How to recover unclaimed depreciation?

[jscon2011]

I thought I was a saint for reporting my rental income for the two-three bedrooms I was renting to soon-to-be married, between jobs family and friends. I filed a Schedule E for all applicable years, 2020, 2021, and 2022. Now, I have only this week learned of the impending Depreciation Recapture when/if I sell the home. I never claimed depreciation, and I suspect, because I am usually very thorough, and based on a number of other comments and questions in this forum, TT doesn't always prompt you for depreciation, or at least does not do it in a way that's intuitive to someone who is completely ignorant of it (as I was, admittedly). Either way, not here to criticize TT for that. Point is, I never claimed the depreciation for those years. 

I can amend 2021 and 2022, but 2020 is out of reach. What are my options for accessing that 2020 depreciation? The internet seems to agree that a 3115 is in order, but my CPA, who I am meeting with in a few days, has been adamant that I do not need a 3115. He is a cagy fellow who communicates poorly in text, so until I sit down with him I cannot truly understand his reasoning. What I can surmise is, if we amend 2021, then we will no longer have "back-to-back" impermissible methods, and therefore no 3115 will be needed...? Idk what else he could be thinking.  And if that were the case, and since I cannot amend 2020, how would I claim that depreciation?

Unsure of best course of action here. 

[tagteam]

Print out the text below and show it to your CPA.

How Do You Correct Depreciation Deductions?

If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. See Filing an Amended Return next. If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method, later.

Filing an Amended Return

You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.

• You claimed the incorrect amount because of a mathematical error made in any year.

• You claimed the incorrect amount because of a posting error made in any year.

• You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.

• You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.

Adoption of accounting method defined.

Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns.

For an exception to the 2-year rule, see sections 6.01(1)(b), 6.19(1)(b), and 6.21(3)(b) of Revenue Procedure 2022-14 on page 502 of Internal Revenue Bulletin 2022-7, available at IRS.gov/irb/2022–7_IRB#REV-PROC-2022-14; or any successor.

When to file.

If an amended return is allowed, you must file it by the later of the following.

• 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.

• 2 years from the time you paid your tax for that year.

Changing Your Accounting Method

Generally, you must get IRS approval to change your method of accounting. You must generally file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

• A change from an impermissible method of determining depreciation for depreciable property if the impermissible method was used in two or more consecutively filed tax returns.

• A change in the treatment of an asset from nondepreciable to depreciable or vice versa.

• A change in the depreciation method, period of recovery, or convention of a depreciable asset.

• A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance.

• A change from claiming a 50% special depreciation allowance to claiming a 100% special depreciation allowance for qualified property acquired and placed in service by you after September 27, 2017 (if you did not make the election under section 168(k)(10) to claim a 50% special depreciation allowance).

Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.

• An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.

• A change in use of an asset in the hands of the same taxpayer.

• Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). If you elected not to claim any special depreciation allowance, a change from not claiming to claiming the special depreciation allowance is a revocation of the election and is not an accounting method change. Generally, you must get IRS approval to make a late depreciation election or revoke a depreciation election. You must submit a request for a letter ruling to make a late election or revoke an election.

• Any change in the placed in service date of a depreciable asset.

See sections 1.446-1(e)(2)(ii)(d) and 1.446-1(e)(2)(iii) of the regulations for more information and examples.

[tagteam]

Here's the IRS Publication:

https://www.irs.gov/publications/p946#en_US_2020_publink1000107386

You need to file Form 3115 to correct the anomaly as you used an impermissible method of accounting on two or more consecutively filed income tax returns.

[jscon2011]

Thank you. I am filing amended 2021 and 2022 returns; do I file the 3115 separately, prior to, or with either of those amended returns?

[tagteam]

You do not file Form 3115 and amended returns.

You could file Form 3115 (and make a 481(a) adjustment) with your 2023 return (if you have not yet filed) or with your 2024 return (next year).

[jscon2011]

Thanks, but I don't understand the "and" in your comment. I don't file 3115 and amended returns? Does that mean I do not file them together, or I never file them for the same years?

Do I go ahead with the amended returns and then file the 3115 with my 2024 taxes? (yes, I filed 2023 already). 

Thanks!

[tagteam]

You do not amend the past returns to include foregone depreciation deductions at all.

Instead, you file Form 3115 with your current income tax return and you should only have to make that adjustment one time.

[Opus 17]

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@jscon2011 wrote:

Thanks, but I don't understand the "and" in your comment. I don't file 3115 and amended returns? Does that mean I do not file them together, or I never file them for the same years?

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If you made the mistake in one year, you could amend that year.  Since you made the mistake 3 years in a row, you need to use form 3115 only.

If your accountant is "cagey" and won't help, get a new accountant.  

[jscon2011]

Ahh, understood. This is so helpful!

To add a layer of context, I also failed to deduct mortgage insurance and a number of other deductions on my rented portion of the home, so I have reasons to amend otherwise. I'm guessing you would suggest amending for those reasons but skipping adding the depreciation to those amendments, and instead using the 3115 for all three years next April?

[tagteam]

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@jscon2011 wrote:

I'm guessing you would suggest amending for those reasons but skipping adding the depreciation to those amendments, and instead using the 3115 for all three years next April?

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Yes.

[AmeliesUncle]

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@jscon2011 wrote:

and instead using the 3115 for all three years next April?

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What about 2023?  Has that already filed?  Did you claim depreciation?  You weren't allowed to claim depreciation in 2023 without filing the 3115.