I need to file a section 481(a) adjustment through form 3115 to account for prior years of not claiming depreciation of a rental property. Is this adjustment on Schedule 1 or on Schedule 3? Please help, I am using Turbotax Premier Desktop. Thanks is used

[DawnC]

It goes to Schedule 1 via Schedule E.   Full instructions for filing Form 3115 are included in this link >>  What should I do if I didn’t take depreciation on my rental property?

[ykant7]

Thank you! On Part 4 of Form 3115, question 26: If I am trying to account for prior tax years of not claiming depreciation, would the number (catch up adjustment) on this line be a positive or negative number? Much appreciated!

[DawnC]

It is generally a negative number that decreases income.  

[ykant7]

Thank you again.  What confuses me is that TurboTax calculates my depreciation for Tax year 2025 as a positive expense on Schedule E, but when trying to account for years lost of claiming depreciation, the amount on Line 19 for the Section 481 Adjustment is a negative amount (example -25,836) It totally counters my other expenses already entered like Management Fees, etc.

[DianeW777]

The expense itself is a number that is subtracted from income, however you do not enter it as a negative number. It is listed as 'Other or Miscellaneous' expenses on Schedule E. Keep in mind the following information.

The rule is as follows - To file IRS Form 3115 for an automatic accounting method change, you must file in duplicate: 

1. attach the original, unsigned form to your timely filed federal tax return (including extensions), and
2. mail a signed copy to the IRS National Office or Ogden, UT office.
   • Form 3115 Instructions (page 2)

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. Keep in mind that even if you prepare the form 3115 in TurboTax, you will need to manually include the Section 481(a) adjustment to your return under miscellaneous expense for the prior year or missed amount.
  • 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. 

The depreciation will not link from Form 3115 to your Schedule E. Be sure to get the total accumulated depreciation prior to 2025, and enter that number on your Schedule E under 'Any Miscellaneous Expenses' then use the description F3115 Section 481(a), then add the amount. Your depreciation schedule will maintain the information for each asset for future use.

You can change to TurboTax Desktop if you choose.

• How to switch from TurboTax Online to TurboTax Desktop?

Additional options that you may consider: 

• While form 3115 is not supported in TT, you can include the adjustment amount in your tax return and still e-file your tax return.
• You would then need to complete form 8453, check the form 3115 box and mail both of these forms to the address on the instructions.  If you do this, make sure to send the envelope certified mail.
• Not necessarily advocating this method, for the simple fact that the IRS staff is down about 25% and just not sure of all the logistics given the reduction in staffing.
• If you decide to mail both the return with the form 3115, I also recommend you send this envelope certified mail as well.

@ykant7 

[ykant7]

Thank you so much! So to be clear, (it's been a long day!) the amount entered into schedule E as Other or Miscellaneous (Tied to the Section 481 Adjustment) is a positive amount. Thanks again for all of your time and information.🙏

[DianeW777]

Yes, you would not use a minus sign to create an opposite affect. Simply enter the number in the expense slot with the description as Section 481 Adjustment.

You're welcome.

@ykant7 

[Mike9241]

The 1099 B is not correct because Schwab does not adjust cost/tax basis for the partnership activity and the Section 751 gain. As part of the K-1 package you got, you got a sales schedule which will allow you to compute the proper tax basis 

if i had to guess

5026 beginning capital

-485 current year loss

-900 current year distributions

+4 section 751 gain

=3645

This matches the sales schedule when including section 751 gain

7

1527

705

1406

=3645 so this is what should be used as cost basis on Schedule D/form 8949. note that Schwab points out that caost basis was not reported to the IRS. These are the reasons

1. For the IEP unit sales on 1099-B, should I enter them exactly as reported first, or do I need to adjust basis/proceeds myself to avoid double counting with the K-1 disposition section. YOU DO NOT ENTER THE DISPOSITION IN THE K-1 REPORTING SECTION YOU WILL BE REPORTING IT TWICE
2. My understanding is that the Section 1256 options on 1099-B are separate from the K-1 partnership disposition and should be reported separately on Form 6781. Is that correct? YES - WHEN YOU GET TO THE SECURITIES/INVESTMENT SECTION, IT'S UNDER CONTRACTS AND STRADDLES
   1. In the K-1 disposition section:
       

      • Should I enter purchase date as “Various”  or Should I use the final sale date for the disposition screen? DOESN'T MATTER BECUASE ONLY THE ORDINARY SECTION 751 GAIN IS REPORTED HERE 
      • In the K-1 sale information section:
        
      •  

        • Should ordinary gain be the Section 751 gain of 4?
        • Since unrecaptured Section 1250 gain is zero, should 1250 gain be entered as 0?
        • are the numbers I entered correct for both regular Gain or Loss part and AMT gain or Loss part? IN THE K-1 SALES SECTION, ONLY THE SECTION 751 GAIN, ITEM 20AB ON THE K-1 IS REPORTED AS BOTH SALES PRICE AND ORDINARY GAIN, WHICH SHOULD MATCH THAT SALES SCHEDULE I REFERRED TO ABOVE 
        • y supplemental K-1 statement includes many Box 20-related items, such as 20V, 20Z1, 20AB, 20AE, 20ZZ10, 20ZZ11, and 20ZZ12. Do I need to manually enter all of these in TurboTax? I’m especially confused because -113 appears multiple times on the supplemental statement. Should that same amount be entered more than once in different places, or would that double count it?
          

        • On the TurboTax screen “We need some information about your 199A income”, I entered:

          • Ordinary business income (loss): -113

            IN 20Z ON THE K-1 ENTTER ONLY THE -113 AS 199INCOME/LOSS. LATER TURBOTAX WILL ASK YOUTO ENTER OTHER 199A INFORMATION WHICH IS WAGES ON 20ZZ1 AND PROPERTY NASIS ON 20ZZ12 

             

            Is that correct? should I enter anything else?  should the Section 751 gain of 4 be included there?

          • Also, where should the 20ZZ10 (-99) partnership interest disposition adjustment for Section 163(j) be reflected in TurboTax?

            UNFORTUNATELY, 20AE IS REPORTED ON FORM 8990 SCHEDULE A LINE 43. TURBOTAX DOESN'T DO THIS FORM. IF YOU DO IT MANUALLY YOU WOULD HAVE TO MAIL IN YOUR RETURN. THE EFFECT OF THIS SMALL AMOUNT ON YOUR RETURN MAY BE ZERO. DON'T KNOW WHAT ISSUES FAILURE TO FILE THIS FORM MIGHT CAUSE. 

            AS TO 20ZZ10 THIS IS WHAT I FOUND ON THE INTERNET, BECAUSE THE CODE IS NOT A STANDARD CODE WHICH WOULD INDICATE HOW TO HANDLE IT IN THE IRS INSTRUCTIONS

            On the K‑1:

            The gain or loss from the disposition is reported in the partner’s income/loss box (Box 1).

            The ZZ10 code is used to indicate that part of the gain/loss is an adjustment for Section 163(j) BIE allocation.

            The amount shown under ZZ10 reflects the portion of the gain/loss that is attributable to the BIE allocation and is adjusted for Section 163(j) rules IRS.

[Mike9241]

@ykant7 be aware that rental real estate is a passive activity except for real estate professionals. As such, if there is a loss on this property and it's a passive activity, the loss will flow to Form 8582 and be subject to the passive loss limitations