‘I never took a dime of depreciation’: I’m 70 and want to sell the rental I’ve owned since 2004. My son says the IRS taxes it anyway and I should keep it for the kids. Is he right?
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My wife and I are 70 and 68, and we have owned a rental house across town since June 2004. We paid $275,000 for it. A nurse has rented it from us for nine years at $2,600 a month and has never been late. I have done our own taxes at the kitchen table every February since the Carter administration.
Here is my confession. I never took a dime of depreciation. My brother-in-law told me the year we bought it that depreciation just comes back to bite you when you sell, so why bother, and I believed him. Twenty-two years of Schedule E forms with nothing on that line.
I am done being a landlord. I do not want to climb a ladder to look at a roof at 70, and my wife wants the money somewhere we can see it. The agent says the house will list at $615,000. I figured the tax was simple: we paid $275,000, we clear about $578,100 after her commission, and we pay capital gains on the difference.
Then our son, who does something with numbers at a bank in Charlotte, looked through my folder and said the IRS is going to bill us for that depreciation anyway, whether I took it or not. He says I threw away twenty years of deductions, and that the smart move now is to keep the house and let him and his sister inherit it. I told him I am not keeping a house I do not want so he can save on taxes someday.
We have my pension of $45,000 a year, about $48,000 a year in Social Security between us, and $600,000 in an IRA we have not touched. We live in Florida. Is he right?
Your son is right about the rule and wrong about the ending. The IRS counts the depreciation you never took, and one form lets you take all of it back on the same return as the sale. The limit is that the form has to go in with a timely filed return and has carve-outs, so this is a year to pay a professional.
What the IRS says you took
Depreciation is the yearly write-off for a building wearing out, spread over 27.5 years for a residential rental, land excluded. Call $55,000 of your $275,000 the land and $220,000 the building, and your deduction was $8,000 a year. From June 2004 through a December closing this year, that is $180,000 you could have taken.
Your son’s point is the phrase "allowed or allowable." When you sell, the law reduces your cost basis by the depreciation you were entitled to, claimed or not. IRS Publication 551 puts it in one sentence: "If you didn’t take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken."
So your basis for the sale is $95,000 rather than $275,000. Clear $578,100 after a 6% commission and the gain is $483,100, against the $303,100 you figured. The first $180,000 of it is what the code calls unrecaptured section 1250 gain, taxed at your ordinary rates up to a 25% cap. The other $303,100 is a plain long-term gain, taxed at 15% for a couple with your income. The 3.8% net investment income tax lands on top once your income passes $250,000, and a year this big also wipes out the new $6,000 senior deduction for each of you.
The bill, both ways
At 2026 federal rates, with your pension, your Social Security and the rent, here is the return your son describes beside the one he has not heard about. Florida has no income tax, so this is the whole bill.
| Sell, nothing filed | Sell, file Form 3115 | |
|---|---|---|
| Gain the IRS sees | $483,100 | $483,100 |
| Depreciation deducted on the 2026 return | $0 | $180,000 |
| Tax at ordinary rates, depreciation layer included | $45,148 | $7,880 |
| Federal tax for 2026 | $103,472 | $54,999 |
| Tax the sale adds | $97,032 | $48,559 |
| Cash left after tax | $481,068 | $529,541 |
Without the form, the sale adds about $97,000 to your tax bill, and about $37,000 of that is tax on deductions you never used. That is the part that stings.
The form your son may not know about
Skipping depreciation for two or more years counts as using the wrong accounting method, and the fix is Form 3115, Application for Change in Accounting Method. It is an automatic change with no user fee, and the IRS procedure behind it, Revenue Procedure 2025-23, covers property sold in the year the form is filed. The missed depreciation for 2004 through 2025, $172,333, becomes one catch-up deduction on your 2026 return, called a section 481(a) adjustment, and this year’s $7,667 goes on Schedule E as usual. Because you are selling the whole property, the passive-loss rules release all of it in the year of the sale.
That deduction offsets the recapture almost dollar for dollar. Your 2026 federal tax drops from $103,472 to $54,999, which is what you would have owed if the rule worked the way you thought it did. You keep $48,473 more of the sale.
One caution. The form rides on a timely filed return, extensions included, and the procedure has exceptions, so hire a CPA or enrolled agent for this one return.
Your son's other idea
He is also right that holding wins on paper. Keep the house until you are both gone and your children take it at its value on that day. The gain and the recapture disappear with you, and your estate is nowhere near the $15 million federal exclusion.
That plan asks you to stay a landlord for another ten or twenty years so that someone else saves tax after you die. Selling at 70 because you want out is a good enough reason, and with the form the sale costs you $48,559 in tax, half of what your son fears.
The bottom line
Sell if you want to sell. Before you list, ask a preparer for one number: your adjusted basis after every dollar of allowable depreciation. Then have them file Form 3115 with your 2026 return so the $172,333 you never claimed lands beside the gain. Your son found the trap. You get to walk around it. And tell your brother-in-law.
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