Adjusting Depreciation in Closed Tax Years to Carryforward Passive Losses to Open Years

[jim5917]

Depreciation was calculated incorrectly starting in 2016 for rental property A. Due to another property (B) there were prior year unallowed losses in 2016. Prior year unallowed losses accumulated until they started being used in 2021. Can I amend closed years (2015-2019) to increase depreciation and losses that roll forward into open tax years?

I’ve researched and don’t see much information on the subject. This article deals mostly with NOLs & partial credit carryforwards and it seems that I should be able to amend, but any guidance would be greatly appreciated.

https://www.thetaxadviser.com/issues/2015/sep/statute-of-limitation-tax-carryovers.html

 It should be noted that we will not be claiming any refund for closed years. Refund would be in 2021. It should also be noted that in 2019 & 2020 there was QBI – amending the returns would lower QBI and a balance due. Not that this should make a difference, but should be noted. I should also note that rental income/loss allowed in 2016-2020 was $0. After amending it would still be $0.

[TaxGuyBill]

If you haven't already done so, you need to verify that correcting the depreciation is allowed to be corrected by amending, versus the correction as being a "change in method of accounting" (which would require Form 3115).  If you are unsure, please post the details about how exactly the depreciation is incorrect.

If it is the type of correction that allows amending, then hypothetically yes, you can amend to correct the amounts, which will change the Passive Loss carryover.  I said "hypothetically" because I have read of situations where the IRS is dumb and won't process the return, but it SHOULD be able to be done.

[jim5917]

I have also researched Form 3115. Seems that change in accounting method is a gray area as well. This client owns the house 50% with a sibling. Previous accountant had their basis as 50% of 50%. So, TOTAL depreciable basis should be $575,000 - Client's portion is 287,500. Basis claimed on taxes is $143,750.

[TaxGuyBill]

Using an incorrect Basis is not a method of accounting, so Form 3115 does not apply.

So you are right, amend the returns to correct the Passive Loss carryovers.  And hope the IRS processes them correctly (with $0 change in taxable income and $0 change in tax, it wouldn't surprise me if they rejected it).

I suppose it might also an option to just report the correct Passive Loss carryover on the appropriate return (as if it was reported correctly, but without actually amending).  But I'm not sure if I would want to try that or not.