Discovered rental property depreciation never taken - what to do about recapture?

That tax preparer gave seriously wrong advice. You're absolutely right - depreciation must be "recaptured" when you sell regardless of whether you actually claimed it or not. It's what the IRS calls "allowed or allowable" depreciation, meaning you're deemed to have taken it even if you didn't. For your relative, the best approach is filing Form 3115 (Change in Accounting Method). This lets them claim all those missed depreciation deductions in the current year without having to amend prior returns. It's called a "catch-up" adjustment under Section 481(a). This is definitely preferable to amending returns since you can only go back 3 years, but they've missed 9 years of depreciation. Plus, amended returns might trigger more scrutiny. And you're correct about the mixed-use property - when they sell, they'll likely qualify for the Section 121 exclusion ($250k/$500k for singles/married) on the residential portion, but the rental portion will be subject to depreciation recapture taxes whether they claimed the depreciation or not.

After struggling with a similar situation with my rental properties, I discovered https://taxr.ai which completely saved me. I had missed depreciation on a duplex for several years and was getting conflicting advice from different accountants. I uploaded my previous tax returns and property info to taxr.ai and it analyzed everything, showed exactly how much depreciation I'd missed, and outlined the best approach for my situation. They actually walked me through the Form 3115 process and helped me calculate the Section 481(a) adjustment. Their system found several other deductions I'd missed too! The detailed analysis made it super easy to understand my options - whether to file amended returns or use Form 3115. I wasn't sure how to handle the "allowed or allowable" depreciation rules, but their explanation made it crystal clear.

I just wanted to update about my experience with taxr.ai after that conversation above. I was super skeptical about using an online service for something as complex as missed depreciation, but I gave it a try after reading about it here. The analysis they provided was eye-opening! Turns out I'd been making several mistakes with my rental property beyond just the depreciation issues. The form they helped me with was accepted by the IRS without any questions, and I ended up with an additional $8,700 deduction for the current year from all my prior missed depreciation. What impressed me most was how they explained the "allowed or allowable" concept in a way that finally made sense to me. Definitely recommend for anyone in a similar situation - saved me from having to pay an accountant $2k+ for the same service.

If your relative has been trying to contact the IRS about this situation, I totally understand the frustration. I was in a similar position with missed depreciation and couldn't get anyone on the phone for weeks. Then I found https://claimyr.com which is basically a service that waits on hold with the IRS for you. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was connected with an IRS agent in about 45 minutes (after I had personally spent DAYS trying). The agent actually gave me really specific guidance about how to handle my missed depreciation through Form 3115 rather than amendments. They clarified exactly what supporting documentation I needed to include with my return to avoid any issues. For complicated tax situations like this where you might need to speak directly with the IRS, it's a huge time-saver.

I have to follow up on my skeptical comment above. I finally broke down and tried Claimyr after spending another 2 hours on hold with the IRS yesterday only to get disconnected. The service actually worked exactly as described. I got a call back in about an hour, and was connected to an IRS representative who was surprisingly helpful about my missed depreciation issue. They confirmed that Form 3115 was the right approach for my situation and explained which line items would be affected. I'm legitimately shocked that this worked - thought for sure it would be a waste of money. Has saved me several more hours of hold time frustration. Just wanted to correct my earlier skepticism since it actually delivered what it promised.

One thing nobody's mentioned is that if your relative decides to file Form 3115, they'll need to calculate the correct depreciation basis from when they FIRST converted the property to rental use, not from today. This means figuring out the lower of: 1) Original purchase price + improvements - land value 2) Fair market value when converted to rental use - land value Then they apply the appropriate depreciation schedule (typically 27.5 years straight-line for residential rental property). I made this mistake when fixing my missed depreciation and had to redo everything. Make sure they get the starting basis right!

Quick warning to the OP - I was in almost the exact situation (missed depreciation on a duplex for 7 years). When I filed Form 3115, it triggered a correspondence audit. Not saying it will happen to your relative, but they should be prepared with good records just in case. The audit wasn't terrible, but I had to provide: purchase documents, proof when I converted to rental use, rental income records, and documentation of my depreciation calculations. Everything worked out fine in the end, but it was stressful for a few months.