Depreciation Recapture for rental property

[Jason Heath]

I sold a rental property.  Half-way through owning it, I realized that I had failed to begin depreciating it when I bought it, and I started depreciating it.  Had I depreciated it from the beginning, I would have accounted for $20,000 of depreciation.  In reality, I only accounted for $8,830 of depreciation.

I am using Turbo Tax.  Regardless of whether I input $20,000 or $8,830 as prior depreciation, my Federal tax return does not change.  However, my state tax return does - inputting $8,830 rather than $20,000 results in a larger State refund ($1,039).  I am thinking this is because the feds are going to take depreciation recapture on what I should have taken ($20,000) rather than what I did take ($8,830).  However, does California not follow those same rules, and does it only take depreciation recapture on what I actually claim I accounted for in depreciation ($8,830)?

Help!  And Thanks!

[Meagan Barkley]

CPA licensed in AR and OK. I'm not sure as to the CA rules. The federal rule is, depreciation must be recaptured up to the amount "allowed or allowable," meaning whether you took the deduction or not. When we get clients who have not taken depreciation in prior years, we take a 481a adjustment to "catch up" the amount they have missed and make an accounting method change on Form 3115. Take a look at http://legacy.nafcc.org/index.php?option=com_content&view=article&id=110&Itemid=595. You may want to consider hiring a CPA to help you with this.