The $65,000 Mistake: Recovering Missed Depreciation from Past Years

The Challenge

A seasoned investor with a $2M portfolio came to us with a sinking feeling: she was paying taxes on her rental income, but her peers in real estate were paying zero. Her previous CPA was a "generalist" who had simply depreciated her buildings over 27.5 years and capitalized every single repair.

She assumed those tax savings were lost forever. She worried she would have to file messy "Amended Returns" for the last 3 years to fix it, which she feared would trigger an audit.

The Solution

We reviewed her depreciation schedules and identified that she had never performed a Cost Segregation study on her older properties.

Instead of amending old returns, we utilized the IRS "Automatic Consent" procedure (Form 3115) to claim "Catch-Up Depreciation". This created a §481(a) adjustment, allowing us to take all the depreciation she missed over the last 5 years and claim it as a single, massive lump-sum deduction in the current tax year.

• The "Repair" correction: We also reclassified several "improvements" (like replacing 20% of a roof) that her old CPA capitalized. We expensed them immediately under the Tangible Property Regulations, further increasing her deduction.

The Result

By correcting the depreciation method from "Straight Line" to "Accelerated" retroactively, we generated a $190,000 catch-up deduction in Year 1.

This wiped out her current year's rental income completely and created a Net Operating Loss (NOL) that she carried forward to future years. We effectively turned her "lost" money into a $65,000 permanent tax savings—all without filing a single amended return.