How to File Form 3115 for a Cost Segregation Study: A Plain-English Guide

You do not have to amend old tax returns to claim depreciation you missed. If you already own a property and never had a cost segregation study, you can generally do a study now and catch up through a change in accounting method. The form for that is Form 3115, Application for Change in Accounting Method. This guide explains what it does and how the process works.

This is general education, not tax advice. Your CPA files the form and should confirm every detail for your situation.

What Form 3115 does

Depreciation is an accounting method. If you have been depreciating the whole building over 27.5 or 39 years and a study shows that part of it belongs in 5, 7 or 15-year property, you are changing your method for those assets. The IRS requires a Form 3115 to make that change. The IRS form and instructions explain the filing rules.

The catch-up amount is called a section 481(a) adjustment. It is the difference between the depreciation you claimed and the depreciation you would have claimed under the new method, through the end of the year before the change. When the adjustment reduces your income, it is generally taken in full on the return for the year of change. That is why a look-back study can create one large deduction in the current year.

Who can use it

A look-back study fits an owner who:

Bought, built or improved a rental or business property in a prior year
Has not done a study for that property
Still owns it

If you sold the property, a different analysis applies. Ask your CPA. Some situations can block an automatic change, such as a recent change to the same method or an ongoing IRS examination, so your CPA should check eligibility first.

The steps

Order the study. The study allocates your purchase price to each depreciation class as of the date the property was placed in service. See what to expect from a study.

Give the report to your CPA. The report supplies the amounts by recovery period.

Your CPA computes the adjustment. The CPA compares the depreciation you claimed with the depreciation under the study.

Your CPA files Form 3115 with your return. For an automatic change, the original form is generally attached to your timely filed federal return for the year of change, including extensions. The Form 3115 instructions also require sending a copy to the IRS. Your CPA follows the current instructions for where and how.

You claim the catch-up deduction. The adjustment appears on the return for the year of change.

An example

You bought a rental in 2021 and depreciated the building over 27.5 years. A study now shows $150,000 of it belongs in 5-year property. Under the new method you would have claimed more depreciation in 2021 through 2025 than you actually did. The total of that difference is the section 481(a) adjustment, and you generally take it in full on your 2026 return. The look-back article walks through the numbers.

The bonus depreciation rate for each asset follows the date you acquired the property. Property acquired after January 19, 2025 qualifies for 100% bonus depreciation under the new law. Earlier acquisitions follow the rates in effect at that time. See the IRS announcement.

What to know before you file

Passive loss limits still apply. A big catch-up deduction does not help if you cannot use the loss. Read the limits in the complete guide.
Recapture applies when you sell. Gain on the shorter-life property is generally recaptured as ordinary income, up to the depreciation claimed.
State rules differ. Some states do not follow federal bonus depreciation or the catch-up treatment.
Keep the study. The IRS audit guide, Publication 5653, tells examiners to look for support for each allocation.

Compare the cost to the benefit

Run your numbers in the ROOM42 calculator and see pricing for the cost of a study.