Form 3115 - Part 4 - Section 481(a) Adjustment - Clarity on Question 27 and 28

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March 3, 2024
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Hi All,

My scenario is a bit simple but I want to make sure that I am answering this question correctly.

Bought my house in 2019 but put up as rental only in 2019. No depreciation was taken in 2021 and incorrect depreciation(quite less) was in 2022. I am now submitting 3115 (using DCN# 7) and need clarification on 2 questions from part 4:

Question 27 - Is the applicant required to take into account in the year of change any remaining portion of a section 481(a) adjustment from a prior change (see instructions)?

I am guessing that answer here is no, since I haven't submitted any previous 481(a) adjustments, but please confirm.

Question 28 - Is the applicant making an election to take the entire amount of the adjustment into account in the tax year of change?

I am guessing this is not applicable to me since my 481(a) adjustment is negative, but please confirm.

Thanks for your help.

Rick19744

Employee

Response to your questions:

Question 27 - you are correct
Question 28 - the answer depends on whether you will take the entire adjustment into account in the current year (or are eligible), or whether you will take it over multiple years as allowed.
- Whether the adjustment is negative or positive does not always impact the response
- A negative adjustment provides the taxpayer with a benefit, so taking the full adjustment in the year of change could be beneficial.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

anxsaAuthor

Thanks @Rick19744. My rental income is considered as "passive", so I won't be able to get any deduction on my main income anyways. Plus the depreciation will make the passive income negative so I am thinking there is no other route than to take this negative adjustment carryover to future years, which means I should mark Question 28 as no. What do you think?

Rick19744

Employee

In accordance with the instructions for form 3115 (page 9 Part IV), the general rule is that you take the full Section 481(a) adjustment into account in the year of change when there is a net negative adjustment.

There could be some exceptions, but not for this specific automatic method change.

So while you may not experience the benefit in the current year, it is the correct adjustment period and will also carry over.

So, in conclusion, the answer to the question on the form should be "yes".

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.