Why the catch-up is possible
When you commission a cost segregation study on a property you've owned for several years, you aren't limited to accelerating depreciation only going forward. Under Rev. Proc. 2015-13, you can file Form 3115 (Application for Change in Accounting Method) to claim a Section 481(a) adjustment — a catch-up deduction in the current year for all the excess depreciation you could have taken in prior years if you had done the study sooner.
This is a powerful planning tool because it means you don't need to amend prior returns. The entire deferred deduction lands in one year on your current tax return, which can produce a large loss in the change year.
How Form 3115 works for cost segregation
Form 3115 is filed with your tax return (and a copy sent to the IRS National Office). You are asking to change your accounting method from straight-line over 27.5 or 39 years to MACRS using the reclassified asset lives the cost segregation study identified. The difference between the depreciation you actually took and the depreciation you could have taken is the 481(a) adjustment — and for a favorable change (you under-depreciated), you deduct the entire adjustment in the year of change.
Example: you've owned a $500,000 building for five years, taking about $91,000 total straight-line depreciation. A cost segregation study shows you should have taken $180,000 under the proper asset classifications. The $89,000 difference is deducted in full this year.
Limits and tradeoffs
The large deduction in one year is generally useful for offsetting income, but it also increases the depreciation recapture exposure at sale. Passive activity loss rules apply: if the deduction creates a rental loss, you may only be able to use it against passive income unless you qualify as a real estate professional or meet the active participation $25,000 allowance. Coordinate the timing of a Form 3115 catch-up with your other income and the passive loss rules to maximize the benefit.
Frequently asked questions
Can I claim catch-up depreciation without amending old returns?
Yes. Form 3115 lets you claim the Section 481(a) adjustment — all missed depreciation in a single current-year deduction — without amending prior returns.
Is there a deadline to file a cost segregation catch-up?
There is no hard deadline. You can do it any year you own the property, but the deduction only benefits you if you have income to offset it, so timing matters.
Does the catch-up affect my depreciation recapture at sale?
Yes — the higher total depreciation increases the recapture amount, though a 1031 exchange can defer it.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.