Higher depreciation taken in prior years

Tax, SDIRAs & Cost Segregation
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Higher depreciation taken in prior years

Sweta Jain
Member since 2024 · 19 posts · 4 votes

Hi,

I purchased a rental in 2020 Nov and when it was tax time for 2020, i used a CPA service. He made a mistake in the way he depreciated the property. He swapped the land and building value while doing depreciation calculation and in effect, I have ended up depreciating using the higher land value. 

Land value is higher in my case than building value!

I carrierd forward the same mistake in 2021, 2022 and 2023 taxes i did using turbo tax!

Now I am trying to fix this mistake and I called the old CPA but he never returned my call. 

I asked HnR block and they said I need to amend all returns. 

I also called turbo tax and they said I just need to file form 3115 and no amends are needed.

Can someone please advise me on how to fix this? If i had taken correct depreciation (lower), it would not have made any difference to my income/tax for these past years. It only changes my passive loss carryover.

Can form 3115 be used to fix an incorrect (higher in my case) cost basis for depreciation? 

Thanks

Shikha

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
1y

@Sweta Jain

H&R Block is generally not suited for real estate taxation, and they are wrong in this case, too. TurboTax is technically correct about Form 3115. What they did not tell you is that completing Form 3115 is not a DIY project, it is complicated.

Another thing they did not tell you is that it may be sufficient to adjust your passive loss carryforward and skip the 3115 hassle. While it is not technically compliant, it is probably an acceptable solution in your case.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    1y

    @Sweta Jain

    H&R Block is generally not suited for real estate taxation, and they are wrong in this case, too. TurboTax is technically correct about Form 3115. What they did not tell you is that completing Form 3115 is not a DIY project, it is complicated.

    Another thing they did not tell you is that it may be sufficient to adjust your passive loss carryforward and skip the 3115 hassle. While it is not technically compliant, it is probably an acceptable solution in your case.

    3Reply
    • Sweta Jain
      OP
      Member since 2024 · 19 posts · 4 votes
      1y
      Quote from @Michael Plaks:

      @Sweta Jain

      H&R Block is generally not suited for real estate taxation, and they are wrong in this case, too. TurboTax is technically correct about Form 3115. What they did not tell you is that completing Form 3115 is not a DIY project, it is complicated.

      Another thing they did not tell you is that it may be sufficient to adjust your passive loss carryforward and skip the 3115 hassle. While it is not technically compliant, it is probably an acceptable solution in your case.


       Thanks Michael.

      0Reply
  • Stephen Nelson
    Accountant , CPA, MBA in Finance, MS in Taxation · Redmond, WA · Member since 2025 · 172 posts · 135 votes
    1y

    I agree with @Michael Plaks but it's possible the land arguably is a higher percentage of value than improvements.

    E.g., a $500,000 property might be $100,000 of land and $400,000 of building... but it could also be $400,000 of building and $100,000 of land.

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  • Natalie KolodijBusiness Member
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    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    1y

    Step 1: 

    Confirming the actual building vs. land value from the year the property went into service using either the ratio from the county assessor or the appraisal. 

    Step 2: 

    If it requires correction a 3115 would be required, you can't amend to fix this. And that's not a super simple form so I'd recommend working with an actual professional to handle the correction. 

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    • Sweta Jain
      OP
      Member since 2024 · 19 posts · 4 votes
      1y
      Quote from @Natalie Kolodij:

      Step 1: 

      Confirming the actual building vs. land value from the year the property went into service using either the ratio from the county assessor or the appraisal. 

      Step 2: 

      If it requires correction a 3115 would be required, you can't amend to fix this. And that's not a super simple form so I'd recommend working with an actual professional to handle the correction. 


       Thanks Natalie. I will take the turbo tax LIVE service and hope they will be able to guide me through it.

      0Reply
  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes
    1y

    Credit to Michael for this insight.

    H&R Block isn’t well-suited for real estate taxation, and while TurboTax is technically correct about needing Form 3115, it’s not a simple. Reach out to a CPA 

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  • Fulton Abraham Sanchez
    CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 94 votes
    1y

    Sweta, hi. You don't need file 3115 form. That is to change method of accounting. Amendment to previous year returns is an option but if you plan to sell the property in coming years the excess depreciation will be taken back and you will pay taxes.
    It is important to reach out to one with real estate experience as location is not an issue these days.



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    • Sweta Jain
      OP
      Member since 2024 · 19 posts · 4 votes
      1y
      Quote from @Fulton Abraham Sanchez:

      Sweta, hi. You don't need file 3115 form. That is to change method of accounting. Amendment to previous year returns is an option but if you plan to sell the property in coming years the excess depreciation will be taken back and you will pay taxes.
      It is important to reach out to one with real estate experience as location is not an issue these days.




       Are you sure this cannot be done via 3115? I cannot even amend the old year returns as its more than 3 years! Other people of this thread advised to use 3115.

      0Reply
    • Fulton Abraham Sanchez
      CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 94 votes
      1y
      Quote from @Sweta Jain:
      Quote from @Fulton Abraham Sanchez:

      Sweta, hi. You don't need file 3115 form. That is to change method of accounting. Amendment to previous year returns is an option but if you plan to sell the property in coming years the excess depreciation will be taken back and you will pay taxes.
      It is important to reach out to one with real estate experience as location is not an issue these days.




       Are you sure this cannot be done via 3115? I cannot even amend the old year returns as its more than 3 years! Other people of this thread advised to use 3115.

      Yes, don't need to change accounting method with form 3115. You could either amend your prior tax returns or simply wait until the property is sold, at which point the excess depreciation will be recaptured.


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    • Michael PlaksPro Member
      Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
      1y
      Quote from @Sweta Jain:
      Quote from @Fulton Abraham Sanchez:

      Sweta, hi. You don't need file 3115 form. That is to change method of accounting. Amendment to previous year returns is an option but if you plan to sell the property in coming years the excess depreciation will be taken back and you will pay taxes.
      It is important to reach out to one with real estate experience as location is not an issue these days.




       Are you sure this cannot be done via 3115? I cannot even amend the old year returns as its more than 3 years! Other people of this thread advised to use 3115.


      You cannot amend. And not only because the window to amend returns closes after 3 years, but because such amendment is specifically prohibited after 2 years of incorrect depreciation.

      Correcting depreciation IS a "change of accounting method" so form 3115 is the proper way to do it. Technically speaking. But not practically speaking.

      The catch is that Form 3115 normally produces an adjustment which either increases or decreases your current taxes. In your particular situation, this adjustment will only change carryforward PAL (passive activity loss) but not current taxable income. Under these circumstances, Form 3115 is likely to not be processable by the IRS even if you file it. 

      If you skip Form 3115 and simply adjust your PAL numbers, you will achieve the correct ultimate outcome and save yourself a major hassle.

      1Reply
    • Stephen Nelson
      Accountant , CPA, MBA in Finance, MS in Taxation · Redmond, WA · Member since 2025 · 172 posts · 135 votes
      1y
      Quote from @Michael Plaks:
      Quote from @Sweta Jain:
      Quote from @Fulton Abraham Sanchez:

      Sweta, hi. You don't need file 3115 form. That is to change method of accounting. Amendment to previous year returns is an option but if you plan to sell the property in coming years the excess depreciation will be taken back and you will pay taxes.
      It is important to reach out to one with real estate experience as location is not an issue these days.




       Are you sure this cannot be done via 3115? I cannot even amend the old year returns as its more than 3 years! Other people of this thread advised to use 3115.


      You cannot amend. And not only because the window to amend returns closes after 3 years, but because such amendment is specifically prohibited after 2 years of incorrect depreciation.

      Correcting depreciation IS a "change of accounting method" so form 3115 is the proper way to do it. Technically speaking. But not practically speaking.

      The catch is that Form 3115 normally produces an adjustment which either increases or decreases your current taxes. In your particular situation, this adjustment will only change carryforward PAL (passive activity loss) but not current taxable income. Under these circumstances, Form 3115 is likely to not be processable by the IRS even if you file it. 

      If you skip Form 3115 and simply adjust your PAL numbers, you will achieve the correct ultimate outcome and save yourself a major hassle.

       Again with @Michael Plaks here. Make the error two years in a row? You've established your (incorrect) accounting method.

      1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Sweta Jain Since the depreciation was calculated incorrectly by swapping the land and building values, this qualifies as a change in accounting method, not just a simple error. In this case, filing Form 3115 is the correct approach. The IRS allows you to fix depreciation mistakes prospectively using this form under Revenue Procedure 2015-13, without needing to amend prior returns. This will trigger a Section 481(a) adjustment, which accounts for the over-depreciation in prior years and corrects the depreciation going forward. While this won’t impact your taxable income from prior years, it can affect your passive loss carryforwards, so it’s important to recalculate them correctly. Work with a tax professional experienced in real estate to file Form 3115 accurately and avoid further issues.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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