All Forum Posts by: Michael Kare
Michael Kare has started 1 posts and replied 13 times.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
Quote from @Michael Plaks:
Quote from @Michael Kare:
Quote from @Michael Plaks:
Quote from @Michael Kare:
Quote from @Michael Plaks:
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.
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
Quote from @Michael Plaks:
Quote from @Michael Kare:
Quote from @Michael Plaks:
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
Quote from @Michael Plaks:
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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?
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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!
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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.
Post: Forgot to deduct depreciation for 2020, 2021, 2022, and 2023.
- Posts 13
- Votes 1
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.