I own 3 rental condos purchased in 2017 for $250,000 total.
I forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
Annual depreciation should be $9,090 (using MACRS, 27.5-year life) with total missed depreciation: ~$36,360 ($9,090 X 4)
My total rental income for 2024 is ~$15,000 before depreciation and ~$6,000 after.
I’m using TaxAct to file my taxes.
Condos are considered "air lots" with no separate land value allocation.

I’ve completed Form 3115 for a change in accounting method and am trying to make a one-time IRC §481(a) adjustment to catch up on the $36,360 missed depreciation in my 2024 return.

The problem: TaxAct allows me to enter $36,360 as "prior depreciation," in my 2024 tax return, but it only results in $400 of tax savings. This doesn’t seem right given my marginal tax rate and the size of the adjustment.

Questions: How can I properly deduct the full $36,000 catch-up adjustment to maximize my tax savings?

Any advice on handling this situation correctly would be greatly appreciated!

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Natalie Kolodij

Tax Strategist| National Tax Educator| Accepting New Clients

Natalie Kolodij

Tax Strategist| National Tax Educator| Accepting New Clients

ModeratorReplied March 11, 2025 20:32

I would recommend a tax professional for this one. Below is the time estimate for form 3115 from the form instructions. It can be a tricky one.

But a few things:

1. Your condos may still have land value. Did you confirm the county lists no land value? If the county lists no land value did you confirm your HOA ownership documents don't actually list you an allocated amount/portion of shared spaces and or land values?

2. Is that annual amount based on the set/existing depreciation schedule from 2019 when it dropped off?

3. It's not prior depreciation. It should be a current expense of the 481(a) adjustment recognizing the total amount of missed depreciation in 2024 you should have an extra $36,360 as a 481(a) adjustment in 2024; and then your 2024 depreciation amount should reflect the correct current year amount.

4. Whether the full catch up of missed depreciation results in a tax savings or not depends on your passive loss limitations.

If your AGI is > $100k then your ability to deduct passive losses will be limited. The 481(a) adjustment feeds into your passive loss so there may still be limitations. (assuming these are long-term rental and you're not REPS)