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What should I do if I didn’t take depreciation on my rental property?

by TurboTax•264• Updated 4 months ago

There are two ways do this:

  1. File an amended return: This only works if you didn’t deduct depreciation on your rental assets for one year. Go back and amend the return to reflect the missed depreciation. Note: You can only go back one year to claim a possible refund for missed depreciation.
  2. 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.

To get IRS approval to change an accounting method, you'll need to file Form 3115, Application for Change in Accounting Method.

In general, you can only change the accounting method to catch up on missed depreciation or change depreciation that was calculated incorrectly.

Note: Form 3115 can’t be used for making a late section 179 election, changing the date an asset was placed in service, or changing the use of an asset.

Form 3115 is a multipage form, but the part that pertains to catch-up depreciation is found on page 8, Schedule E - Change in Depreciation or Amortization. In Part I(a), the DCN code is “7” to indicate a change in depreciation method from an impermissible method to a permissible one. You also need to complete the Information for All Requests on pages 1 to 3.

You can only prepare Form 3115 in TurboTax Desktop, and you must be in the Forms Mode to prepare it.

In TurboTax Desktop:

  1. Select Forms.
  2. Select Open Form and type 3115.
  3. Select Form 3115, p1-3: Change in Accounting Method and select Open.
  4. Complete the following:
    1. Tax year of change: Enter current year.
    2. Type of applicant: Choose what type of entity you are.
    3. Type of accounting method change: Select Depreciation or amortization.
    4. Part I: For question 1(a) DCN: Type in 7.
    5. Answer questions 2 and 3.
    6. Part II: Answer questions.
    7. Part IV, question 25: Select No (to get to Part IV, you might have to select QuickZoom at the bottom of the form).
    8. Question 26: Enter the depreciation adjustment amount. 
    9. Question 27: Answer No.
    10. Answer question 28.
    11. Skip to Page 8, Schedule E Change in Depreciation or Amortization and complete the section (you might have to select QuickZoom at the bottom of the form again).

Attach Form 3115 to the tax return for the year of the change and include:

  • A statement describing the property subject to the change 
  • The year the property was placed in service 
  • The property’s use in the applicant’s trade, business, or income-producing activity

Review questions 5–7 for additional disclosure requirements, and mail a copy of Form 3115 and the disclosure statement to the address in the instructions of Form 3115.

Lastly, enter the adjustment referenced as section 481(a) depreciation adjustment in the Other Expense section on your schedule E, page 1 or on Form 8825 if for a partnership or S corporation rental activity.