Error in depreciation

[KDB TAX]

For a number of years, client has depreciated the land (20%) rather than the improvements (80%) on the $438,278 total basis of a rental property.  The Depreciation method is 27.5 years straight line.

For the current year and future years, can this be adjusted/corrected in the return by overriding the amount of depreciation on the value of the land to $0 and entering a ‘new asset’ with a basis = Total basis of improvements less the amount depreciated on the land in all prior years. The resulting ‘new asset’ would be depreciated based on 27.5 years straight line. The new asset would be entered on asset entry worksheet

OR

Continue to depreciate the value of the land and entering a new asset with a basis= total basis of improvements divided by 27.5 less the amount depreciated on the land as described above.

Or perhaps more aggressively, depreciate the entire ‘new basis’ over the remainder of the 27.5 years.

If none of these approaches is appropriate, what is correct?

[Just-Lisa-Now-]

Form 3115 is used for things like this I believe.  I've never tried to use it though, it looks a bit daunting.

[dd4vols]

Change in Accounting Method Form 3115:
Form 3115, Change in Accounting Method, is used to correct most other depreciation errors, including the omission of depreciation. If you forget to take depreciation on an asset, the IRS treats this as the adoption of an incorrect method of accounting, which may only be corrected by filing Form 3115. When changing methods of accounting from not taking depreciation (incorrect method) to taking depreciation (correct method) use Code 7 on Form 3115 if the asset is still in use, code 107 if disposed.

The IRS’s automatic consent procedures for taxpayers who have adopted an impermissible method of accounting for depreciation (or amortization) and have either claimed no allowable depreciation, less depreciation than allowable, or more depreciation than allowable is provided in the guidance at Rev. Proc. 2015-13 and 2018-31.

Generally, Form 3115 must be attached to the taxpayer’s tax return for the year of change by the original due date (including extensions). A copy must also be filed with the IRS no later than when the original is filed with the taxpayer’s return.

Taxpayers who qualify under the automatic procedure are permitted to change to a method of accounting under which the allowable amount of depreciation is claimed. The unclaimed depreciation from years prior to the year of change is taken into account as a net negative (taxpayer favorable) adjustment in the year of change, generally effective for tax years ending on or after December 31, 2001 and are deducted in full on the return for the year of change.

[TaxGuyBill]

Your Asset Entry Worksheet should show the ACTUAL value of land, the ACTUAL value of the building, and "prior depreciation" that SHOULD have been taken.  Nothing besides that for Asset Entry Worksheets.

Then, as Lisa said, use Form 3115 to 'catch up' on the depreciation.  If you have never done that and it looks intimidating, Google "Brass Tax Form 3115".  She has a step-by-step booklet for sale for about $20 that can walk you through how to do it.

As a side note, this MIGHT be a "gray area" whether or not you are even allowed to "catch up" with Form 3115 or not.  If, as you say, they were depreciating the land and not the building, yes, Form 3115 applies.  On the other hand, if they were merely using the wrong Basis for depreciating the building, there is nothing can be done and Form 3115 would not apply.  I would go with the first viewpoint, as it has much better results.  🙂

[BobKamman]

As @TaxGuyBill says, with a clarification I have added,

"Your Asset Entry Worksheet should show the ACTUAL value original basis of land, the ACTUAL value original basis of the building, and 'prior depreciation' that SHOULD have been taken. Nothing besides that for Asset Entry Worksheets."

I don't think Form 3115 is intended to convert sow's ears into silk purses.  I wouldn't file it anyway; the Accounting Police have worse blunders to patrol.  I would file amended returns for all open years, if another $9,500 or so in depreciation deductions would make a significant difference.  Then I would tell the client to expect to pay tax on recaptured depreciation, even if not claimed, when the bulding is sold.  The client can avoid this by dying first.