Missed Depreciation on a Rental? Why Amending Prior Returns Is Usually the Wrong Move
- Rich Arzaga
- 2 days ago
- 4 min read
By Rich Arzaga, CFP®, CCIM, The Real Estate Whisperer®
When investors discover that depreciation was missed on a rental property, the reaction is rarely technical.
It’s emotional.
If the omission was accidental, the question is:
“Is it too late to fix this? And how much could we recover?”
If it was intentional, the question shifts:
“What happens if we just leave it alone and go forward correctly?”
And almost inevitably, someone suggests:
“Let’s just amend the last few years.”
That instinct makes sense. Amending feels responsible. It feels like a cleanup. It feels like the obvious way to correct something that shouldn’t have happened.
But in most cases, it’s not the best move.
Why Amending Feels Logical
For most people, tax returns are annual events. You file one each year. If something is wrong, correct it for that year.
So when depreciation is missing, the thinking is simple:
We missed it. Let’s go back and fix it.
The problem is that depreciation isn’t just a one-year deduction.
It’s part of a system.
This Isn’t Just an Error — It’s a Method Issue
If this were a math mistake or a missed small deduction, amending would likely be appropriate.
But depreciation works differently.
Depreciation is part of your accounting method — the structured system used to report income and deductions over the life of the property. It operates every year the rental is in service.
When depreciation is omitted, the issue isn’t that a calculator failed.
The issue is that the method wasn’t applied.
That distinction matters because the IRS treats method corrections differently from isolated errors.
Missed depreciation is usually a method issue — not a simple amended return problem.
If you’re unsure how missed depreciation works in the first place — including why recapture still applies even when it wasn’t taken — it’s worth reviewing the foundation before deciding how to fix it.
Think of It This Way
Imagine you’ve been tracking rental income correctly but have not applied depreciation each year.
The IRS doesn’t want you reopening five years of tax filings to rewrite history. Instead, there is a formal process to correct the method going forward and calculate the cumulative difference between what was taken and what should have been taken.
That process is handled through a change in accounting method, filed using Form 3115.
The adjustment itself — often called a Section 481(a) adjustment — simply measures the difference between allowable depreciation and what was actually claimed.
In certain situations, correcting depreciation doesn’t just resolve a compliance issue — it can set the stage for strategic coordination with other tax events, including retirement income shifts or liquidity events.
In plain English:
It catches you up in a structured way.
Rather than amending multiple prior returns, the system allows you to fix the method in the current year and account for the cumulative difference.
For most investors, that’s a relief.
The IRS provides a structured way to catch up missed depreciation without amending multiple years of returns.
Why Amending Multiple Years Is Usually Harder
Amending three, four, or five years of returns sounds straightforward. In practice, it often becomes expensive and administratively messy.
Each amended year may affect:
Passive activity loss carryforwards
State filings
Income thresholds
Credit calculations
Professional costs increase.
Paperwork multiplies.
IRS processing delays can stretch for months.
Reopening prior years can also introduce review exposure that wouldn’t otherwise exist.
That doesn’t mean amending is never appropriate. There are situations where it may be considered.
But in most missed depreciation cases, correcting the accounting method is cleaner, more predictable, and less disruptive.
In most cases, correcting the depreciation method is simpler and more cost-effective than amending multiple prior returns.
When to Involve the CPA or Enrolled Agent
Immediately — and collaboratively.
This isn’t about fault. It’s about alignment.
Most tax professionals understand accounting method changes and are familiar with the correction process. In many cases, they prefer that the issue be addressed properly rather than patched year by year.
The conversation typically sounds like this:
“The good news is, there’s a formal process for correcting this. It’s recoverable. And it’s often less disruptive than it sounds.”
This is rarely adversarial. It’s procedural.
The goal isn’t to revisit the past. It’s to stabilize the system going forward.
One important caveat: if a property sale is already underway, timing becomes critical. Once escrow closes, certain planning options narrow significantly.
Is This Going to Be Messy?
That’s the question clients ask next.
The answer is usually no.
This is a well-established correction pathway. The process is structured. The outcome is predictable. In some cases, the timing of the correction can create planning flexibility.
For example, the adjustment may:
Offset income in a higher-tax year
Interact with Roth conversion timing
Affect capital gain planning
Matter for retirement or Medicare income thresholds
Correcting missed depreciation isn’t just about compliance. It can become part of a broader financial strategy.
The correction process can also create planning opportunities — which we’ll explore next.
Frequently Asked Questions
Do I need to amend prior tax returns for missed depreciation?
Usually not. Missed depreciation is typically corrected through a change in accounting method rather than by amending multiple prior returns.
What is Form 3115 used for?
Form 3115 is used to request a change in accounting method. In rental property cases, it allows taxpayers to correct depreciation treatment and account for prior differences in a structured way.
Can missed depreciation be caught up in one year?
Yes. The cumulative difference between allowable and claimed depreciation is calculated and adjusted in the current year through the accounting method change process.
Authored by Rich Arzaga, CFP®, CCIM, Founder, The Real Estate Whisperer® Financial Planning. Helping clients and advisors integrate real estate into holistic financial plans.
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