Missed depreciation due to business percentage use error
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesI would actually start with the question, "Does it make sense to try to get more depreciation now?"
You've owned this property more than 17 years. It won't be much longer before you can't take ANY depreciation. It might be wiser to look at selling this asset and buying something else that will bring you more depreciation offsets. If you are looking at selling, taking more depreciation now would be counterproductive because you would be converting long-term capital gains into ordinary income via depreciation recapture.
11 Replies
- 1moGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
I would actually start with the question, "Does it make sense to try to get more depreciation now?"
You've owned this property more than 17 years. It won't be much longer before you can't take ANY depreciation. It might be wiser to look at selling this asset and buying something else that will bring you more depreciation offsets. If you are looking at selling, taking more depreciation now would be counterproductive because you would be converting long-term capital gains into ordinary income via depreciation recapture.
- Member since 2026 · 26 posts · 3 votes1mo
Correcting a long-term business percentage error usually requires Form 3115 for a change in accounting method, but historical adjustments across many years can get complicated. A CPA experienced in depreciation recovery should look at your specific Schedule E history.
- Accountant · Long Island, NY · Member since 2021 · 184 posts · 148 votes1mo
Hi @Wayne B. and welcome to BP.
Using the wrong business-use percentage is treated the same as claiming no depreciation at all under the IRS's rules. Both are "impermissible methods," and both are corrected the same way, via Form 3115 + a catch-up adjustment in the current year.
That said, completing a form 3115 for $20k of depreciation might not be worth it. It honestly depends on your specific situation. I'm assuming that this is an LTR, and it's likely you already have suspended passive losses on this property. The $20K catch-up wouldn't generate an immediate deduction, it would simply add to a passive loss carryforward that only becomes usable against passive income or when you dispose of the property. A Form 3115 filing is often not included in a base fee wherever you decide to get your return prepped and often commands a higher add-on price. Therefore, the near-term benefit may not clearly outweigh the cost unless you have (or expect) passive income to absorb it soon, or you're planning to sell.
As @Greg Scott stated, catching up more depreciation now increases unrecaptured Section 1250 gain at sale (because your basis is reduced with added depreciation), which is taxed at a higher rate (up to 25%) than standard long-term capital gains. @Greg Scott, the recapture on Section 1245 personal property (appliances, furniture, etc) is recaptured at ordinary income rates, however I don't believe @Wayne B. received a cost seg to break out all those assets (likely no accelerated components). So, if you're leaning toward selling in the next few years, there's an argument for leaving the depreciation history as-is rather than paying to correct it.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes1mo
Quick question:
Will he be forced to pay depreciation recapture on the depreciation he could have taken if he sells without doing an exchange? (I believe this is the case if you literally don’t take any depreciation. But in this case he only took some of the depreciation.).
I doubt this will ever affect me but just wanted to take the chance to learn.- Accountant · Long Island, NY · Member since 2021 · 184 posts · 148 votes1mo
Quote from @Bill B.:
Quick question:
Will he be forced to pay depreciation recapture on the depreciation he could have taken if he sells without doing an exchange? (I believe this is the case if you literally don’t take any depreciation. But in this case he only took some of the depreciation.).
I doubt this will ever affect me but just wanted to take the chance to learn.Hi @Bill B. - Legally yes
Basis is reduced by depreciation allowed or allowable... not by what was actually claimed. So even if @Wayne B. never fixed the error and just sold as-is, his basis for gain calculation would be reduced by the full amount he was entitled to deduct (100% business use), not the lower amount he actually claimed (58.3%).Realistically, the IRS has no independent way of verifying the correct business-use percentage unless something in the return or a future exam surfaces it. So, if a sale return is prepared using the lower, actually claimed depreciation amount instead of the correct allowable amount, it's unlikely to get caught without an audit that specifically digs into the usage history.
To be clear, that's a statement about detection odds, not a recommendation. Once the correct business-use percentage is known, using a lower figure to calculate basis at sale is a knowing misstatement, not a defensible filing position. It's not something I would prepare or advise.
- 1moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Form 3115 works for this too, not just for missed depreciation entirely, it also covers a change from an impermissible to a permissible method of accounting for depreciation, and using the wrong business use percentage for 15 straight years counts as that, this isn't just a math correction, it's been applied consistently and incorrectly across every return, which is exactly the kind of situation 3115 exists for. You'd file Form 3115 with a 481(a) adjustment picking up the full $20,000+ of missed depreciation in the current tax year as a catch-up deduction, rather than amending 15 years of returns individually.
One thing to verify carefully before filing, since your error was applying 58.3% instead of 100% business use, confirm that 100% is actually correct for the entire period, if there was ever any personal use of the unit during those 15 years (even briefly before a tenant moved in, or between tenants), that would change the calculation and the 481(a) adjustment needs to reflect the accurate percentage for each year, not just assume 100% retroactively. Get the full basis and depreciation schedule recalculated properly before submitting, since 3115 corrections get scrutinized given the dollar amount involved here.
Happy to connect!
INVESTOR FRIENDLY CPA®5241 Reviews - 1moJoaquim ResendeBusiness MemberMember since 2026 · 11 posts · 2 votes
Using the same incorrect business-use percentage over multiple years generally establishes an impermissible method of accounting for depreciation. Because that method has been used for more than two consecutive tax years, the correction would generally be made through Form 3115 rather than by amending the prior returns.
An important consideration regarding a future sale is that depreciation is generally treated as “allowed or allowable.” Under §1016(a)(2), the property’s basis must generally be reduced by the depreciation that should have been claimed, even when the taxpayer did not actually claim it.
Therefore, leaving the depreciation history uncorrected generally does not preserve basis or eliminate the potential unrecaptured §1250 gain. It may instead produce the worst result: losing the depreciation deduction while still reducing basis when calculating the gain on sale.
If the entire property has actually been held and reported as a rental, rather than only 58.3% of the property, the depreciation allowable on the full depreciable building basis does not disappear simply because only 58.3% was entered on the depreciation schedule. The missed depreciation would generally still need to be corrected through Form 3115, including potentially in the year the property is sold.
In other words, waiting until the sale generally does not avoid the issue. It only postpones the Form 3115 correction and the opportunity to claim the missed depreciation.
- 1moWayne B.Rental Property Investor · Chesapeake Beach, Calvert County · Member since 2026 · 2 posts · 0 votesOP
I thank everyone who replied to my question.
@Greg Scott, I was under the impression that I must account for the depreciation at sale, regardless of whether I claimed it on my taxes or not -- as @Bill B. and @Joaquim Resende noted. If true, should the question be "Is it cost effective to get more depreciation by correcting the error using Form 3115 or should I simply correct the error this year and amend where possible?"
I appreciate @Christopher Tile's perspective that it might not be cost effective to try to recover the 25% tax savings on $20000.00 missed depreciation. I don't have a sense of the cost of having an expert prepare a Form 3115 to recover the missed depreciation. Does anyone have a point of reference for the cost of preparing a Form 3115 to correct missed depreciation over many years?
Thanks and Regards, Wayne B.
- Accountant · Long Island, NY · Member since 2021 · 184 posts · 148 votes1mo
Quote from @Wayne B.:
I thank everyone who replied to my question.
@Greg Scott, I was under the impression that I must account for the depreciation at sale, regardless of whether I claimed it on my taxes or not -- as @Bill B. and @Joaquim Resende noted. If true, should the question be "Is it cost effective to get more depreciation by correcting the error using Form 3115 or should I simply correct the error this year and amend where possible?"
I appreciate @Christopher Tile's perspective that it might not be cost effective to try to recover the 25% tax savings on $20000.00 missed depreciation. I don't have a sense of the cost of having an expert prepare a Form 3115 to recover the missed depreciation. Does anyone have a point of reference for the cost of preparing a Form 3115 to correct missed depreciation over many years?
Thanks and Regards, Wayne B.
@Wayne B. My pleasure.
Regarding price - I've seen a range anywhere between $500-$1500 depending on the firm. The fee won't change based on the amount of depreciation catch-up. It's pretty much the same work regardless. For example, if you are catching up on $300k of depreciation, it would make sense to pay a premium to ensure the 3115 is prepared correctly and by a firm with the proper experience.
- 1moJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 898 votes
Before you decide how to fix it, it's worth pinning down what kind of error this actually is, because that drives the whole approach. If the 58.3% was effectively a method you adopted and repeated year after year, the fix is Form 3115 with a 481(a) catch-up that pulls the entire missed amount into the current year instead of amending fifteen returns. If it looks more like a math or posting mistake, or the facts about how the unit was used genuinely changed along the way, that isn't a method change and an amended return is the route, though you'd generally only be able to reach back about three years. One thing I'd push back on is the idea that leaving it alone saves you something at sale, because basis gets reduced by depreciation allowed or allowable, so you take the basis hit whether or not you ever claimed the deduction. Not correcting it costs you the write-off and doesn't spare you anything later. Where I would slow down is timing, since the catch-up is a passive deduction, so if you have no passive income and your income is above the phaseout for the $25,000 allowance it just parks as a carryforward until you have passive income or dispose of the property. And don't just plug 100% into every year, run each year with the correct percentage and the right depreciable basis, land excluded, using the May 2009 mid-month convention, so the number holds up. How this shakes out really depends on your own facts and income picture, so walk through it with your CPA before you file anything.
Malabute & Company CPAs525 Reviews - CPA| New Clients Welcome| 50 States · Member since 2016 · 430 posts · 93 votes3w
Wayne, I think your cost-benefit question is the right next step. Before deciding whether to correct the history, I’d quantify the §481(a) adjustment, whether the resulting deduction is currently usable or becomes suspended, and the expected holding/sale timeline. That lets you compare the economic benefit of the correction with the professional cost instead of deciding from the $20K missed-depreciation figure alone.
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