Over-depreciation of rental home in 2024 – amend return or handle through depreciation recapture when selling in 2026?

[user17731760614]

Dear Experts,

I would appreciate guidance on a depreciation reporting issue.

My wife and I rented out our primary residence for about 2.5 months in 2024 while we moved to a rental house in another state due to job. While preparing our 2024 tax return, a calculation error occurred in the depreciation entry: the entire purchase price was used for depreciation instead of the building value only. The asset was depreciated using the 27.5-year straight-line method, but the incorrect basis resulted in over-depreciation and a lower AGI for 2024.

We discovered this error before filing our 2025 return and intend to correct the depreciation going forward.

Separately, our financial situation has changed and we are now planning to sell the house in 2026. The total depreciation involved (incorrect 2024 + correct 2025) will still be under $50,000. We also understand that depreciation recapture is taxed at ordinary income rates (up to 25%), and our tax bracket in 2026 is expected to be lower.

Given this situation, we are considering the following options:

Option 1 – Staggered filing

• File an amended 2024 return (Form 1040-X) to correct the depreciation and AGI

• Request an extension for the 2025 return

• File the 2025 return after the 2024 amendment is processed (hopefully before Oct 15)

Option 2 – Simultaneous filing

• File the 2024 amendment and the 2025 return at the same time, both reflecting the corrected depreciation

Option 3 – Correct going forward

• Do not amend the 2024 return

• File the 2025 return with the correct depreciation

• Track depreciation claimed for 2024 (partial year), 2025 (full year), and 2026 (partial year)

• When selling in 2026, report depreciation recapture based on the total depreciation claimed

My main questions:

1. Is Option 3 acceptable, or would the IRS expect the 2024 return to be amended due to the over-depreciation?

2. If we do not amend 2024, are there penalties or compliance risks associated with the excess depreciation taken that year?

3. Between Options 1 and 2, is there any practical advantage or IRS preference?

One complication is that correcting 2024 depreciation will increase AGI, potentially pushing us into a higher tax bracket for both 2024 and 2025, while our tax rate is expected to be lower in 2026 due to a change in income.

Any guidance on the correct IRS approach and risk considerations would be greatly appreciated.

Thank you in advance for your help.

[user17731760614]

@DianeW777 
May i request you advise here. Thanks

[DianeW777]

See the advice based on the options you presented.

1. Option 1: File the 2025 tax return with the correct building cost basis now. You do not have to wait while you weigh the options for an amendment of 2024.
2. Option 2: This is partially already answered above, if you choose to prepare the amendment, any time after acceptance of the 2025 tax return is fine.
3. Option 3: The IRS will recapture ALL the depreciation you used when you sell in 2026. 

Summary: 

• I lean toward number 1 in the main questions. To be honest I must say the IRS would require an amendment in most circumstances, however since the property is going to be sold in 2026, it's all handled regardless through recapture. 
• A key question is how certain you are the property will be sold. If there is any doubt, then amend immediately as noted above. As you have already suspected interest and penalty is a possibility only if the IRS has a question before you sell and file your 2026 tax return. 
• Keep in mind that no matter your choice the 2025 tax return will not change because you filed it with the correct cost basis for the depreciation.

@user17731760614 

[user17731760614]

@DianeW777 
Thanks a lot for your advice.

As per the house sale, we are in middle of the process and hope to close in a month. I haven't yet filed my 2025 returns yet. As per your suggestion, it's ideal to file 2025 returns with correct building cost basis and corrected previous year depreciation to show accumulated depreciation till 2025. 
@DianeW777 ,@Turbotax community,

• could you please advise on any specific item or info from 2024 returns that is relevant to 2025 filing? Just checking to make sure I can complete correct 2025 returns before April 15th without need for amendment later. 
• Are there any penalties on improper depreciation applied at recapture time during selling? Is the penalty  mainly on the taxes owed on income lowered due to over-depreciation?
• If an amendment is asked by IRS, will it be only for 2024? provided 2025 returns use correct cost basis.

Appreciate your response.
Thanks

[DianeW777]

Yes, you can file the 2025 correctly now. The change you make to the rental home cost basis, reduced by the land value, will make the 2025 return correct allowing you to file it now. Also be sure you did enter the land value where indicated in this rental home asset. An amendment of the 2024 return will correct it but will not make any change to the 2025 return. In other words, no amendment will be required for your 2025 tax return.

There only action in 2026 will be the recapture of the depreciation claimed in 2024, 2025 and 2026. In other words the tax for the part of the gain that is attributable to the reduction in your cost basis for depreciation deductions all years.

Yes, only the 2024 tax return would be required to be amended. The 2025 tax return is being filed accurately, as will the 2026 return. The only penalty will be late payment and interest for the additional tax due on the 2024 tax return when amended because of a lower depreciation deduction resulting in higher overall income. It doesn't seem like it would be significant since it only applies to the depreciation change.

Here are the amendment procedures for the 2024 tax return. Follow the instructions in the link below to take the necessary steps to amend in TurboTax Desktop or TurboTax Online.

The amendment can be completed using the steps in the link below.

• How do I amend a tax return for a prior year?

@user17731760614 

[user17731760614]

@DianeW777 

Thanks a lot for the advice and information.

For the 2025 filing, I do not need to be accurate with the total depreciation part of the house, if I file 2025 first followed by 2024 amendment. Please clarify. 

As per amendment Turbotax is only allowing me to download the 2024 tax filing software to a desktop and no option for online editing similar to current 2025 filing. Please let me know why i am not able to access the amendment in online version.

I will initiate the 2025 filing first followed by amendment of 2024 filing and will reach out for any further concerns.

Thanks a lot again.

[DianeW777]

Yes, you must be accurate with the depreciation in 2025. Use the tax assessments to figure out the percentage of cost that applies to the house and land.  Land/Total cost -- Building/ total cost = either will give the rate to use for your purchase price to arrive at the correct amounts for 2025. The 2025 tax return must use the correct figures for the rental house for the correct depreciation.

The link provides instructions for both TurboTax Online and TurboTax Desktop, based on which was used to file the original return.

@user17731760614 

[user17731760614]

@DianeW777 

Thanks for the response!