Should I amend previous tax returns if my CPA incorrectly filled out Form 8582 (Passive Activity Loss Limitations)

[curiousAI]

I purchased a rental property in 2019, and my then CPA started the depreciation schedule for it. In 2020, we began some renovations on the property, so he added another asset for the renovations to the depreciation schedule. The renovations continued well into 2021, incurring additional expenses.

In early 2022, I switched CPAs. This new CPA filed my 2021 and 2022 tax returns, but then stopped filing my tax returns after that.

Later in 2023, I received a corrected W-2 from my previous employer for the 2021 tax year. When I started revisiting my 2021 tax return, I noticed the depreciation schedule was missing:
- an asset for the 2020 renovations,
- the original property asset’s depreciation amount was calculated incorrectly,
- and Form 8582 didn’t include the previous years' (2019 and 2020) unallowed losses, only the loss for 2021 and onward.

My question is, what should I do now? Do I need to amend the 2021 (which I need to do due to the corrected W-2)? Do I need to amend 2022 and 2023 returns to modify Form 8582 and account for the proper unallowed loss? Or can I just re-add the assets for my 2024 return and calculate the amount that should have been taken previously?

[DianeW777]

First you should amend the 2021 and add the assets to your return for that year if you like. Since you need to amend any way it makes sense to add them to your 2021 tax return. 

However, you do have another option.  You can uses form 3115 to take a deduction of all depreciation for 2021, 2022, and 2023, that was not previously included on those returns.  Add the assets to your tax return for 2024, then calculate the amount for each of the missing years.  The residential rental property and capital improvements have the same method of 27.5 year, straight line depreciation.  The chart is posted for you and can be accessed in IRS Publication 946. Do not include 2024 because TurboTax will calculate the correct amount for the current tax year.

Next, for the prior depreciation you have not used.  

• You can use the following form to correct the depreciation for your rental property. Take any amount not previously expensed on prior returns, as an expense on the current year tax return as 'Other Expenses'.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2024 tax return.

• Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation.
  • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
• You must use the TurboTax Desktop ‌ to complete this form. TurboTax doesn't help you with this form. And your return must be mailed because this form is not supported through e-file.

This must be completed and filed with the return on time.

You can change to TurboTax Desktop if you choose.

• How to switch from TurboTax Online to TurboTax Desktop?