Form 3115 - How to correct excess depreciation on rental conversion?

You're definitely on the right track! When you convert a primary residence to a rental property, you should use the lower of your adjusted basis (purchase price plus improvements minus any depreciation) or the fair market value at the time of conversion. Form 3115 with DCN 7 is indeed the correct approach for fixing depreciation errors. The beauty of using Form 3115 is that you don't need to amend prior year returns - that's one of its main benefits. The 481(a) adjustment lets you catch up and correct the error. For the 481(a) adjustment, you have two options: take the full $26k in income this year as you suggested, or spread it over 4 years ($6,500 per year). Both are legally acceptable - it just depends on your tax situation and preference. Make sure you're using the correct depreciation method going forward based on the proper basis. Also, attach the Form 3115 to your current year return and send a copy to the IRS office in Ogden, UT as specified in the instructions.

I went through something similar last year with my rental and used taxr.ai (https://taxr.ai) to help me figure out the depreciation mess I'd created. I was also using the wrong basis calculation but didn't realize it for years! Their system actually identified my depreciation errors when I uploaded my previous tax forms and property documents. They have tax professionals who specifically handle real estate issues and Form 3115 situations. Saved me a ton of time figuring out the exact adjustment amount and how to properly complete the form. The best part was they showed me how to document everything correctly to avoid raising audit flags with the sudden adjustment. Definitely worth checking out if you want professional guidance on fixing this.

Just wanted to follow up after using taxr.ai for my rental property depreciation issue! After seeing the recommendation here, I uploaded my previous tax returns and property info, and they pointed out I'd actually been under-depreciating my rental (opposite problem from most people). Their specialists walked me through the whole Form 3115 process and helped me calculate the exact adjustment. They even provided a detailed explanation document I could keep with my tax records in case of future questions from the IRS. What impressed me most was how they explained everything in plain English - I finally understand the whole "basis at conversion" concept that I've been getting wrong for years. Definitely a weight off my shoulders getting this fixed!

Have you tried calling the IRS directly about this? I had a similar issue and spent WEEKS trying to get through to someone who could actually help. Finally used Claimyr (https://claimyr.com) to connect with an IRS agent - they have this system that navigates the IRS phone tree and gets you a callback when an agent is available. I was super skeptical, but you can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed exactly what you're planning to do with Form 3115 is correct and gave me additional pointers specific to my situation. Way better than guessing or relying solely on internet advice (no offense to everyone here). Getting direct confirmation from the IRS gave me peace of mind.

I need to eat crow here. After my skeptical comment, I decided to try Claimyr anyway because I was desperate to talk to someone at the IRS about my own depreciation issue. Got a callback in about 30 minutes and spoke directly to an IRS agent who was actually helpful! The agent confirmed that Form 3115 with DCN 7 is exactly what I needed and that I didn't need to file amended returns. She also explained that I could choose between taking the full hit this year or spreading it over 4 years, depending on what works better for my tax situation. For anyone dealing with depreciation issues, getting direct confirmation from the IRS is really valuable. Never thought I'd say this, but I'm glad I tried the service after doubting it.

Something to consider - when you file Form 3115, you're absolutely correct that you don't need to amend prior years' returns, but you should also be aware there's a mandatory spread of the Section 481(a) adjustment over 4 tax years if the net adjustment is greater than $50,000. Since yours is $26k, you have the option to take it all at once or spread it out. If you're in a lower tax bracket this year compared to future years, taking the hit all at once could make sense. Otherwise, spreading it over 4 years would soften the blow.

Has anyone considered the impact this might have on the passive activity loss limitations? I made a similar mistake and when I corrected it, I had to recalculate my PAL carryovers because the lower depreciation affected my passive income/loss calculations for multiple years.

Just to add some perspective from someone who went through this exact situation - I also used FMV instead of adjusted basis when I converted my primary residence to rental property a few years back. The mistake cost me about $18k in excess depreciation over 4 years. I filed Form 3115 with DCN 7 last year and can confirm it's much smoother than you might expect. The key things that helped me: 1. I chose to spread the 481(a) adjustment over 4 years since I was already in a higher tax bracket and didn't want to push myself even higher 2. Made sure to attach a detailed explanation of how I calculated the adjustment (showing original basis vs. what I incorrectly used) 3. Updated my depreciation software to use the correct basis going forward The IRS processed it without any issues or follow-up questions. No amended returns needed, which was a huge relief. One tip: if you're doing this yourself, double-check your math on the 481(a) adjustment calculation - that's where most people make errors according to my CPA. Good luck getting this sorted out! It feels great once it's behind you and you know everything is correct going forward.

I'm dealing with a similar depreciation mess on my rental property and this thread has been incredibly helpful! I made the same mistake of using FMV instead of adjusted basis when I converted my home to a rental about 3 years ago. One thing I'm still unclear on - when calculating the 481(a) adjustment, do I need to account for any improvements I made to the property between the original purchase and the conversion date? I added a deck and updated the kitchen during the time I lived there, so my adjusted basis should be higher than just the original purchase price, right? Also, for those who chose the 4-year spread option, do you report it as ordinary income each year, or does it get special treatment since it's related to depreciation recapture? I'm trying to plan out the tax impact before I file the Form 3115. Thanks to everyone for sharing their experiences - it's so much better than trying to figure this out from just reading IRS publications!

I went through this exact same situation two years ago and can confirm you're on the right track with Form 3115 and DCN 7. The relief of finally getting it sorted out is huge! One thing I'd add that hasn't been mentioned yet - make sure you keep really detailed records of your correction process. I created a spreadsheet showing year by year what I claimed vs. what I should have claimed, along with supporting documentation for my original purchase price and any improvements. This came in handy when I got a notice from the IRS about 8 months later (not an audit, just a clarification request). Having everything organized made it easy to respond, and they accepted my documentation without any issues. Also, if you're using tax software, some programs don't handle Form 3115 very well, especially the 481(a) adjustment calculations. I ended up having to do mine by hand and attach it as a PDF. Just something to keep in mind if your software seems to be calculating things incorrectly. The peace of mind of knowing everything is correct going forward is worth the hassle of fixing it properly!