Rental property - entered in incorrect cost basis a few years ago and thus have an incorrect depreciation for a few years ... what to do?

Forum|Forum|4 years ago
April 2, 2022
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Dear Community:

I was hoping you can help me. 3 years ago, I started using Turbotax and at that time, I entered in the basis for my existing rental property incorrectly and thus, for the last three years, I have been depreciating more than I should have.

What should I do?

Option A: I could do a 1040x for each of the three years but this seems so complex.

Option B: Can I just correct the basis this year, taking into account the TOTAL depreciation thus far I have expensed including the incorrect amounts these three years and just move forward?

My preference is Option B. It would mean that for three years past, I should have paid more taxes (I had a higher depreciation expense) but it also means that in the outyears, I will now have a lower depreciation expense than I would have if I did not make the mistake since the basis will be lower.

Any help is appreciated. Thank you! Ray

Not A Product Question

ColeenD3

Using a wrong Basis for depreciation can only be corrected by amended returns, and you can only amend up to the 3 prior years.

When entering the asset in TurboTax and it asks for "prior depreciation", you need to enter the amount that you could have taken (if you leave it blank, I think it automatically calculates that).

Depreciation errors are corrected by either filing an amended return or filing a change in accounting method form. Depreciation errors that are NOT subject to the accounting method change filing requirements require amended returns and include:

Amended Returns:

You claimed the incorrect amount because of a mathematical error made in any year.
You claimed the incorrect amount because of a posting error made in any year.
You claimed the incorrect amount on property placed in service by you in tax years ending before the statute of limitations has expired.
You are changing the amount of Section 179 claimed or not claimed.
Election to apply the $2,500/$5,000 de minimis safe harbor rules (within its own time period requirements of return due date plus extension).
Election not to claim bonus depreciation under 168k (within its own time period requirements of return due date plus extension).

Amending returns will only correct depreciation errors that have occurred in the last three years.

Wrong basis

raynam8Author

Thank you for the response.

I made an error in depreciation for 2018, 2019, 2020. Does this mean I can amend those three years? I heard about form 3115 being needed if a change needs to be made prior to 3 years. I then hear about the "2 year rule". I am confused as to when the 3 years back start. Essentially, I did it incorrectly for 3 years straight and was wondering if I need form 3115 or it is just a simple amendment?

Thank you.

"The use of an incorrect method of depreciation, which would include taking no depreciation, is considered the use of an incorrect accounting method. Once an incorrect accounting method has been used for two years, a Form 3115 is required to change accounting methods back to a correct method, or in this case, since not taking depreciation is incorrect, to begin taking depreciation a Change in Method Form 3115 must be filed."

Carl11_2

Employee

You'll need to amend each individual return, starting with the oldest one first. Take note that when you amend the 2nd year, you will have to enter prior year's depreciation manually, as when amending you can not import from the prior year return. So to get the correct amount of prior year's depreciation, that's why you have to start amending the oldest tax return first.

raynam8Author

Thank you.

ITGnyus

A Form 3115 would be the correct route to make this adjustment for the prior 3 years!

ColeenD3

You are not correcting an incorrect depreciation method, you are correcting your basis.

Explanation of the 2-year rule:

The use of an incorrect method of depreciation, which would include taking no depreciation, is considered the use of an incorrect accounting method. Once an incorrect accounting method has been used for two years, a Form 3115 is required to change accounting methods back to a correct method, or in this case, since not taking depreciation is incorrect, to begin taking depreciation a Change in Method form must be filed.

Outlined in my earlier post, the IRS states:

Depreciation errors that are NOT subject to the accounting method change filing requirements require amended returns and include:

Amended Returns:

You claimed the incorrect amount because of a mathematical error made in any year.
You claimed the incorrect amount because of a posting error made in any year.
You claimed the incorrect amount on property placed in service by you in tax years ending before the statute of limitations has expired.

raynam8Author

Thank you for the response and sorry for me not truly understanding it.

For 2018 to 2020, I entered in an incorrect cost basis which then triggered an incorrect depreciation expense for those three years. Note: I owned this property since 2009 and just made this error in 2018 to 2020. I thought that IRS treated incorrect depreciation for more than two years as a change to depreciation method requiring form 3115.

raynam8Author

I will also add that a sold it (well replaced it in a 1031 exchange) in 2021 so not sure if there is something I could do in 2021 to fix everything other than amending 2018 to 2020 (if possible).