“I know I need to use Form 3115 to change the method on the 1 property listed on the Sch E. The problem I am having is knowing how to fix the other property. Can I amend the last 3 yrs adding the other property and separating the expenses to reflect it being in service and taking depreciation?”----> I guess you are in very complex situation;Form 3115 needs to be filed for the year in which the underclaimed depreciation was discovered. Since you are changing depreciation methods, you should assume the IRS still views asset-recovery-period changes as accounting-method changes(New Temp. Regs. Sec. 1.446-1T(e)(2)(ii)(d)(2)(i) states that a change in the recovery period of an asset being depreciated under Sec. 168 (ACRS or MACRS) will be deemed an accounting-method change requiring IRS consent). A change in a depreciable asset's recovery period( from 29 yr to 27.5 yr) is accounting-method changes under the Fifth Circuit's decision.So, you need to file Form 3115, because a change in asset recovery periods is an accounting-method change. You ALSO need to file amended return for 2007-2010.I guess you need to file an amended return to recover the lost depreciation expense in 2008.Before the court held that a change in a depreciable asset’s usefuel life were not accounting-method changes. However, you should also be wise to consider that the IRS could change its position on the issue, voluntarily or otherwise, at any time. Needless to say, the other rental property needs to be depreciated also; you need to file an amended returns for the previous years to claim 27.5-year depreciation .The property’d be subject to unrecaptured depre rule, 25% tax rate rule, I mean. The IRS assumes that a rental property loses value every year. By not taking depreciation, you lose out on the tax savings. Even if you elect not to report depreciation(intentionally/unintentionally) on your tax return, the IRS assumes you've taken it anyway. When you sell your property, you will have to pay tax on recaptured depreciation even if there is no recapture amount to take. In this way, the IRS makes taking depreciation on investment property mandatory.
“ Does Form 3115 need to be used for this property also. I have never dealt with Form 3115 before, does it allow me to take past unclaimed deprecation off on the current taxes? “---->Correct. As said above, as long as you are changing depreciation methods and the IRS still views asset-recovery-period changes as accounting-method changes, Form 3115 needs to be filed. I guess you do not need to file the Form 3115 for the other rental property.