You discover that a client has owned a rental property for several years but never claimed depreciation.
Can you simply amend the prior tax returns?
Sometimes, but not always.
If the depreciation error is caught before the taxpayer has established an accounting method, an amended return may be appropriate. But when the same impermissible depreciation method has generally been used on two or more consecutively filed returns, correcting the error may require Form 3115, Application for Change in Accounting Method. The IRS specifically identifies this as a change in accounting method for depreciation.
Understanding that distinction can help tax professionals determine the right way to correct missed depreciation.
When Can Missed Depreciation Be Corrected With an Amended Return?
Consider two taxpayers who failed to claim depreciation on rental properties.
Scenario 1: One year was missed.
A rental property was placed in service in 2025, but no depreciation was claimed. The error is discovered before filing the 2026 return.
Because the improper treatment has only been used for one year, Jason Dinesen explains that an accounting method has not yet been established and the 2025 return can be amended.
Scenario 2: Two years were missed.
Now suppose the property was placed in service in 2024 and no depreciation was claimed on either the 2024 or 2025 return.
In this situation, the taxpayer has generally established a method of accounting. Rather than simply amending both returns, Form 3115 may be required to make the correction.
IRS Publication 946 similarly explains that using the same impermissible depreciation method on two or more consecutively filed returns generally constitutes a change in accounting method when corrected.
How Does Form 3115 Help Correct Missed Depreciation?
Form 3115 is used to request a change in an overall accounting method or the accounting treatment of a particular item.
When correcting certain depreciation errors, a Section 481(a) adjustment can account for depreciation that should have been claimed in previous years.
Jason demonstrates this with a rental property that should have generated $7,860 of depreciation over two prior years. Instead of amending both returns, Form 3115 is used in the example to catch up the missed depreciation in the year of change.
The IRS confirms that when Form 3115 is used to change from an impermissible to a permissible depreciation method, the Section 481(a) adjustment accounts for the difference between depreciation actually deducted and depreciation that was allowable before the year of change.
What If the Client Claimed Too Much Depreciation?
Form 3115 isn't limited to missed depreciation.
Jason also demonstrates what happens when a taxpayer depreciates the entire purchase price of a rental property without properly allocating a portion to nondepreciable land.
After correcting the allocation, the example results in $5,000 being added to income rather than an additional deduction.
That's an important reminder: correcting depreciation through Form 3115 doesn't always work in the taxpayer's favor. The adjustment depends on whether depreciation was previously underclaimed or overclaimed.
Amended Return or Form 3115?
A useful starting point is:
Situation |
Potential Correction |
|
One year of missed depreciation before a method is established |
Amended return may be appropriate |
|
Same impermissible depreciation treatment generally used on 2+ consecutive returns |
Form 3115 may be required |
|
Change from an established impermissible depreciation method |
Generally Form 3115 |
|
Excess depreciation from an established improper method |
Form 3115 may be required |
The facts still matter, and not every depreciation correction is an accounting method change. IRS guidance should be reviewed before determining the appropriate procedure.
Build Your Depreciation Knowledge
Missed depreciation can look like a simple error, but once an accounting method has been established, fixing it can become much more complicated.
2026 Understanding Powerful IRS Forms: Form 843, Form 3115 & More
In this course, Jason Dinesen, EA, takes a practical look at Form 3115 and other powerful IRS forms. He explores depreciation corrections, accounting method changes, penalty relief, inventory methods, business purchase-price allocations, and more.
2026 Depreciation Essentials
In this course, take a deeper look at depreciation concepts and strategies tax professionals need when working with depreciable property.
Together, these courses can help you understand how depreciation should be handled and what to do when it hasn't been handled correctly.
Frequently Asked Questions
What happens if a taxpayer forgot to depreciate a rental property?
The appropriate correction depends on how long the improper treatment has been used. One year may be correctable through an amended return, while an established accounting method may require Form 3115.
What is the two-year rule for missed depreciation?
The IRS generally considers an impermissible depreciation method established when it has been used on two or more consecutively filed returns.
Can Form 3115 catch up missed depreciation?
Yes, in qualifying accounting method changes. A Section 481(a) adjustment can account for depreciation that should have been claimed before the year of change.
Is Form 3115 only used for depreciation?
No. Form 3115 is used for changes in an overall accounting method or the accounting treatment of an item.
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