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June 18, 2022
Question

I neglected to take depreciation during the 10 year rental period prior to selling it in March 2022. Any advice, can TurboTax help?

  • June 18, 2022
  • 2 replies
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2 replies

Critter-3
June 18, 2022

You will need to file a form 3115 with the 2022 return to correct this error and it is NOT a DIY form so either use a local tax pro or upgrade to a LIVE version of the TT online program.   If you don't you will pay more in taxes than you need to. 

Carl11_2
Employee
June 19, 2022

Basically, when you sell the property (as I understand, you sold it in 2022) you are required to recapture the depreciation taken, or the depreciation you "should" have taken, and pay taxes on that recaptured depreciation. I am assuming the property was still classified as a rental at the time of the sale, meaning that you will report the sale on SCH E of your 2022 tax return you will complete next year.

Instead of dealing with the 3115 on your 2021 return (assuming you have not filed it yet) when you report the sale on your 2022 tax return the program will automatically figure the depreciation you "should" have taken. Then that depreciation will be recaptured and taxed in the year of the sale.

Weather you file the 3115 or not, you will recapture the depreciation and pay taxes on it. Two things to keep in mind about depreciation recapture.

1) Recaptured depreciation is added to, and increases your AGI in the year of sale. This has the potential to bump you into the next higher tax bracket (depends on the numbers and a number of other factors) as well as change any tax credits you may or may not qualify for.

2) Recaptured depreciation as taxed as the "ordinary" income tax rate anywhere from 0% to a maximum of 25%.

 

Employee
June 20, 2022

@Carl11_2 wrote:

Weather you file the 3115 or not, you will recapture the depreciation and pay taxes on it. 


As @Critter-3 stated, Form 3115 needs to be filed. A Section 481(a) (catch-up) adjustment will be made which will entirely offset the depreciation recapture (from the foregone depreciation).