481 (a) Adjustment

[sami]

I have a new client who owns three rental properties and never claimed any depreciation on them for the past 10 years. After explaining to him the implications of not claiming the depreciation, he agreed for me to fix it. I was thinking of preparing Form 3115 and calculating the 481 (a) adjustment. In this case he will have a negative 481 (a) adjustment. I am not sure if I can take the entire adjustment in current year or over a four year period? If I take the entire adjustment in the current year it will be over $130,000 and will make his taxable income zero and will get him a big refund. Will this cause any issues with IRS? Can anyone suggest me how the missed depreciation on rental property be handled? Has anyone came across this kind of issue? Thanks

[ATSMAN]

I had only done a large 481 adjustment and we filed paper because of the supplemental documents (old schedule E copies, etc.) to prove that depreciation was never claimed because the software taxpayer was using was not doing the calculation correctly. You also need to write the explanation letter. Good luck.

[Uncle Sam]

Yes - I had a very similar situation of a client who had 3 rental properties (3 different coop units) where until he came to me never picked up depreciation for those units.
I completed Form 3115, explained the situation in detail, prepared a schedule of missed depreciation for each unit by year, then picked up a 481(a) adjustment (negative) on the year discovered, never heard anything from IRS. That goes back at this point - about 6 years ago.

[sami]

Thank you so much. I agree, I would have to attach a letter with explanation and the missed depreciation schedule. This team work helped built my confidence as I have never done a Form 3115 but studied and researched on it for past three days. Thanks again

[Uncle Sam]

Form 3115 has a special section for depreciation adjustments because it's a common area of discrepancy. When working with it - I would keep a set of the instructions in front of you as you are completing the form.

[sami]

Thanks for the word of precaution

[Lion]

A good, inexpensive resource is Lisa Ihm's booklet from Brass Tax: Tax:https://brasstax.com/shop?olsPage=products&page=2

Or, start with her free worksheet: https://brasstax.com/practice-aids#9...e-69f1d56b6507