Catch Up Missed Depreciation Before a Sale With Form 3115

Skipping depreciation never avoided the tax, because basis drops by the allowable amount either way

Section 1016(a)(2) adjusts basis for depreciation to the extent of the amount allowed as a deduction, but not less than the amount allowable. Publication 946 says the same in one sentence: you must reduce the basis of property by the depreciation allowed or allowable, whichever is greater, and if you do not claim depreciation you are entitled to deduct, you must still reduce basis by the full allowable amount.

At sale that lower basis produces a larger gain, and the depreciation portion is taxed as unrecaptured section 1250 gain at up to 25% under section 1(h), which defines that gain by reference to all depreciation, not just what was deducted. The page on recapture when you never claimed depreciation covers that result; this page covers the repair.

The repair exists because, after two returns, a wrong depreciation treatment is an accounting method rather than an error. Reg. section 1.446-1(e)(2)(ii)(d) treats a change from nondepreciable to depreciable treatment, and a change in method, recovery period or convention, as a change in method of accounting. Method changes are fixed with a catch-up adjustment, not by amending old returns.

Form 3115 under automatic change 7 converts the missed years into one deduction

Section 6.01 of Rev. Proc. 2025-23, the current list of automatic changes, covers a change from an impermissible to a permissible method of depreciation for property on which the impermissible method was used in at least the two taxable years immediately preceding the year of change and that you own at the beginning of the year of change. If you placed the property in service only last year, the same section lets you amend that return instead, or still file the Form 3115.

The catch-up is the section 481(a) adjustment. Publication 946 describes it as the difference between the depreciation actually deducted and the total allowable before the year of change; if nothing was deducted, it is the total allowable. Rev. Proc. 2015-13 section 7.03 sets the adjustment period: one taxable year for a negative adjustment, which is yours, and four years for a positive one. Publication 946 says the negative adjustment is reported on the business return as other expenses.

Filing mechanics come from Rev. Proc. 2015-13 section 6.03 and the Instructions for Form 3115: attach the original to the timely filed return, including extensions, for the year of change, and send a signed copy to the IRS in Ogden, Utah, no earlier than the first day of the year of change and no later than the date you file the original. There is no user fee for an automatic change. Schedule E of the form carries the depreciation detail.

Changes that are not method changes cannot use this route. Publication 946 lists them: a mathematical or posting error, a change in use of the asset in your hands, a late depreciation election or a revocation, and a change in the placed-in-service date. Those go on an amended return within the normal limitation period, or nowhere.

Timing against the sale: file for the sale year or earlier, and a separate procedure covers property already sold

Section 6.01 requires that you own the property at the beginning of the year of change, so a Form 3115 filed with the return for the year of sale works as long as you owned the property on the first day of that year. The deduction and the gain then land on the same return, which is the cleanest result.

If the sale year has already closed without a Form 3115, section 6.07 of Rev. Proc. 2025-23, change number 107, adopts the procedure of Rev. Proc. 2007-16 for property that has been disposed of: the year of change is the year of disposition, and the change may be made on the original return or on an amended return filed before the assessment period for that year expires, with the Form 3115 attached and the gain recomputed to match. That is a one-time fix, not a routine.

Section 6.07 does not apply to property disposed of in a nonrecognition transaction such as a section 1031 exchange, unless you elected under Reg. section 1.168(i)-6(i) to treat the whole replacement basis as newly placed in service. An exchanger should therefore file the Form 3115 for a year in which the property is still owned, or with the exchange-year return while the relinquished property was still on the books at the start of the year.

The adjustment is part of the rental activity's income or loss, so the passive activity rules can hold part of it back if you have no other passive income and the activity is not fully disposed of in a taxable sale. The suspended passive losses page explains why an exchange does not free them and a sale does.

The arithmetic usually favors filing, because the deduction is ordinary and the recapture is capped at 25%

Hypothetical, round numbers: a residential rental with $1,100,000 of depreciable building basis, held ten full years with no depreciation claimed. Straight line over 27.5 years is $40,000 a year, so $400,000 was allowable and your basis is $400,000 lower whether or not you deducted it. With no Form 3115, you sell and pay 25% on $400,000 of unrecaptured section 1250 gain, $100,000, for depreciation you never used.

With a Form 3115 for the sale year, the $400,000 negative section 481(a) adjustment is an ordinary deduction against that year's income. At the 35% bracket, which Rev. Proc. 2025-32 puts at $512,450 to $768,700 of taxable income for joint filers in 2026, the deduction is worth $140,000 while the recapture costs $100,000. Even at 24% the deduction roughly matches the recapture, and the gain itself is unchanged. Run your own numbers with your CPA, including state tax and the net investment income tax.

If you exchange instead of selling, the same filing still produces the deduction while the recapture rides into the replacement basis, as the page on whether a 1031 exchange defers depreciation recapture explains. The exchanged basis then keeps depreciating on the old schedule, so the catch-up also corrects the schedule your replacement inherits.

Get the schedule right before the Form 3115, because it also fixes partial errors and sets up the replacement

The same automatic change corrects under-depreciation, not only zero depreciation: a building run over 39 years that qualified for 27.5, land improvements treated as building, or a cost segregation study applied late. Publication 946 lists a change in recovery period as a method change. The residential versus nonresidential depreciation page covers the 80% test that decides which period applied.

Build the fixed-asset ledger first. The adjustment needs the placed-in-service date, the basis split between land and building, improvements added since, and any components retired, which is where the partial asset disposition rules come in. The adjusted basis page walks through the reconstruction when records are thin.

Add the filing to your pre-sale checklist alongside the closing withholding forms and the exchange agreement. The Form 3115 is signed and attached to the return, not sent to the closing table, so nothing about the sale or the exchange timeline changes; only the sale-year return does.