Depreciable Basis was Not the Correct Amount- Can This Be Fixed
What is the amount was less or more that the amount that should have been listed for the property
Using an incorrect basis is not a changing in accounting method, it is a “mathematical or posting error”, so Form 3115 cannot be used (some people say it can be used in the year of the sale, but I’m still not convinced of that).
Basis for Depreciation was Too High.
If the Basis for depreciation was too high (and therefore too much depreciation), it is probably not a big deal. The taxpayer has been benefiting from the ‘extra’ depreciation all of these years, and when the property is eventually sold, will need to pay the Unrecaptured Section 1250 Gain on that. Hypothetically if they have always been in the same tax bracket, they will ‘break even’ (or even end up better off due to being limited to 25% for the Unrecaptured Section 1250 Gain). If the taxpayer still owns the property when she dies and it gets a step-up in Basis, then he/she really did good by taking too much depreciation.
Basis for Depreciation was Too Low.
If the basis was too small (and therefore not enough depreciation), you cannot fix it using Form 3115. In this case the ‘open’ years should be amended to correct the error to receive the immediate tax benefit available in the open years. When the property is sold, less depreciation will have been taken, than would have been taken had the correct basis been used. Therefore, in theory, there will be less Unrecaptured Section 1250 Gain. This is an OK solution unless you are in a lower tax bracket when the property is sold.
Some people say your can catch up the depreciation using the Form 3115 when the property is sold. The problem with that, it is still not a change in accounting method for depreciation NOT taken. It is still a “mathematical or posting error” for the INCORRECT basis used.