Case study ยท Real estate partnership
$1.7 million in missed depreciation, found during routine tax prep
A Central Coast real estate partnership had gone through several ownership changes between 2016 and 2024, and none of them had ever been reflected on its tax returns. We caught it while preparing their return, and what started as tax prep became a full forensic review of the partnership's basis.
Found and caught up in one year
$1.7M
of missed depreciation
Catch-up
~9 years
of depreciation, claimed at once
Partners
Every one
brought to current, appraised values
The challenge
Ownership changes over nearly a decade that never made it onto the returns, leaving every partner's basis wrong.
What we did
Traced each change, got appraisals, rebuilt basis and depreciation schedules, and made the elections needed to fix it.
The result
Every partner's basis corrected, $1.7M of missed depreciation recovered in one year, and lower tax bills for the partners.
The challenge
When a partner's interest changes hands, for example when a partner passes away, the incoming owner's share of the partnership's property can step up to its value at that time. That step-up should increase depreciation and reduce taxable gain when a property is eventually sold.
This partnership had several ownership changes between 2016 and 2024. None of them had been reflected on the returns before we were involved. The partners were depreciating their properties on outdated values and carrying basis numbers that would have overstated their gains on any future sale.
How we found it
We didn't go looking for a forensic project. While preparing the partnership's return, we read through the underlying tax documents and compared them to the returns that had been filed. The ownership history didn't match what the returns showed, and once we pulled that thread, it ran back through nearly a decade.
What we did
- Traced every ownership change from 2016 through 2024 against the partnership's documents and prior returns
- Helped the partnership get appraisals so each step-up was based on supported values
- Rebuilt each partner's basis and the property depreciation schedules from 2016 forward
- Made the Section 754 election and recorded the Section 743(b) basis adjustments for the incoming owners
- Claimed the years of missed depreciation in a single year with an accounting method change (Form 3115), instead of amending past returns
The result
Every partner's basis now reflects current, appraised values. We found the full $1.7 million and caught it up in the same year: roughly nine years' worth of depreciation, claimed at once. We applied it on the partnership's return, and the deduction flowed through to every partner, lowering their taxable income and their tax bills. The depreciation they had been missing was recovered without amending a single past return, and their depreciation going forward is based on the correct, higher values. When any of the properties is eventually sold, the gain will be calculated on the right basis instead of an outdated one.
Why it matters for your partnership
Ownership changes in real estate partnerships are easy to miss, especially when the returns are prepared the same way year after year. We read the documents behind the return, not just last year's numbers. If your partnership has had a partner pass away, sell, or transfer an interest, it's worth checking that your basis and depreciation caught up.
Has your partnership had ownership changes?
See our real estate accounting, forensic accounting and cost segregation services. Your first consultation is free.