I didn't know I HAD to take depreciation

[Stanley Crawford]

I would like to blame Turbotax for this mess but I know it my fault.  First let me explain how I got in this mess and hopefully someone has some good advice on getting out of it. I started buying buy and hold rentals in 2011. I bought and rehabbed 8 but I sold 2 in 2017..These are all very cheap propeties with an average basis of $18K after repairs that rent for around $550 each . I knew back in 2012 that my taxes were getting complicated but I didnt know where to get tax help I mean I went to HR Block but the lady there seemed to know less than me about business taxes and was talking about $2000 and up.(about 10 percent of my profits) So I started using Turbotax and I thought everthing was going fairly well. Until a couple of days ago when I watched a podcast and found out that depreciation was actually manadtory ie the IRS will assume you took it even If you did not. Turbotax does not tell you this and I was trying to keep it simple and I never took any. So now for the last 24 hours I have been trying to figure out how to fix it...Some tax gurus say to amend returns others talk about a 3115 but I cant even get close to figuring out how to fill that out. I know I need a CPA and I have an appointment with one but I live out in the sticks and i am not sure he is going to know much about real estate taxes himself....Unfortunatly I have a complicated tax return without the kind of income that makes a 2 or 3K per year CPA make sense. I only make about 50K per year with 20K coming from the rentals..The CPA websites I have seen seem to be geared for investers with a lot more income. 

[Michael Plaks]

@Stanley Crawford

First, there're LOTS of people who miss depreciation, and unfortunately even CPAs miss it, not to mention the franchise shops like H&R Block. Don't kick yourself. Now, let's get the concepts right. 

1. By not taking depreciation you only hurt yourself. You could deduct it, but you did not, so you have been paying more taxes than you should have. With cheap properties, those were small amounts, so maybe not that much was lost. You can start taking depreciation now and possibly decide to just let the old errors stay. It's not like you're breaking the rules or cheating the IRS. You're cheating yourself.

2. Where it becomes a problem is when you sell a property. The IRS rules will tax you on that old depreciation - as if you did take it. As in - maybe you borrowed $100 from me, and maybe you did not - but you still owe it to me. Unfair, I know. But the IRS goes like - hey, you could take it, so we assume you did, and if you did not - it's your problem, not ours.

3. Because of the #2, most people want to fix this problem when they discover it. People who don't know enough suggest that you redo ("amend") your old returns. Wrong. First, you can only go back 3 years. Second, it is specifically not allowed by the IRS. The right way to fix it is via Form 3115. It is a very complicated form, and very few people know how to do it right. Doing it wrong is not worth it. I would not entrust it to some random tax person if I were you. This is one of those situations where professional help is needed. And not just any professional help - a real expert.

4. The timing of Form 3115 matters. In a low-income year, you do not want to do it. This form creates a large one-time deduction, so you better choose a high-income year for this procedure.

5. Whenever you're ready, I recommend you hire one of the tax professionals from this BiggerPockets forum. There are some 20 of us here, working with clients remotely, no need for a face-to-face. Most of us have experience with 3115. Your local CPA may or may not. If you go local, quiz him about 3115 and make sure he knows how to do it.