Correcting cost basis for home office depreciation

[internetblue]

For some reason, the cost basis calculation for depreciating my home office has been based on the entire purchase price of my house, including the land, which I recently discovered isn’t eligible for depreciation. This has been the case since I bought the house in 2021, and now I’m looking to correct it.

I’ve gone into the “Forms” view and opened the worksheet for Form 8829 (specifically line 38 of the worksheet), but I’m unable to edit the original purchase price or land value fields. The purchase price is locked, and while the land value line is blank, it won’t let me add the land value from 2021 either.

Do I need to address this now, or can I leave it as is for the time being? I’m not planning to sell the house soon, but I want to make sure I’m not setting myself up for problems with depreciation recapture when I eventually do sell.

[DavidD66]

The sooner you address the issue the better.  Since the entire cost of your house is allocated to the structure, and none to the land, you are taking too much depreciation expense each year.  You need to file Form 3115 Application for Change in Accounting Method in order to correct your depreciation for prior years.  Form 3115 is not a simple form to complete, so you might want to seek some help from a local tax professional.  

Before you start making any changes to your return that might affect prior years, I suggest you make a copy of your return by saving it with a different name.  

You should be able to adjust the "total cost when asset was acquired" in line 4 of the Asset Entry Worksheet and add the cost of the Land on line 8 of the Asset Entry Worksheet.  These amounts flow to lines 37 and 38 of Form 8829.  Note, line 4 of the Asset Entry Worksheet is the value of the entire property (structure and land).  Once you make changes to these amounts, they will change accumulated depreciation as well as current year depreciation.  That change in Accumulated Depreciation should be a decrease and the corresponding depreciation expense you took will need to be added back via Form 3115.   

[internetblue]

Thanks for the quick response! Can I file Form 3115 within my TurboTax return and does TurboTax guide me through it, or do I need to handle it separately via CPA or something. 

Also, since I’m not selling my house right now, can I just correct the value in the Asset Entry Worksheet as you suggested and skip Form 3115? The difference is pretty small—$2,400 in depreciation before the correction vs. $2,100 after.

One more clarification: Should line 4 of the Asset Entry Worksheet definitely include both land and house value? The note next to line 4 says, “Include land for asset type I, J, or M,” but I believe mine is H—a residential house with a home office. Just want to be sure I’m entering it correctly.

[DavidD66]

Yes, you can file Form 3115 in TurboTax, but it's not going to guide you through it.  I suggest you take a close look at it before you attempt it.  I am pretty sure you can get away with just correcting the value in the Asset Entry Worksheet.  I don't think the IRS will ever notice your change.  Line 4 may not need to include the value of the land.  I was looking at an asset entry worksheet for a rental property.  If there isn't a line item for the land that is subtracted from the value on line 4 to determine the cost basis of the structure, don't include it.  If that's the case and you do, you'll be right back where you started - depreciating based on total cost, including the land.