Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.

Tax, SDIRAs & Cost Segregation
1yFollow

Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.

Michael Kare
Member since 2025 · 13 posts · 1 vote

I need advice on catching up on missed depreciation for my rental properties. Here’s my situation:

  • 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!

1Reply
458 views

Most Popular Reply

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

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)

Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
WebsiteView Page
5Reply
See this reply in the discussion

32 Replies

Jump to latestLatest
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    1y

    @Michael Kare

    i'd work with a CPA on this

    seems worth it to get it right

    good luck

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    1y

    If you think it’s worth more than $400 you should definitely pay a CPA or a tax pro, especially if you plan to use the software in future years. Either the software is wrong and you should immediately stop using it. Or it’s right and you’ll know to trust it next time when the tax guy says it’s right. 

    Ps. There are situations where an extra $30k in depreciation could result in ZERO tax savings. If you’re not showing any positive net rental income and you have w-2 income you don’t get to write off infinite rental expenses, including depreciation. 

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

    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)

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    5Reply
    • Michael Kare
      OP
      Member since 2025 · 13 posts · 1 vote
      1y
      Quote from @Natalie Kolodij:

      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)

       Natalie,

      Thank you for your reply. How can I practically expense an extra $36,360 as a 481(a) adjustment in 2024? I have tried to insert $36,360 as Prior Depreciation in TaxAct, but the savings are around $400. 

      0Reply
    • Natalie KolodijBusiness Member
      Moderator
      Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
      1y
      Quote from @Michael Kare:
      Quote from @Natalie Kolodij:

      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)

       Natalie,

      Thank you for your reply. How can I practically expense an extra $36,360 as a 481(a) adjustment in 2024? I have tried to insert $36,360 as Prior Depreciation in TaxAct, but the savings are around $400. 


       You typically put it as an "other" expense. I'm not sure how TaxAct needs to handle it. 

      Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
      Kolodij Tax & Consulting
      WebsiteView Page
      0Reply
    • Michael Kare
      OP
      Member since 2025 · 13 posts · 1 vote
      1y
      Quote from @Natalie Kolodij:
      Quote from @Michael Kare:
      Quote from @Natalie Kolodij:

      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)

       Natalie,

      Thank you for your reply. How can I practically expense an extra $36,360 as a 481(a) adjustment in 2024? I have tried to insert $36,360 as Prior Depreciation in TaxAct, but the savings are around $400. 


       You typically put it as an "other" expense. I'm not sure how TaxAct needs to handle it. 


      Natalie,

      Thank you for your response. Your guidance is invaluable to me. I have placed the entire $36,360 into "other" expenses into Schedule E in TaxAct. Unfortunately, only the first $8,000 out of $36,360 provide tax savings. 

      Please note that my total rental income for 2024 is ~$15,000 before depreciation and ~$6,000 after.

      Should I just print the return and manually insert the entire $36,360 into Schedule E into "other" expenses and paper file the return?

        0Reply
      • Natalie KolodijBusiness Member
        Moderator
        Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
        1y
        Quote from @Michael Kare:
        Quote from @Natalie Kolodij:
        Quote from @Michael Kare:
        Quote from @Natalie Kolodij:

        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)

         Natalie,

        Thank you for your reply. How can I practically expense an extra $36,360 as a 481(a) adjustment in 2024? I have tried to insert $36,360 as Prior Depreciation in TaxAct, but the savings are around $400. 


         You typically put it as an "other" expense. I'm not sure how TaxAct needs to handle it. 


        Natalie,

        Thank you for your response. Your guidance is invaluable to me. I have placed the entire $36,360 into "other" expenses into Schedule E in TaxAct. Unfortunately, only the first $8,000 out of $36,360 provide tax savings. 

        Please note that my total rental income for 2024 is ~$15,000 before depreciation and ~$6,000 after.

        Should I just print the return and manually insert the entire $36,360 into Schedule E into "other" expenses and paper file the return?


           Unfortunately I can't provide additional assistance to that really. 

          Without fully knowing your tax situation and reviewing the return I can't speak to why it's limiting what it is. 

          I would contact software support or work with a professional. 

          Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
          Kolodij Tax & Consulting
          WebsiteView Page
          0Reply
        • Michael Kare
          OP
          Member since 2025 · 13 posts · 1 vote
          1y
          Quote from @Natalie Kolodij:
          Quote from @Michael Kare:
          Quote from @Natalie Kolodij:
          Quote from @Michael Kare:
          Quote from @Natalie Kolodij:

          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)

           Natalie,

          Thank you for your reply. How can I practically expense an extra $36,360 as a 481(a) adjustment in 2024? I have tried to insert $36,360 as Prior Depreciation in TaxAct, but the savings are around $400. 


           You typically put it as an "other" expense. I'm not sure how TaxAct needs to handle it. 


          Natalie,

          Thank you for your response. Your guidance is invaluable to me. I have placed the entire $36,360 into "other" expenses into Schedule E in TaxAct. Unfortunately, only the first $8,000 out of $36,360 provide tax savings. 

          Please note that my total rental income for 2024 is ~$15,000 before depreciation and ~$6,000 after.

          Should I just print the return and manually insert the entire $36,360 into Schedule E into "other" expenses and paper file the return?


             Unfortunately I can't provide additional assistance to that really. 

            Without fully knowing your tax situation and reviewing the return I can't speak to why it's limiting what it is. 

            I would contact software support or work with a professional. 

            Natalie,

            How much would you charge for your assistance with correcting missed depreciation deductions? I have 2024 taxes done (not submitted) in TaxAct that I can print/email and form 3115 completed with explanations.

            Thank you.

            0Reply
        • Karolina Powell
          Member since 2021 · 107 posts · 82 votes
          1y

          Disregard

          0Reply
        • Alecia LovelessPro Member
          Member since 2019 · 3k+ posts · 2k+ votes
          1y

          @Michael Kare As my tax return has become more complicated over the years due to multiple properties I have come to realize it’s just worth paying the deductible expense to have an accountant prepare my taxes.

          My 2023 tax return was over 70 pages long. It was beyond the scope of my ability to even think about preparing it.

          I’d recommend you stop using accounting software that’s designed to prepare tax returns for people who have very little more than a W-2 income and no assets and hire an accountant going forward.

          2Reply
        • Ashish AcharyaBusiness Member
          CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
          1y

          @Michael Kare You're on the right track using Form 3115 to catch up on $36,360 in missed depreciation with a §481(a) adjustment, but your tax savings may be limited by passive activity loss (PAL) rules. If your MAGI is over $150K, passive losses can't offset W-2 or other income unless you qualify as a Real Estate Professional (REPS) or use the Short-Term Rental (STR) loophole.

          If MAGI is under $100K, you can deduct up to $25K in passive losses, phasing out between $100K–$150K. Ensure TaxAct is correctly reporting the adjustment on Schedule E and Schedule 1, Line 8, as IRS compliance requires. If losses are limited, they’ll carry forward until offset by passive income or a future property sale. While amending past returns is an option, the §481(a) adjustment is generally preferred. Consulting a real estate CPA can help maximize deductions and ensure proper reporting.

          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.

          [email protected]941-914-7779
          INVESTOR FRIENDLY CPA®4.9242 Reviews
          WebsiteView Page
          TaxMD® | Tax Planning Software
          WebsiteView Page
          0Reply
          • Michael Kare
            OP
            Member since 2025 · 13 posts · 1 vote
            1y
            Quote from @Ashish Acharya:

            @Michael Kare You're on the right track using Form 3115 to catch up on $36,360 in missed depreciation with a §481(a) adjustment, but your tax savings may be limited by passive activity loss (PAL) rules. If your MAGI is over $150K, passive losses can't offset W-2 or other income unless you qualify as a Real Estate Professional (REPS) or use the Short-Term Rental (STR) loophole.

            If MAGI is under $100K, you can deduct up to $25K in passive losses, phasing out between $100K–$150K. Ensure TaxAct is correctly reporting the adjustment on Schedule E and Schedule 1, Line 8, as IRS compliance requires. If losses are limited, they’ll carry forward until offset by passive income or a future property sale. While amending past returns is an option, the §481(a) adjustment is generally preferred. Consulting a real estate CPA can help maximize deductions and ensure proper reporting.

            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.

            Ashish,

            Thank you for your comment. My total 2024 income is less than $100K with self employed activities.

            My understanding is that §481(a) adjustment is not limited to $25K and I can take the entire $36,360 deduction in 2024 (with form 3115 attached). Please confirm.

            I am trying to figure out a way to deduct $36,360 in TaxAct.

            0Reply
          • Natalie KolodijBusiness Member
            Moderator
            Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
            1y
            Quote from @Michael Kare:
            Quote from @Ashish Acharya:

            @Michael Kare You're on the right track using Form 3115 to catch up on $36,360 in missed depreciation with a §481(a) adjustment, but your tax savings may be limited by passive activity loss (PAL) rules. If your MAGI is over $150K, passive losses can't offset W-2 or other income unless you qualify as a Real Estate Professional (REPS) or use the Short-Term Rental (STR) loophole.

            If MAGI is under $100K, you can deduct up to $25K in passive losses, phasing out between $100K–$150K. Ensure TaxAct is correctly reporting the adjustment on Schedule E and Schedule 1, Line 8, as IRS compliance requires. If losses are limited, they’ll carry forward until offset by passive income or a future property sale. While amending past returns is an option, the §481(a) adjustment is generally preferred. Consulting a real estate CPA can help maximize deductions and ensure proper reporting.

            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.

            Ashish,

            Thank you for your comment. My total 2024 income is less than $100K with self employed activities.

            My understanding is that §481(a) adjustment is not limited to $25K and I can take the entire $36,360 deduction in 2024 (with form 3115 attached). Please confirm.

            I am trying to figure out a way to deduct $36,360 in TaxAct.

            It's not the the adjustment is limited; you get to report the full adjustment on Schedule E. 

            But the amount of loss you can take is limited. 

            You're only allowed $25,000 of passive loss in the year, regardless of how it was generated. 

            Any excess/remaining loss carries forward.

            Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
            Kolodij Tax & Consulting
            WebsiteView Page
            0Reply
          • Michael Kare
            OP
            Member since 2025 · 13 posts · 1 vote
            1y
            Quote from @Natalie Kolodij:
            Quote from @Michael Kare:
            Quote from @Ashish Acharya:

            @Michael Kare You're on the right track using Form 3115 to catch up on $36,360 in missed depreciation with a §481(a) adjustment, but your tax savings may be limited by passive activity loss (PAL) rules. If your MAGI is over $150K, passive losses can't offset W-2 or other income unless you qualify as a Real Estate Professional (REPS) or use the Short-Term Rental (STR) loophole.

            If MAGI is under $100K, you can deduct up to $25K in passive losses, phasing out between $100K–$150K. Ensure TaxAct is correctly reporting the adjustment on Schedule E and Schedule 1, Line 8, as IRS compliance requires. If losses are limited, they’ll carry forward until offset by passive income or a future property sale. While amending past returns is an option, the §481(a) adjustment is generally preferred. Consulting a real estate CPA can help maximize deductions and ensure proper reporting.

            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.

            Ashish,

            Thank you for your comment. My total 2024 income is less than $100K with self employed activities.

            My understanding is that §481(a) adjustment is not limited to $25K and I can take the entire $36,360 deduction in 2024 (with form 3115 attached). Please confirm.

            I am trying to figure out a way to deduct $36,360 in TaxAct.

            It's not the the adjustment is limited; you get to report the full adjustment on Schedule E. 

            But the amount of loss you can take is limited. 

            You're only allowed $25,000 of passive loss in the year, regardless of how it was generated. 

            Any excess/remaining loss carries forward.

            Natalie,

            I am reporting full adjustment of $36,360 on Schedule E, but only $25K on form 8582 and I carry forward remaining $11,360. Please confirm.

            How can I do it with TaxAct?

            Should I just ament 2021, 2022, 2023, and use 481a adjustment from 2020 to catch up $9,090 on my 2024 taxes (with form 3115 for 2020 adjustment only)?

            Can we schedule a consultation to discuss my tax situation. I don't know if I will be able to solve it on my own.

            Thank you.

            0Reply
        • Aaron ZimmermanBusiness Member
          Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
          1y

          The way form 8582 will work is you show loss you have. The loss would be calculated as income less total expenses (including the 481(a) adjustment). Your income affects the deductibility of the loss. If you have under $100k MAGI, you can take up to $25k in loss against active income. The rest would roll forward into future years. 

          Given your timeline, I'd recommend extending your return to get this right and to work with a tax professional.

          Please note that this is not tax advice specific to your situation. 

          [email protected]
          Brick House CPAs53 Reviews
          WebsiteView Page
          0Reply
          • Michael Kare
            OP
            Member since 2025 · 13 posts · 1 vote
            1y
            Quote from @Aaron Zimmerman:

            The way form 8582 will work is you show loss you have. The loss would be calculated as income less total expenses (including the 481(a) adjustment). Your income affects the deductibility of the loss. If you have under $100k MAGI, you can take up to $25k in loss against active income. The rest would roll forward into future years. 

            Given your timeline, I'd recommend extending your return to get this right and to work with a tax professional.

            Please note that this is not tax advice specific to your situation. 

             Aaron, please confirm that form 8582 will be needed for §481(a) adjustment. I was thinking of using Schedule 1, Line 8z. 

            0Reply
          • Aaron ZimmermanBusiness Member
            Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
            1y

            @Michael Kare if it's passive, it will flow through to form 8582. That's where the loss would show and any carryforward would be. 

            [email protected]
            Brick House CPAs53 Reviews
            WebsiteView Page
            0Reply
        • Michael Kare
          OP
          Member since 2025 · 13 posts · 1 vote
          1y

          In continuation to my initial post on 03/20/2025

          I’m self-employed at my primary job, in addition to my rental real estate activities. My total self-employment income is under $100,000, and after expenses and losses, my federal income tax for 2024 is only about $1,000. However, I owe around $5,000 in self-employment tax. My understanding is that the §481(a) adjustment from missed depreciation won’t reduce my self-employment tax, and given my tax profile, a $36,360 adjustment is only saving me that $1,000 in income tax for 2024.

          It seems that amending prior year returns would result in a larger overall benefit than a one-time §481(a) adjustment in the current year.

          My depreciation for 2017–2019 was reported correctly. I plan to amend 2022 and 2023 to claim missed depreciation.

          Question: What actions should I take for 2020 and 2021? Is it allowable to apply the §481(a) adjustment on my 2024 return for just those closed years? Total missed depreciation for 2020 and 2021 is $18,195

          For context: I “materially participate” in my rentals but am not designated as a Real Estate Professional.

          0Reply
        • Jason MalabuteBusiness Member
          Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 914 votes
          1y

          You’ll want to remember that depreciation catch-up (via Form 3115 and a §481(a) adjustment) can only be taken when the tax return is filed on time or when the property is sold. If the prior years weren’t filed properly or timely, you can’t just “catch up” the depreciation retroactively outside those events.

          Malabute & Company CPAs527 Reviews
          WebsiteView Page
          0Reply
          • Natalie KolodijBusiness Member
            Moderator
            Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
            1y
            Quote from @Jason Malabute:

            You’ll want to remember that depreciation catch-up (via Form 3115 and a §481(a) adjustment) can only be taken when the tax return is filed on time or when the property is sold. If the prior years weren’t filed properly or timely, you can’t just “catch up” the depreciation retroactively outside those events.


             Are you saying that if someone didn't take depreciation on prior years, or if those prior returns were filed late or incorrectly....

            They are not allowed to do a 3115 on the current year return to catch up on that missed depreciation? 

            Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
            Kolodij Tax & Consulting
            WebsiteView Page
            0Reply
          • Rohullah Sharifi
            Dr · VA · Member since 2025 · 154 posts · 35 votes
            1y


            Quote from @Natalie Kolodij:
            Quote from @Jason Malabute:

            You’ll want to remember that depreciation catch-up (via Form 3115 and a §481(a) adjustment) can only be taken when the tax return is filed on time or when the property is sold. If the prior years weren’t filed properly or timely, you can’t just “catch up” the depreciation retroactively outside those events.


             Are you saying that if someone didn't take depreciation on prior years, or if those prior returns were filed late or incorrectly....

            They are not allowed to do a 3115 on the current year return to catch up on that missed depreciation? 

            with all due respect, this is absolutely possible:



            → Form 3115, Application for Change in Accounting Method




            • This form lets you “catch up” all previously unclaimed depreciation in one shot.



            • You take a §481(a) adjustment (a lump-sum deduction) on your current year’s Schedule E. It can often create a large deduction in the current year, which is perfectly legal if done correctly.


            I am tax accountant and practical done so, which take the depreciation and deducts.

            thank you.

            0Reply
        • Rohullah Sharifi
          Dr · VA · Member since 2025 · 154 posts · 35 votes
          1y

          You should contact your accountant, as they can help you address the missed depreciation properly. When depreciation hasn’t been claimed in prior years, the IRS does not allow you to simply go back and amend all those returns. Instead, your accountant can file Form 3115 (Application for Change in Accounting Method) to request an adjustment.

          This form allows you to "catch up" all previously unclaimed depreciation in the current tax year through what’s called a Section 481(a) adjustment. Essentially, it corrects your depreciation schedule and ensures you receive the full deduction you’re entitled to—without having to amend past returns.

          So, in short:

          • Your accountant will file Form 3115.

          • The form adjusts your accounting method to include the missed depreciation.

          • You get a catch-up deduction this year for all prior unclaimed depreciation.

          0Reply
        • Michael Kare
          OP
          Member since 2025 · 13 posts · 1 vote
          1y

          To make things easier, entire post as follows:

          I need advice on catching up on missed depreciation for my rental properties. Here’s my situation:

          • 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.
          • Condos are considered "air lots" with no separate land value allocation.
          • I am “materially participate” in my rentals and I am not designated as a Real Estate Professional.

          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.

          I’m self-employed at my primary job, in addition to my rental real estate activities. My total self-employment income is under $100,000, and after expenses and losses, my federal income tax for 2024 is only about $1,000. However, I owe around $5,000 in self-employment tax. My understanding is that the §481(a) adjustment from missed depreciation won’t reduce my self-employment tax, and given my tax profile, a $36,360 adjustment is only saving me that $1,000 in income tax for 2024.

          It seems that amending prior year returns would result in a larger overall benefit than a one-time §481(a) adjustment in the current year.

          My depreciation for 2017–2019 was reported correctly. I plan to amend 2022 and 2023 returns to claim missed depreciation.

          Question: What actions should I take for 2020 and 2021? Is it allowable to apply the §481(a) adjustment on my 2024 return for just those closed (unamendable) years? Total missed depreciation for 2020 and 2021 is $18,195

          With taxes due October 15, any advice on handling this situation correctly would be greatly appreciated!

          0Reply
        • Michael Kare
          OP
          Member since 2025 · 13 posts · 1 vote
          1y

          Jason, I have a refund due for 2024 with Taxes due October 15. If I do not file timely (file after October 15), I will not be able to submit §481(a) adjustment?

          0Reply
        • Michael PlaksPro Member
          Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
          1y

          @Michael Kare

          You will not appreciate my suggestion, but I suggest leaving this for a tax pro, as you continue to make wrong conclusions and are about to make wrong actions that could backfire. This is not an easy thing, really, and even tax professionals who are not real estate specialists make mistakes here. That said...

          1. You cannot amend ANY of your old returns. It is against the rules. It might fly under the radar, but it still breaks the rules. The only correct procedure is one Form 3115 and one set of 481(a) adjustments for ALL years combined.

          2. Given your low tax situation for 2024, you probably should wait and apply this correction to your 2025 taxes next year. This should give you more savings.

          3. But if you're determined to do it for 2024, you must do it before October 15. Notice that the mechanics of submitting Form 3115 are complicated. You need to attach it to your tax return AND also send it simultaneously to another IRS department. Read 3115 instructions carefully.

          4. 481(a) adjustments are entered on Schedule E, per property, not Schedule 1, and it does change calculations on Form 8582.

          1Reply
          • Aaron ZimmermanBusiness Member
            Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
            1y

            @Michael Plaks I second this. Leave this to a pro and also you're not going to be saving much in taxes anyway by doing this. Do the 3115 in 2025 and be done with it 

            [email protected]
            Brick House CPAs53 Reviews
            WebsiteView Page
            0Reply
          • Michael Kare
            OP
            Member since 2025 · 13 posts · 1 vote
            1y
            Quote from @Michael Plaks:

            @Michael Kare

            You will not appreciate my suggestion, but I suggest leaving this for a tax pro, as you continue to make wrong conclusions and are about to make wrong actions that could backfire. This is not an easy thing, really, and even tax professionals who are not real estate specialists make mistakes here. That said...

            1. You cannot amend ANY of your old returns. It is against the rules. It might fly under the radar, but it still breaks the rules. The only correct procedure is one Form 3115 and one set of 481(a) adjustments for ALL years combined.

            2. Given your low tax situation for 2024, you probably should wait and apply this correction to your 2025 taxes next year. This should give you more savings.

            3. But if you're determined to do it for 2024, you must do it before October 15. Notice that the mechanics of submitting Form 3115 are complicated. You need to attach it to your tax return AND also send it simultaneously to another IRS department. Read 3115 instructions carefully.

            4. 481(a) adjustments are entered on Schedule E, per property, not Schedule 1, and it does change calculations on Form 8582.

            Michael, I am working on my 2024 taxes (due Octoer 15) with depreciation deducted as it should. Please confirm that I can wait and apply 481(a) adjustment (for 2020 - 2023) to my 2025 taxes next year. Also, how many years I can wait before applying 481(a) adjustment for
            2020 - 2023? Thank you.





            0Reply
          • Michael PlaksPro Member
            Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
            1y
            Quote from @Michael Kare:
            Quote from @Michael Plaks:

            @Michael Kare

            You will not appreciate my suggestion, but I suggest leaving this for a tax pro, as you continue to make wrong conclusions and are about to make wrong actions that could backfire. This is not an easy thing, really, and even tax professionals who are not real estate specialists make mistakes here. That said...

            1. You cannot amend ANY of your old returns. It is against the rules. It might fly under the radar, but it still breaks the rules. The only correct procedure is one Form 3115 and one set of 481(a) adjustments for ALL years combined.

            2. Given your low tax situation for 2024, you probably should wait and apply this correction to your 2025 taxes next year. This should give you more savings.

            3. But if you're determined to do it for 2024, you must do it before October 15. Notice that the mechanics of submitting Form 3115 are complicated. You need to attach it to your tax return AND also send it simultaneously to another IRS department. Read 3115 instructions carefully.

            4. 481(a) adjustments are entered on Schedule E, per property, not Schedule 1, and it does change calculations on Form 8582.

            Michael, I am working on my 2024 taxes (due Octoer 15) with depreciation deducted as it should. Please confirm that I can wait and apply 481(a) adjustment (for 2020 - 2023) to my 2025 taxes next year. Also, how many years I can wait before applying 481(a) adjustment for
            2020 - 2023? Thank you.

            Michael - great name, by the way ;)

            I will say it again: you're likely creating more problems for yourself by trying to DIY it. I understand your aversion to paying a tax professional, but you would be better off.

            Your attempt to DIY this thing may result in losing some of the benefits and even triggering an IRS audit. And then it might cost you even more to get it straightened out. But of course it's your decision.

            You should not switch to the correct depreciation without simultaneously filing 3115. The whole 3115 approach is called "changing an accounting method from an impermissible to permissible."  And you're planning to switch to another incorrect accounting method (because prior depreciation matters) before making the ultimate switch to the correct one. Plus, there is hardly any benefit to adding depreciation in 2024 considering your low taxable income for 2024.

            The most beneficial thing is probably waiting, but I'm saying "probably" because I do not have all the details about your situation, and there could be numerous factors changing my preliminary hunch. There is no statutory limit on waiting.

            0Reply
          • Michael Kare
            OP
            Member since 2025 · 13 posts · 1 vote
            1y
            Quote from @Michael Plaks:
            Quote from @Michael Kare:
            Quote from @Michael Plaks:

            @Michael Kare

            You will not appreciate my suggestion, but I suggest leaving this for a tax pro, as you continue to make wrong conclusions and are about to make wrong actions that could backfire. This is not an easy thing, really, and even tax professionals who are not real estate specialists make mistakes here. That said...

            1. You cannot amend ANY of your old returns. It is against the rules. It might fly under the radar, but it still breaks the rules. The only correct procedure is one Form 3115 and one set of 481(a) adjustments for ALL years combined.

            2. Given your low tax situation for 2024, you probably should wait and apply this correction to your 2025 taxes next year. This should give you more savings.

            3. But if you're determined to do it for 2024, you must do it before October 15. Notice that the mechanics of submitting Form 3115 are complicated. You need to attach it to your tax return AND also send it simultaneously to another IRS department. Read 3115 instructions carefully.

            4. 481(a) adjustments are entered on Schedule E, per property, not Schedule 1, and it does change calculations on Form 8582.

            Michael, I am working on my 2024 taxes (due Octoer 15) with depreciation deducted as it should. Please confirm that I can wait and apply 481(a) adjustment (for 2020 - 2023) to my 2025 taxes next year. Also, how many years I can wait before applying 481(a) adjustment for
            2020 - 2023? Thank you.

            Michael - great name, by the way ;)

            I will say it again: you're likely creating more problems for yourself by trying to DIY it. I understand your aversion to paying a tax professional, but you would be better off.

            Your attempt to DIY this thing may result in losing some of the benefits and even triggering an IRS audit. And then it might cost you even more to get it straightened out. But of course it's your decision.

            You should not switch to the correct depreciation without simultaneously filing 3115. The whole 3115 approach is called "changing an accounting method from an impermissible to permissible."  And you're planning to switch to another incorrect accounting method (because prior depreciation matters) before making the ultimate switch to the correct one. Plus, there is hardly any benefit to adding depreciation in 2024 considering your low taxable income for 2024.

            The most beneficial thing is probably waiting, but I'm saying "probably" because I do not have all the details about your situation, and there could be numerous factors changing my preliminary hunch. There is no statutory limit on waiting.

            Michael, it appears I have two choices:

            Option 1: Apply the 481(a) adjustment when filing 2024 taxes, using the $36,360 to offset $1,000 in taxes.

            Option 2: Do not apply the 481(a) adjustment and continue not to depreciate the condos for 2024, as in 2020–2023. The issue is that I do not expect to have enough income next year to offset the $45,450 total adjustment ($36,360 plus $9,090). I estimate that I will owe the same $1,000. Additionally, with this option, I’ll need to pay around $2,000 before October 15
            (income that was offset by depreciation) as I initially planned to deduct depreciation for 2024.

            Any advice on handling this situation would be greatly appreciated!

            0Reply
          • Michael PlaksPro Member
            Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
            1y
            Quote from @Michael Kare:
            Quote from @Michael Plaks:
            Quote from @Michael Kare:
            Quote from @Michael Plaks:

            @Michael Kare

            You will not appreciate my suggestion, but I suggest leaving this for a tax pro, as you continue to make wrong conclusions and are about to make wrong actions that could backfire. This is not an easy thing, really, and even tax professionals who are not real estate specialists make mistakes here. That said...

            1. You cannot amend ANY of your old returns. It is against the rules. It might fly under the radar, but it still breaks the rules. The only correct procedure is one Form 3115 and one set of 481(a) adjustments for ALL years combined.

            2. Given your low tax situation for 2024, you probably should wait and apply this correction to your 2025 taxes next year. This should give you more savings.

            3. But if you're determined to do it for 2024, you must do it before October 15. Notice that the mechanics of submitting Form 3115 are complicated. You need to attach it to your tax return AND also send it simultaneously to another IRS department. Read 3115 instructions carefully.

            4. 481(a) adjustments are entered on Schedule E, per property, not Schedule 1, and it does change calculations on Form 8582.

            Michael, I am working on my 2024 taxes (due Octoer 15) with depreciation deducted as it should. Please confirm that I can wait and apply 481(a) adjustment (for 2020 - 2023) to my 2025 taxes next year. Also, how many years I can wait before applying 481(a) adjustment for
            2020 - 2023? Thank you.

            Michael - great name, by the way ;)

            I will say it again: you're likely creating more problems for yourself by trying to DIY it. I understand your aversion to paying a tax professional, but you would be better off.

            Your attempt to DIY this thing may result in losing some of the benefits and even triggering an IRS audit. And then it might cost you even more to get it straightened out. But of course it's your decision.

            You should not switch to the correct depreciation without simultaneously filing 3115. The whole 3115 approach is called "changing an accounting method from an impermissible to permissible."  And you're planning to switch to another incorrect accounting method (because prior depreciation matters) before making the ultimate switch to the correct one. Plus, there is hardly any benefit to adding depreciation in 2024 considering your low taxable income for 2024.

            The most beneficial thing is probably waiting, but I'm saying "probably" because I do not have all the details about your situation, and there could be numerous factors changing my preliminary hunch. There is no statutory limit on waiting.

            Michael, it appears I have two choices:

            Option 1: Apply the 481(a) adjustment when filing 2024 taxes, using the $36,360 to offset $1,000 in taxes.

            Option 2: Do not apply the 481(a) adjustment and continue not to depreciate the condos for 2024, as in 2020–2023. The issue is that I do not expect to have enough income next year to offset the $45,450 total adjustment ($36,360 plus $9,090). I estimate that I will owe the same $1,000. Additionally, with this option, I’ll need to pay around $2,000 before October 15
            (income that was offset by depreciation) as I initially planned to deduct depreciation for 2024.

            Any advice on handling this situation would be greatly appreciated!


            Sorry, cannot give you such advice responsibly without knowing your full situation
            0Reply
          • Michael Kare
            OP
            Member since 2025 · 13 posts · 1 vote
            1y
            Quote from @Michael Plaks:
            Quote from @Michael Kare:
            Quote from @Michael Plaks:
            Quote from @Michael Kare:
            Quote from @Michael Plaks:

            @Michael Kare

            You will not appreciate my suggestion, but I suggest leaving this for a tax pro, as you continue to make wrong conclusions and are about to make wrong actions that could backfire. This is not an easy thing, really, and even tax professionals who are not real estate specialists make mistakes here. That said...

            1. You cannot amend ANY of your old returns. It is against the rules. It might fly under the radar, but it still breaks the rules. The only correct procedure is one Form 3115 and one set of 481(a) adjustments for ALL years combined.

            2. Given your low tax situation for 2024, you probably should wait and apply this correction to your 2025 taxes next year. This should give you more savings.

            3. But if you're determined to do it for 2024, you must do it before October 15. Notice that the mechanics of submitting Form 3115 are complicated. You need to attach it to your tax return AND also send it simultaneously to another IRS department. Read 3115 instructions carefully.

            4. 481(a) adjustments are entered on Schedule E, per property, not Schedule 1, and it does change calculations on Form 8582.

            Michael, I am working on my 2024 taxes (due Octoer 15) with depreciation deducted as it should. Please confirm that I can wait and apply 481(a) adjustment (for 2020 - 2023) to my 2025 taxes next year. Also, how many years I can wait before applying 481(a) adjustment for
            2020 - 2023? Thank you.

            Michael - great name, by the way ;)

            I will say it again: you're likely creating more problems for yourself by trying to DIY it. I understand your aversion to paying a tax professional, but you would be better off.

            Your attempt to DIY this thing may result in losing some of the benefits and even triggering an IRS audit. And then it might cost you even more to get it straightened out. But of course it's your decision.

            You should not switch to the correct depreciation without simultaneously filing 3115. The whole 3115 approach is called "changing an accounting method from an impermissible to permissible."  And you're planning to switch to another incorrect accounting method (because prior depreciation matters) before making the ultimate switch to the correct one. Plus, there is hardly any benefit to adding depreciation in 2024 considering your low taxable income for 2024.

            The most beneficial thing is probably waiting, but I'm saying "probably" because I do not have all the details about your situation, and there could be numerous factors changing my preliminary hunch. There is no statutory limit on waiting.

            Michael, it appears I have two choices:

            Option 1: Apply the 481(a) adjustment when filing 2024 taxes, using the $36,360 to offset $1,000 in taxes.

            Option 2: Do not apply the 481(a) adjustment and continue not to depreciate the condos for 2024, as in 2020–2023. The issue is that I do not expect to have enough income next year to offset the $45,450 total adjustment ($36,360 plus $9,090). I estimate that I will owe the same $1,000. Additionally, with this option, I’ll need to pay around $2,000 before October 15
            (income that was offset by depreciation) as I initially planned to deduct depreciation for 2024.

            Any advice on handling this situation would be greatly appreciated!


            Sorry, cannot give you such advice responsibly without knowing your full situation

            Michael,

            I addtion to the $1,000, I have about $5,000 of self employment tax due. Is there a way for 481(a) adjustment to offset self employment tax? Thank you.

            0Reply
          • Michael PlaksPro Member
            Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
            1y

            Self-employment tax is completely separate and cannot be reduced by anything you do with your rental properties, including 3115/481(a)

            0Reply
        Join the conversationCreate a free account to reply, vote on answers and follow this thread.
        Log InJoin for Free