Claimed the wrong cost basis on a rental property for 16 years, resulted in exsess deprecation when I sold it. Do I need to do form 3115 or does the unrecaptured 1250 gain take care of it?

[rlamoreaux1]

My main issue is from the years 2005 until the year 2020, I claimed the wrong cost basis on 2 rental homes. What I claimed for the cost was the price I paid for them. What I should have claimed was an adjusted cost basis from form 8824 in the year 2005.

To compound the issue, I did not have a copy of my 2005 tax return, so I did not know what form 8824 line 25 was.

The earliest return I had was 2008. I used the “Tax History” of the 2008 return and recreated my 2005 return. I added the asset deprecation values also from the 2008 return. This plus the best guess on the property I gave up in the 1031 exchange allowed me to recreate the form 8824 in 2005.

I now had the adjusted cost basis for the property received in the 1031. I used county tax records to calculate the % of the total cost basis that was the land value.

I sold the properties in 2021.

I created a 2021 tax return using the proper cost basis. This resulted in a excess depreciation reported to the IRS of over $129000, also a schedule D and a unrecaptured 1250 gain  was produced.

I then created a 2021 tax return using the bad cost basis. This also resulted in a schedule D and a unrecaptured 1250 gain  to be produced, but of a much higher number.

The refund in both returns were basically similar.

Do I need to do form 3115 with a method change in the good return, because of the excess deprecation or does the unrecaptured 1250 gain take care of the problem?

Thanks

[ZoltanB45]

If you had a higher basis, you took extra depreciation each year. You would not be able to amend those returns now. If you are trying to change something this year that would have an affect on prior returns, the IRS probably wont allow it..if they realize it.

[Mike9241]

using form 3115 the excess depreciation would be recaptured as ordinary income. then only the correct depreciation would be recaptured as SEC 1250 gain.  this could produce significantly different results than if you didn't do the 3115 but recaptured all the depreciation you took as SEC 1250 gain.  the 3115 is probably the proper route but you may want to discuss this with a tax pro.