Form 3115 for Cost Segregation: Catch Up Missed Depreciation Without Amending

This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.

What is Form 3115?

The IRS treats the way you depreciate an asset as an "accounting method." Once you've used a method on two or more filed returns, you generally can't just switch on your own. You file Form 3115 to make the change.

For real estate owners, the most common reasons to file are:

• Applying a cost segregation study to a property bought in an earlier year
• Fixing depreciation that was never claimed, or claimed incorrectly
• Changing how certain improvements are treated

How the catch-up works: the Section 481(a) adjustment

Here's the magic. Instead of amending each prior return, you calculate the difference between:

• The depreciation you actually claimed in prior years, and
• The depreciation you would have claimed under the new method

That difference is the Section 481(a) adjustment.

• If it's a negative adjustment (you get more deductions), you generally take the full amount in the year of change.
• If it's a positive adjustment (you owe more income), it's generally spread over four years.

Cost segregation catch-ups are almost always negative adjustments, meaning a big deduction now.

A simple example

You bought a rental in 2021 and depreciated the building straight-line over 27.5 years. In 2026, a look-back study reclassifies $120,000 into 5- and 15-year property.

• Depreciation you claimed on that $120,000 (2021–2025): about $20,000
• Depreciation you would have claimed under the study (100% bonus was in effect in 2021): about $120,000
• Section 481(a) adjustment: about $100,000 extra deduction in 2026

Bonus depreciation in a look-back follows the rate in effect when the property was placed in service, not the year you file Form 3115. A property placed in service in 2024, for example, would use the 60% rate for its short-life parts.

Automatic vs. non-automatic changes

• Automatic changes have a Designated Change Number (DCN) in IRS guidance. No user fee, no advance approval needed. Changing depreciation methods for cost segregation catch-ups is commonly filed under DCN 7.
• Non-automatic changes require advance IRS permission and a user fee.

How to file

1. Complete Form 3115 with the correct DCN and the 481(a) calculation.
2. Attach the original to your timely filed tax return for the year of change, including extensions.
3. Send a signed copy to the IRS separately, as the instructions require.
4. Report the 481(a) adjustment on your return.

Missing the filing requirements can cost you automatic consent, so this is a job for your CPA.

When you might amend instead

If you've filed only one return using the wrong method, you may be able to file an amended return instead, because a method generally isn't "adopted" until it appears on two consecutive returns.

Frequently asked questions

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This content is not tax or financial advice for you. Please talk with a CPA to find what's right for your situation.