When a Tax Correction Becomes a Strategic Opportunity
- Rich Arzaga
- 2 days ago
- 4 min read
This Is Where the Conversation Changes
By Rich Arzaga, CFP®, CCIM, The Real Estate Whisperer®
When clients discover missed depreciation, they expect a compliance discussion.
What they don’t expect to hear is this:
“This may actually create an opportunity.”
If you’re unfamiliar with how missed depreciation arises — or why the IRS treats “allowed or allowable” depreciation the way it does — start with the foundation before thinking strategically.
Once the issue is identified and a solution is available, the question shifts from How do we fix this? to:
How do we use this adjustment intelligently?
Correcting depreciation is required. It keeps you aligned with IRS rules. That’s compliance.
But the strategic use of that correction — that’s where planning begins.
This is where the conversation changes.
It becomes less about cleaning up the past and more about coordinating the future.
When a Large 481(a) Deduction Actually Helps
A depreciation correction often produces a sizable one-year deduction. Whether that’s helpful depends almost entirely on timing.
The technical mechanics of correcting depreciation — including why amending prior returns is usually unnecessary — are explained separately. The strategy only works when the correction is handled properly.
A large deduction can be powerful when paired with:
The sale of a highly appreciated property
Gains from stocks, options, crypto, or business interests
An unusually high-income year
A planned liquidity event
What matters is alignment.
In plain language, income alignment means matching deductions to high-income years — instead of wasting them in low-income years where they don’t meaningfully reduce taxes.
The deduction itself isn’t good or bad.
The year it lands in determines whether it quietly disappears — or meaningfully improves after-tax outcomes.
Strategic Intersections
1. Income-Related Monthly Adjustment Amount (IRMAA) Lookback Windows
Medicare premiums are income-sensitive. And they operate on a two-year lookback.
In 2026, Medicare looks at 2024 income. That’s not intuitive.
For higher-income households, IRMAA surcharges can add $5,000 to $15,000 per year to a couple's premium.
A properly timed 481(a) adjustment can reduce Modified Adjusted Gross Income in the relevant year — potentially avoiding a surcharge tier.
This isn’t just about income tax.
It’s about future premiums.
A depreciation correction can reduce more than taxes — it can lower future Medicare premiums.
Ignoring timing here doesn’t just cost money once. It can cost the full amount for the entire Medicare year.
2. Roth Conversion Windows
Roth conversions are most effective in lower-income years — particularly:
Early retirement
Between career transitions
Before Required Minimum Distributions begin
A large 481(a) deduction can create room for a Roth conversion in the same year.
This is powerful because:
You’re using a real estate tax correction to subsidize a retirement account optimization.
Instead of treating these decisions as separate, they become portfolio coordination.
One asset class can subsidize the strategic use of another.
When tax decisions are siloed, opportunities are missed.
When they’re coordinated, outcomes compound.
3. Liquidity Events: Business Sales & Concentrated Stock
Large one-time income events create high marginal tax exposure.
A depreciation correction can soften that spike.
It won’t eliminate tax on a major event. But it can offset part of the impact.
Timing offsets matter.
Failing to align these events often results in unnecessary tax at the highest marginal rate.
4. Retirement Income “Valleys”
The years between full-time employment and Required Minimum Distributions are often misunderstood.
They’re not empty years.
They’re planning years.
Lower-income periods can be used to:
Cluster Roth conversions
Recognize capital gains intentionally
Absorb depreciation corrections efficiently
This isn’t tax avoidance.
It’s income smoothing — intentionally managing the timing of income recognition to avoid unnecessary marginal spikes.
Not all low-income years are accidental. Some are strategic.
Apply the correction too early (while fully employed), and it may dilute its value.
Apply it too late (once RMDs begin), and the window may have closed.
Of course, all of this depends on timing. If a property sale is already under contract or has closed, the flexibility to coordinate these moves may be limited.
When You Might Delay Fixing It
There are cases where immediate correction isn’t optimal.
If there’s no broader plan…
If income alignment hasn’t been evaluated…
If liquidity events are pending…
Sometimes the wiser move is to pause briefly, model scenarios, and then proceed.
This isn’t about avoiding compliance.
It’s about sequencing it.
Fix it intentionally.
When You Would Accelerate It
Acceleration can make sense when:
Early retirement begins
Income unexpectedly drops
A high-income event is imminent
A Roth conversion window is opening
Tax windows are calendar-bound.
Missed timing can mean permanently lost opportunities.
With proper modeling, the lifetime impact can be significant—sometimes hundreds of thousands of dollars. In certain cases, millions.
This is the quiet power of coordinated tax strategy.
Tax Prep vs. Tax Planning
Tax preparation reports what happened.
Tax planning shapes what happens next.
Depreciation correction is required.
Strategic use of that correction is optional — but powerful.
Real estate investors often cite tax benefits as a reason for owning property.
It follows that those same investors would want to optimize those benefits when an opportunity appears.
Used thoughtfully, real estate can support financial independence.
Used strategically, it can enhance it.
This is where tax correction stops being administrative — and starts being strategic.
FAQ
Can a depreciation correction reduce IRMAA?
Yes. If timed properly, a 481(a) adjustment can reduce Modified Adjusted Gross Income in the relevant lookback year and potentially lower Medicare premium surcharges.
Can missed depreciation be used to fund Roth conversions?
In some cases, yes. A large deduction can create taxable “space” to convert retirement funds at a lower effective tax rate.
Should depreciation corrections be timed?
Often, yes. Aligning the correction with income spikes or retirement transitions can materially improve after-tax outcomes.
Is it ever strategic to delay a depreciation correction?
A brief delay may be appropriate to coordinate timing with other income events, but compliance requirements should always be respected and evaluated by a qualified professional.
Authored by Rich Arzaga, CFP®, CCIM, Founder, The Real Estate Whisperer® Financial Planning. Helping clients and advisors integrate real estate into holistic financial plans.
Comments