Missed Depreciation on a Rental: How Form 3115 Recovers It Without Amending Years of Returns

Here is a situation I hear often. A homeowner moves out of a Sarasota house and rents it instead of selling. Years go by. The rent goes on Schedule E. Depreciation never does. Then the owner decides to sell and learns that the IRS will reduce the basis anyway, as if the depreciation had been taken all along.

That is the allowed or allowable rule, and it is unforgiving. The fix, fortunately, is not to amend a decade of returns. It is a single form, filed correctly.

Why missed depreciation hurts twice

IRC 1016(a)(2) reduces the basis of property for depreciation allowed, but not less than the amount allowable. Allowable means what you were entitled to claim. If you claimed nothing, basis still drops by the allowable amount.

So you lose twice. You paid tax on rental income that depreciation should have sheltered. Then, at sale, your gain is computed with a basis reduced as if you had sheltered it. Part of that gain may be taxed as unrecaptured section 1250 gain at up to 25 percent, as explained in the recapture guide.

Amended return or Form 3115?

The answer depends on how many years the error has been on returns.

If you used an impermissible depreciation method on only one return, the change generally is not a change in method of accounting. You fix it with an amended return for that year, if the statute of limitations is open.

If you used the impermissible method on two or more consecutive returns, you have adopted a method of accounting. Changing it is a change in accounting method under IRC 446(e), which requires the consent of the IRS. For missed depreciation, that consent is granted automatically if you follow the procedures, using Form 3115, Application for Change in Accounting Method.

The automatic change

The IRS publishes a list of automatic accounting method changes. The current list is Rev. Proc. 2025-23, which has since been modified by later revenue procedures, including Rev. Proc. 2025-28 and Rev. Proc. 2026-32. Section 6.01 of Rev. Proc. 2025-23 covers a change from an impermissible to a permissible method of accounting for depreciation or amortization. It applies to property for which you used the impermissible method in at least two taxable years. The designated automatic accounting method change number for this change is 7.

The general procedures for filing automatic changes come from Rev. Proc. 2015-13, as modified. Check the current versions before you file. The IRS updates the list, and the filing details change from time to time.

The section 481(a) adjustment

The point of the method change is the catch-up. IRC 481(a) requires an adjustment to prevent amounts from being duplicated or omitted because of the change. For missed depreciation, the adjustment is the total depreciation you should have claimed in prior years minus what you actually claimed. That is a negative adjustment, meaning a deduction.

Under the general procedures in Rev. Proc. 2015-13, a negative 481(a) adjustment is generally taken into account entirely in the year of change. So ten years of missed depreciation can be deducted in one year, in addition to the current year's depreciation. No amended returns. No reopening of closed years.

Whether you can use the deduction that year is a separate question. On a rental, it is part of a passive activity, so the passive loss rules apply. If the deduction creates a loss you cannot use, it is suspended and carried forward like any other passive loss. See the passive loss guide.

Filing mechanics

1. Compute the correct depreciation. Start with the basis when the property was placed in service as a rental. For a converted residence, the depreciable basis of the building is generally the lesser of its fair market value or adjusted basis on the conversion date. Allocate between land and building. Land is never depreciable.
2. Compute the 481(a) adjustment. Total allowable depreciation from the placed-in-service date through the end of the prior year, minus what was actually claimed.
3. Complete Form 3115 using DCN 7, with the required statements and computations.
4. Attach the original to your timely filed federal return, including extensions, for the year of change.
5. File a signed copy with the IRS office designated in the Form 3115 instructions, generally no later than the date you file the original with your return.
6. Claim the adjustment and current-year depreciation on the return.

Publication 946 explains how to figure depreciation. Publication 527 covers rental-specific rules, including converting a residence to a rental.

If you already sold

Rev. Proc. 2025-23 includes a separate automatic change, in section 6.07, for an impermissible to permissible method of accounting for depreciation of property that has already been disposed of. Owners who find the error while preparing the sale-year return can often still capture the missed depreciation. That section builds on Rev. Proc. 2007-16, which allows the change for disposed property when you claimed no depreciation, or less than the allowable amount, in the year of change or earlier years. The rules for disposed property are specific, so read that section closely. Act no later than the sale-year return if you can.

A simple illustration

Suppose you converted a former residence to a rental eight years ago, the building portion of its basis on the conversion date was $220,000, and you never claimed depreciation. Straight-line over 27.5 years, the annual allowable amount is about $8,000. After eight years, the allowable total is roughly $64,000. File Form 3115 this year and the negative 481(a) adjustment of about $64,000 is deducted this year, along with this year's regular depreciation. Without the change, you would lose those deductions and still carry a basis about $64,000 lower when you sell. These numbers are illustrations only.

Common mistakes

• Using the original purchase price for a converted residence. The conversion rule uses the lesser of value or adjusted basis on the conversion date.
• Depreciating land. Use the county assessor's land and improvement split, an appraisal, or another reasonable method.
• Forgetting improvements. A new roof or HVAC system placed in service later has its own depreciation schedule.
• Filing only one copy. The duplicate copy to the IRS office is part of the procedure.
• Using a superseded revenue procedure. Check the current list.

Why it matters in an audit

Examiners reviewing a rental sale routinely recompute basis using allowable depreciation. If you have not fixed missed depreciation, they will reduce basis without giving you the deductions. A method change during an exam is subject to additional limits, so it is far better to fix this before the IRS asks. The broader exam process is covered in the Schedule E audit guide. Related decisions about what was capitalized in the first place are in the repairs versus improvements guide.

You cannot avoid the basis reduction. You can make sure you got the deductions that justify it.