Should I file form 3115 with current year return and show as section 481 adjustment in 2018 for a overstated rental property depreciation?

[CS]

This is a new client for me who has owned property for 5 years.

[TaxGuyBill]

How was it overstated?  Was the cost of land included?

My point is that overstating depreciation is usually a "mathematical or posting error", and does not qualify for Form 3115.

[CS]

yes land was included.

[TaxGuyBill]

In my opinion, it is a 'gray area'.

When the property was "placed in service", the 4562 showed ONE asset that was placed in service.  That asset had an incorrect Basis, which would be a "mathematical or posting error" (which is not eligible to be fixed via Form 3115).

It could also be viewed as putting the Land into service and depreciating it (which CAN be fixed on Form 3115).  However, the 4562 only showed ONE asset, so I'm not sure if that would be allowed.


Which would mean:
Option #1:  Use Form 3115.  Even if it technically is not allowed, I doubt if the IRS would care even if they carefully looked at it.
Option #2:  Let leave it alone.  It won't really hurt anything now, just start using the correct Basis and the actual "prior depreciation".  Whenever the property is sold, there will be more gain due to the overstated depreciation, but it probably is not a big deal.

[itonewbie · Accepted solution]

Supposing the overstatement was not due to mathematical or posting errors and the adjustment is less than $50k, your client may elect to include the entire excess on the 2018 return.  Otherwise, you'd spread that over 4 years between 2018 and 2021.