Published by AE Tax Advisors Team • 2026-07-10

Incorrect Depreciation Method Corrected -- $42,000 Recovered

The Client

Laura Hensley, a rental property investor in Knoxville, Tennessee, owned a duplex purchased six years earlier for $340,000. She also earned $130,000 from her healthcare administration career. The property generated $24,000 in annual rental income.

The Problem

Laura's prior CPA had been depreciating the property over 39 years (the commercial property life) instead of 27.5 years (the residential rental property life). This error reduced her annual depreciation deduction from $9,890 to $6,970 -- a difference of $2,920 per year. Over six years, she had been shortchanged $17,520 in depreciation deductions. The CPA had also failed to separate the land value, depreciating the full purchase price including land.

Our Strategy

We filed Form 3115 to correct the depreciation method from 39-year commercial to 27.5-year residential. The Section 481(a) catch-up adjustment captured all six years of missed depreciation in a single year. We also corrected the land allocation (reducing the depreciable basis by the land value) and identified $18,000 in unclaimed repair deductions across the six years that had been improperly capitalized.

The Results

The Form 3115 correction plus the repair deduction recovery produced $42,000 in total tax savings. Laura received the full benefit on her current-year return without amending any prior filings. Her ongoing depreciation deduction also increased by $2,920 per year going forward.

Key Takeaway

Using the wrong depreciation life on a rental property is one of the most common and costly CPA errors. Residential rental property should be depreciated over 27.5 years -- not 39 years. Form 3115 allows correction and catch-up without amending prior returns.