Amend Taxes for Depreciation or File Form 3115?

[KumarB]

Client purchased residential investment property in 2010 and sold it in 2014.
She did not claim any depreciation on it initially when placed in service in 2011 as per her prior tax preparer advise!
I know I have to recapture the depreciation regardless if it was taken or not when reporting sale.
She also has a 2 family (purchased in 2012) lives in part and rent other . Again, no depreciation was taken on rental portion.

Should I amend her 2011 - 2014 taxes to claim the missed depreciation for both properties or file form 3115?

[TaxGuyBill]

I THINK technically you need to use 3115s.

When it was filed in 2011 and 2012, that formed an "adoption of accounting method", which would require 3115. The way I read it, you are not supposed to amend to correct it when that happens. I'm not 100% sure of that, but that's how I read it.

http://www.irs.gov/publications/p946/ch01.html#en_US_2013_publink1000107385

[ttbtaxes]

Amend

We all agree that for the property sold you must include factor in depreciation (to increase the gain) in your gain/loss calculation whether it was taken or not. That's the depreciation allowed or allowable rule.

You are also entitled to take depreciation that was missed on both properties. I don't see this as a change of accounting method. I see it as a correction of an error. The original return calculated the depreciation to be zero and the amended return calculates at whatever the proper amount is. The 3115 will elect the new methods for the 2012 property but I don't see how the depreciation not taken could be considered a 481(a) adjustment.

I'd amend 2011-2013 for both properties.

[TaxGuyBill]

I don't see how the depreciation not taken could be considered a 481(a) adjustment.

Not claiming depreciation is considered as an "impermissible" method of accounting for depreciation, and Form 3115 can be used with Code 7 (or 107 if it is disposed) to 'catch up' on the depreciation with a 481(a) adjustment.

http://www.irs.gov/pub/irs-drop/rp-15-14.pdf#page=22

http://www.irs.gov/instructions/i3115/ch02.html#d0e1299

[ttbtaxes]

You're correct Bill. I guess we learn something new each day.

[TaxprepP]

Client purchased residential investment property in 2010 and sold it in 2014.
She did not claim any depreciation on it initially when placed in service in 2011 as per her prior tax preparer advise!
I know I have to recapture the depreciation regardless if it was taken or not when reporting sale.
She also has a 2 family (purchased in 2012) lives in part and rent other . Again, no depreciation was taken on rental portion.

Should I amend her 2011 - 2014 taxes to claim the missed depreciation for both properties or file form 3115?

You will need to file form 3115 for an 481(a) adjsutemnt to claim the missesd depreciation according to the webinar "The ABCs of form 3115" from NAPT.