since timing and amount of the depreciation was changed back in 2013, but in fixing it to be correct I am essentially changing it again. As part of that change I understand that the depreciation that was not captured becomes an expense while the equivalent amount is also treated as income. As part of that correction how do I fix the asset being depreciated so its correct basis is used when I "sell" it within TT? Can I simply mark up the asset definition (the transfer from 2023 confirmation screen) to correct it? I presume I should not change the depreciation taken so far as then I'd be double counting it as the Form 3115 is handling that change?

I appreciate your guidance but more information would help me get this correctly fixed.

Regards

[MarilynG1 · Accepted solution]

Since you've sold the property, use the correct Cost Basis when reporting the sale, and TurboTax calculates the depreciation that would have taken for you. 

If you don't want to try to recoup depreciation you didn't get, no need to file Form 3115.

@RentalsForMe