What Happens If You Never Took Depreciation on a Rental?
- Rich Arzaga
- 2 days ago
- 5 min read
By Rich Arzaga, CFP®, CCIM, The Real Estate Whisperer®
When I review rental property tax returns and notice depreciation is missing, the most common reaction isn’t panic. It’s confusion.
“We file the taxes every year on the property. It should all be there. We try to catch all the expenses.”
That’s reasonable. Most investors assume that if the return is filed and expenses are entered, cost recovery is being handled correctly.
Rather than assume anything, I ask them to explain how they believe depreciation works. Then we review the return together and determine where it should appear. Sometimes they think it’s reflected elsewhere.
Often, it isn’t there at all.
What “Allowed or Allowable” Means — Without the Jargon
One of the bundled benefits of rental real estate is depreciation. It allows you to shelter a portion of rental income each year through a non-cash deduction.
When you sell, and taxes are due, part of those prior deductions are recaptured. You benefit from the deduction during ownership and give some back at sale — but not all of it. That’s how the system is designed.
Here’s the key:
If you don’t take depreciation, the IRS still treats you as if you did.
The deduction was “allowable.” At sale, recapture is calculated as though it had been claimed—whether it was or not.
You don’t avoid recapture by skipping depreciation. You only give up the benefit during ownership.
If you don’t claim depreciation on a rental property, the IRS still calculates recapture as if you did.
Why Depreciation Gets Missed
Missed depreciation is rare. But when it occurs, I typically see three causes.
First, self-prepared returns. Tax software prompts for depreciation, but investors may get unsure about land allocation or simply skip the section.
Second, professional oversight. It’s surprising when it happens, especially because depreciation is foundational to rental taxation. But gaps in delegation and review can occur.
Third, intentional avoidance. Some investors believe skipping depreciation will avoid recapture later.
In each case, it’s not about intelligence. Rental property ownership is complex. But it shows how easy it is to underestimate the mechanics of long-term investing.
A Simple Example
Let’s assume:
Purchase price: $500,000
20% land
80% building (improvement)
Single-family rental
27.5-year depreciation schedule
The building portion is:
$500,000 × 80% = $400,000
Annual depreciation:
$400,000 ÷ 27.5 = about $14,545 per year
Over 10 years:
$14,545 × 10 = $145,450 of allowable depreciation
If the investor is in the 24% tax bracket;
$145,450 × 24% ≈ $34,908 in missed tax savings
That’s nearly $35,000 that could have stayed in their pocket over a decade.
Skipping depreciation can permanently increase your lifetime tax bill by eliminating years of allowable deductions.
And here’s the important part:
Even if those deductions were never taken, the basis is still reduced by $145,450. At sale, recapture is calculated as if they had been.
In addition, correcting missed depreciation can also affect suspended passive activity losses, which may further change the net tax outcome in the year of sale or transition.
The deduction was missed. The recapture still applies.
The Emotional Reaction
When investors learn this, the reaction is usually frustration — sometimes disbelief.
“I thought that was taken care of.”
“I thought skipping it avoided the issue.”
“Is it too late?”
It’s rarely hopelessness. It’s more about clarity.
I’ve seen it before. It’s correctable. And while it may feel like a setback, it rarely derails the broader financial plan.
The Quiet Financial Cost
The real cost is not recapture.
Recapture would have applied either way.
The real cost is the lost opportunity.
Higher annual taxes.
Less after-tax cash flow.
Less capital to reinvest.
Less compounding over time.
Skipped depreciation isn’t just a technical oversight. It’s a quiet erosion of after-tax wealth.
The real cost of missed depreciation is not recapture — it’s the lost compounding from higher taxes paid each year.
Is It Too Late?
It’s never too late to align with the tax rules. There is a structured, orderly process for correcting missed depreciation.
And in many cases, it does not require amending multiple years of prior returns.
It is never too late to learn something new.
The fix is often cleaner than people think.
Before exploring how to correct missed depreciation properly, it helps to understand why amending prior returns is usually not the right first step. In the next article, I’ll explain how missed depreciation is typically corrected — and why refiling multiple years of returns is usually not necessary.
Timing also matters. If a property sale is pending, the sequence of events can significantly affect the remaining flexibility.
Frequently Asked Questions
1. What happens if I never took depreciation on my rental property?
If you never claimed depreciation, the IRS still treats the deduction as “allowable.” When you sell the property, depreciation recapture is calculated as if you had taken those deductions — even if you didn’t. Skipping depreciation does not eliminate recapture; it only eliminates the annual tax benefit.
2. Do I still have to pay depreciation recapture if I didn’t claim depreciation?
Yes. Depreciation recapture applies to depreciation that was allowed or allowable. Even if you did not deduct it on prior tax returns, your adjusted basis is reduced by the amount that should have been taken, and recapture is calculated accordingly.
3. Can I fix missed depreciation from prior years?
In many cases, yes. There is a formal IRS process to correct missed depreciation without amending multiple prior tax returns. The correction is often handled by changing the accounting method, allowing the missed depreciation to be recognized in a single tax year.
4. Is amending prior tax returns required to fix missed depreciation?
Usually not. While every situation is unique, missed depreciation is typically corrected using IRS procedures that do not require refiling several years of past returns.
5. What is the real financial cost of skipping depreciation?
The highest cost is not recaptured because the tax is due regardless of whether depreciation is claimed. The highest cost is the loss of tax savings and the missed opportunity to reinvest them over time. Higher taxes paid each year reduce after-tax cash flow and the long-term compounding effect.
6. How does missed depreciation affect passive activity losses?
Correcting depreciation can change the amount of suspended passive activity losses available. This can affect the tax outcome in the year of correction or in the year the property is sold.
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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