Do I owe depreciation recapture if I never claimed depreciation?

Basis falls by the depreciation you were allowed to take, not the amount you deducted

The statute is drafted so the two numbers end up the same. §1016(a)(2) reduces basis "to the extent of the amount ... allowed as deductions in computing taxable income," then closes with "but not less than the amount allowable under this subtitle or prior income tax laws."

Publication 946 states it plainly: "You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater." If the deduction was skipped, "you must still reduce the basis of the property by the full amount of depreciation allowable."

Hypothetical, ignoring the first-year mid-month convention: a house bought for $400,000 with $320,000 allocated to the structure gives $11,636 of allowable depreciation a year over 27.5 years. Ten years of ownership takes $116,364 off basis, on ten returns or on none.

If the rental was your home first, the allowable amount starts lower than you think

The accidental-landlord case has its own opening number. Publication 527 sets the depreciable basis on a converted home as "the lesser of its adjusted basis or its FMV when you change it to rental use," and the clock starts when the place is "ready and available" to rent, not when a tenant signs.

So a house bought for $250,000, worth $310,000 the month it went on the rental market, depreciates from $250,000 less the land allocation, and the mid-month convention prorates the first year. Every one of those years is allowable whether or not it was deducted.

That opening number also fixes the size of the Form 3115 catch-up, so pull the closing statement from the original purchase, the property-tax assessment used for the land split, and the date the listing went live before your accountant starts.

• Residential rental property runs 27.5 years, straight line, mid-month convention, under MACRS GDS.
• Land is excluded from the allowable amount, so the land-to-building split drives everything that follows.
• Improvements made after the conversion carry their own placed-in-service dates and their own allowable totals.

You pay 25% on write-offs that never reached a single return

§1(h)(6) defines unrecaptured §1250 gain by what "would be treated as ordinary income if section 1250(b)(1) included all depreciation," and §1(h)(1)(E) prices that slice at 25%. Publication 544 describes the recapture base the same way: depreciation "allowed or allowable."

Carry the hypothetical forward. The $116,364 of allowable depreciation produces $29,091 of tax at the 25% ceiling, while the same deductions, claimed by an owner in the 22% bracket, would have been worth roughly $25,600 of ordinary tax saved. Skipping them converted a deduction into a bill.

Sizing the whole exposure, including the 15% or 20% slice on the rest of the appreciation and the 3.8% net investment income tax, belongs on how much recapture you will owe.

Form 3115 change number 7 pulls the whole catch-up into one tax year

Section 6.01 of the IRS list of automatic accounting-method changes, Rev. Proc. 2025-23, covers a taxpayer moving "from an impermissible to a permissible method of accounting for depreciation or amortization" and assigns it change number 7. Treating a depreciation method or recovery period as a method of accounting comes from Reg. §1.446-1(e)(2)(ii)(d).

The catch-up arrives as a negative §481(a) adjustment, and the Form 3115 instructions give it the short road: "The section 481(a) adjustment period is generally 1 tax year (year of change) for a negative section 481(a) adjustment." A positive adjustment would have been spread over four.

One skipped year is different. If the property went into service in the tax year immediately before the year of change, section 6.01(1)(b) lets you amend that year's return instead, and Publication 946 says a wrong amount is corrected "by filing an amended return for that year."

• The impermissible method must have been used in at least the two tax years immediately preceding the year of change.
• The property must be "owned by the taxpayer at the beginning of the year of change."
• The original form is attached to the timely filed (including extensions) return; a signed duplicate goes to the IRS in Ogden.
• No user fee applies to an automatic change.
• The attached description must be specific: section 6.01(3)(b)(i) rejects "erroneous method to proper method" as a description.

Exchange first and change number 107 slams shut on you

There is a separate automatic change, number 107 under section 6.07, for property already gone: it applies where the owner "claimed less than the depreciation allowable" and it is filed for the year the property was disposed of, on the original return or on an amended one within the §6501(a) assessment period.

It does not reach exchangers. Section 6.07(2)(b)(iv) excludes "any property disposed of by the taxpayer in a transaction to which a nonrecognition section of the Code applies (for example, § 1031)," unless the taxpayer elects under Reg. §1.168(i)-6(i) and (j) to treat the replacement's entire basis as newly placed in service.

That election has its own consequences for how the new property depreciates, which is the subject of depreciating the replacement after a 1031. The practical sequence is simpler: make the year of change a year in which you still hold the building.

The exchange still defers the §1250 layer you never claimed

Nothing about the missed deductions weakens the deferral. §1031(a)(1) recognizes no gain on a like-kind exchange of real property, and §1250(d)(4) caps the recapture taken into account at the gain actually recognized, which is nil when no boot changes hands.

§1031(d) then hands the old basis to the replacement, so the low basis produced by ten years of allowable depreciation travels with you into the next building or DST interest. See how basis carries over and what is owed when you finally cash out.

If you take cash out, the boot is taxed and the §1250 slice is first in line; that ordering is covered on how boot is taxed.

Where the catch-up deduction lands, and why it may sit idle

The §481(a) adjustment is a rental deduction, not a reduction of the sale price, so it reports with the activity that generated it. With little or no passive income it can be suspended under §469 and wait, which is exactly the position described on suspended passive losses in an exchange.

Filing the change and the exchange in the same year is a real sequencing question, and the answer turns on your other income; have your CPA or attorney settle the timing and the wording of the Form 3115 statements before the exchange agreement is signed.

We are a 1031 exchange broker, not a tax preparer, so the Form 3115 work stays with your accountant. What we can do is keep replacement options on the table while that filing is prepared, drawing on more than twenty years of placing sellers into DSTs.