You are probably worried that you have made a mistake with depreciation on one of your rentals. The good news is that most mistakes are fixable, and some of them you can actually prevent if you know what to watch for. Let me walk through the four biggest traps I see.
Mistake 1: Depreciating the Land
The single most common depreciation error is this: depreciating the land portion of the property price. This happens because many owners do not know where the land ends and the building begins, so they depreciate the whole purchase price.
The IRS rule is absolute: land never depreciates. It does not wear out, it does not deteriorate, and it has no recovery period. A $200,000 property that is 20% land means you can only depreciate $160,000, not $200,000.
Example: an owner bought a $100,000 rental, never split land from building, and claimed $3,636 in annual depreciation (as if the whole price was a 27.5 year residential building). The actual split was 20% land and 80% building, so only $80,000 was depreciable. The real annual depreciation should have been $2,909. Over five years, they overclaimed roughly $3,635 in depreciation, which means they underreported income by that amount. On audit, the IRS could deny the overage, add back income, and assess additional tax, penalties, and interest.
How to prevent it: get the land split documented before you claim any depreciation. Use the county assessor records online (free), and if those seem unreliable, pay for an appraisal. A $300 appraisal today saves thousands in audit exposure later.
Key takeaway: land is off limits for depreciation, and you need a documented split before you file.
Mistake 2: Using the Purchase Date Instead of the Placed-in-Service Date
The second trap is treating the purchase date as the start of depreciation, even if the property was not ready to rent yet.
You close on a property in December 2025 for $200,000. The inspection reveals major roof work needed. You spend all of January and February 2026 repairing and renovating, and the property is ready to rent March 1, 2026. Many owners record depreciation starting December 2025, but it should start March 2026.
Why does this matter? First, depreciation is allowed only while the property is held for rent and available for rent. If it was under renovation in December and January, it was not held for rent yet. Second, if you get audited and the property was not even in rentable condition on the claimed depreciation start date, the IRS can disallow the entire deduction as premature.
Real example: I had a client who bought a property in November 2025, closed in December 2025, and claimed a full year of depreciation on the 2025 return. The property did not actually have a tenant until August 2026. When we reviewed the file, I caught that depreciation should have started August 2026, not December 2025. We amended the prior return, removed the incorrect deduction, and corrected the record going forward.
How to fix it: keep dated photos and receipts of renovation work, screenshots of lease listings or ads showing when you began marketing, and your first lease agreement. This timeline proves when the property was placed in service. If you missed the date on a prior return, file Form 3115 to correct it going forward without amending every year.
Key takeaway: placement in service is the placed-in-service date, not the purchase date, and your documentation is the proof.
Mistake 3: Not Claiming Depreciation at All
This one surprises most people, but it is critical: the IRS assumes you took all allowable depreciation on your property, whether you actually claimed it or not. If you skip depreciation to hide income, the IRS does not reward you. Instead, when you sell the property, you owe depreciation recapture tax on the full amount anyway, without ever getting the deduction.
Example: an owner had a rental for 10 years, never claimed depreciation, and thought she was ahead. Annual depreciation was $5,000 per year, so over 10 years that was $50,000. When she sold the property, she owed unrecaptured Section 1250 tax on that $50,000 at a rate of up to 25% (as much as $12,500), even though she never claimed the deduction. She paid the recapture tax without ever getting the deduction upfront. She was doubly hurt.
In contrast, if she had claimed depreciation from day one, she would have saved roughly $1,250 per year in tax, getting the benefit upfront. When she sold, she still would owe the recapture tax, but at least she got the 10-year tax savings to offset it.
The lesson: claim depreciation every year. It is not optional, and skipping it does not protect you; it costs you.
If you forgot to claim depreciation in prior years, you can file Form 3115 (change in accounting method) to catch it up. This is a powerful tool because it allows you to claim all missed depreciation at once without filing amended returns for each separate year. Missed depreciation produces a favorable (negative) Section 481(a) adjustment, a deduction you claim in the year of change; there is no interest charge for catching up depreciation you failed to take, so you come out ahead.
Key takeaway: skipping depreciation hurts you twice: no deduction upfront and full recapture later. File Form 3115 to catch up missed years.
Mistake 4: Confusing Repairs with Capital Improvements
This one does not directly affect depreciation calculation, but it is a cousin error that many owners make in the same season: mixing up what gets deducted now versus what gets capitalized and depreciated.
A repair is fixing a small part of the property. A capital improvement is upgrading or replacing a whole system or component. The difference controls the tax treatment.
Repairs are deducted in full in the year you paid for them. You paint the kitchen, fix a leak, replace a broken window. Deduct it now.
Capital improvements are added to the property’s basis and then depreciated over time. You replace the entire roof, install a new HVAC system, rip out the old carpeting and install new carpet throughout. These are capitalized (added to basis) and depreciated.
Real example: an owner spent $8,000 on flooring in a rental. She deducted the entire $8,000 as a repair in the current year. At audit, the IRS questioned it, saying that new flooring is a capital improvement and should be capitalized and depreciated over 27.5 years, not deducted now. The audit adjustment reduced her current year deduction by $8,000 and imposed additional tax, penalties, and interest.
The rule of thumb: if you are replacing a component wholly (the entire roof, the entire system, the entire flooring), it is capital. If you are fixing or patching part of something (a few shingles, a pipe, one room’s flooring), it is a repair.
How to prevent it: when you are describing an expense in QuickBooks or to your accountant, ask yourself: “Am I fixing something broken, or replacing the whole thing?” If you are unsure, get a professional opinion before you deduct it.
Key takeaway: repairs are now, improvements are capitalized and depreciated over time. Get this right the first time.
How to Fix Missed Depreciation Using Form 3115
If you have already made one or more of these mistakes in prior years, the tool to fix it is IRS Form 3115 (Application for Change in Accounting Method). This form lets you catch up depreciation from past years without filing an amended return for each year individually.
Here is how it works: you file Form 3115 with your current year return, declaring that you want to change your accounting method to depreciate the property correctly. When you have under-claimed depreciation, the IRS allows you to:
- Catch up all missed depreciation from prior years at once, as a favorable Section 481(a) adjustment (a deduction) taken in the year of change.
- Claim that catch-up without any interest charge, because you are recovering a deduction you failed to take, not paying back tax.
- Avoid filing separate amended returns for each prior year, which saves time and complexity.
Example: you own five rentals and realized in 2026 that you never claimed depreciation on any of them. Years back: 2021 through 2025, five years of missed depreciation. If you filed five separate amended returns, you would need tax returns for each year, revised computations for each year, and separate filings with the IRS. Using Form 3115, you file once with the current return, show all the catch-up as a single deduction, and the IRS processes it as a method change.
The result is strongly in your favor: you get the full catch-up deduction now, with no interest owed on it, versus not claiming it and paying recapture tax later without ever having gotten the upfront benefit.
Key takeaway: if you missed depreciation, file Form 3115 with your current return to catch up without amending every prior year.
FAQ
Q: I claimed depreciation on the land portion of my property by mistake. What do I do?
A: If it was recent (one or two years), file an amended return and correct it. If it was longer ago, consider filing Form 3115 as a method change to establish the correct split going forward. Either way, get a professional involved so the correction is done right.
Q: My property closed in October 2025 but did not have a tenant until April 2026. When does depreciation start?
A: April 2026, when it was placed in service (ready and available to rent). Keep documentation of the renovation dates and the first lease or rental listing to prove when it became available.
Q: Can I catch up missing depreciation from 10 years ago?
A: Yes, using Form 3115. You can catch up decades of missed depreciation at once, claimed as a single favorable Section 481(a) deduction in the year of change. There is no interest charge for catching up depreciation you under-claimed; you simply get the deduction.
Q: Is it better to claim depreciation and have a bigger recapture tax later, or skip it and avoid recapture?
A: Always claim it. The IRS assumes you took depreciation whether you claimed it or not, so you cannot avoid recapture by skipping the deduction. You only lose by skipping it: no upfront tax savings and full recapture later.
Next Steps
If you suspect you made a mistake with depreciation, do not wait until tax season next year. Pull your prior returns, check your land-to-building split, verify the placed-in-service dates, and confirm you are claiming depreciation every year. If something is wrong, fixing it now with Form 3115 is cheaper and faster than explaining it to an auditor later.
Many rental owners also miss opportunities by not knowing about cost segregation, which can accelerate depreciation even further by reclassifying components into shorter lives. If you own commercial property or a short-term rental, cost segregation might unlock thousands in additional deductions.
The REI Tax Hack Facebook community is a great place to learn from other investors and ask questions about depreciation and other strategies. If you want a professional review of your property files and depreciation setup, Malabute and Company CPAs can walk through your portfolio and make sure everything is right.
Internal Links
- Up to the pillar: The Complete Guide to Depreciation and Cost Segregation
- Across to siblings: How Rental Property Depreciation Actually Works, What is Cost Segregation
- To a related pillar: Year-Round Tax Planning Should Not Start in April (for catching up mistakes proactively)
If you want to talk through how this applies to your properties, book a discovery call.