Form 3115 depreciation catch up and when you can use it

The IRS treats depreciation as a method of accounting, so you correct it by changing the method instead of restating one year’s figure. You file Form 3115, the Application for Change in Accounting Method, to move from the method you have been using to the one you should have been using, and you report the cumulative difference between them as a section 481(a) adjustment.

That adjustment is the whole shortfall since the property went into service, and you take it in a single year. You are in this position if you never claimed depreciation, used the wrong recovery period, or never had a cost segregation study done.

What a Form 3115 depreciation catch up looks like

Depreciation understated since the property was placed in service, corrected in one filing rather than by reopening each year.

2019understated

2020understated

2021understated

2022understated

2023understated

2024understated

▼

Year of change: one section 481(a) adjustment The whole cumulative shortfall lands in the current year. No amended returns, and the reach back is not capped at three years.

A negative adjustmentDeductions you should have had. Taken in full in the year of change.

A positive adjustmentIncome going the other way. Generally spread across four years instead.

You deduct an adjustment in your favor in full in the year of change, and you are in that position whenever you underclaimed depreciation. Where you have to increase your income instead, you spread the adjustment across four years: the year of change and the three that follow.

You reach back to the year the property went into service, however long ago that was. Because you are changing a method, the three year limit on amended returns does not apply to your adjustment.

When you can use Form 3115 and when you have to amend

You file Form 3115 after two or more consecutive tax years of the wrong treatment, and you can no longer amend those returns.

You adopt a method of depreciation by using it on two consecutive tax returns, including a method that is impermissible, meaning it does not match what the IRS allows for that asset. From that point the IRS Commissioner has to consent before you change it, and you request that consent on Form 3115.

You have not adopted a method after a single year, so you choose. You can amend that return, and the IRS gives you until you file the following year’s return to do it. You can also file Form 3115, because the IRS waives the two-year rule for depreciation changes.

What happened	Route	Reach back
Wrong method, one year only	Amended return or Form 3115	That year
Wrong method, two or more consecutive years	Form 3115	To the placed in service year
Arithmetic or posting error	Amended return	That year only
Never claimed depreciation at all, multiple years	Form 3115	To the placed in service year

Where you amend, the IRS expects that amended return before you file the following year’s return.

Who a Form 3115 depreciation change applies to

• Owners who never depreciated a rental:A former home became a rental and the owner set up no schedule for it.
• Property on the wrong recovery period:A residential rental put on 39 years, or a short term let put on 27.5 when the facts pointed the other way.
• A cost segregation lookback:You have owned the property for years without a study, you commission one now, and you claim the whole reallocation on Form 3115.
• Improvements never added to basis:You expensed capital work or left it off the schedule, so your depreciation has been understated since.
• Land and building split wrong at purchase:Too much to land means depreciation has been understated every year since closing.

You can check the land and building split against your closing statement in minutes, without reconstructing the depreciation schedule.

What Form 3115 does not fix

• An election you failed to make. You make some elections by the due date of the return and lose them afterwards, and you cannot bring them back by changing a method.
• Depreciation on property you did not own or did not have in service.
• A basis you cannot substantiate. You have to reconstruct what you claimed each year and what you should have claimed, and the adjustment is only as good as that reconstruction.

Whether you can use the deduction this year

Where you have no income the catch up can offset, you carry it forward as a suspended loss until you do, or until you sell the property. You have to clear two separate tests to use it against your other income, and you are not finished when you clear the first.

• Test one, is the activity a rental.The IRS treats a rental as passive whatever your hours. You fall outside that treatment where your average period of customer use is seven days or less, or thirty days or less where you also provide significant personal services.
• Test two, do you materially participate.You only remove the automatic passive label when you clear test one, and the IRS then tests the activity like any other business. You materially participate where you spend more than 500 hours on it, or more than 100 hours where no other individual spends more.
• Who counts toward the hours.The IRS counts everyone who works on the property, including cleaners, co-hosts and property managers. At 120 hours against a cleaning crew at 140 you fail, despite clearing 100.
• How you compute the seven day average.You compute it across each customer’s right to use the property, not across the nights they occupy it. You lose the exception for the whole year if you accept one booking long enough to take your annual average over seven days.
• If you work in real estate full time.You can offset the catch up against your other income where you meet the IRS tests for a real estate professional, which is a separate route from the two tests.
• Order of work.We run this analysis before the study, so you know whether you can use the catch up this year.

You still face the ordinary limits after clearing both tests. You need basis, you need to be at risk, and you may hit the cap on excess business losses.

How to file Form 3115

You file a depreciation change of this kind as an automatic change, so the IRS charges no user fee and you do not wait for approval before filing.

• The original.You attach it to a timely filed return, including extensions, for the year of change.
• The duplicate.You send a signed copy to the IRS in Ogden, Utah, at mail stop M/S 6111, by post or by private delivery.
• What you get.Where you file correctly, the IRS gives you audit protection on prior years for the method you changed.
• What you lose.File late or incorrectly and that protection goes.

You give the change a designated change number so the IRS knows which change you are making. A depreciation correction on property you still hold is DCN 7, and the same correction on property you have sold is DCN 107. Your preparer selects the number, and you lose the audit protection if they select the wrong one.

Where you base the change on a cost segregation study, we do the study and the filing together.

Bonus depreciation in a lookback study

You claim the bonus rate that applied to the property when you acquired it, and for anything you acquired after January 19, 2025 that rate is 100%. You stay on the older stepped-down schedule for property you acquired on or before that date.

The IRS treats property under a written binding contract signed before January 20, 2025 as acquired on the earlier date, even where you closed and placed it in service months later.

You do not undo an election by filing Form 3115. Where you elected out of bonus for a class of property, you recover the difference between the longer recovery period and the shorter one, and you do not get the bonus back.

What happens to your tax bill when you sell

You pay the depreciation back at two rates when you sell, and you move more of it into the higher rate when you run a cost segregation study.

• The reclassified components.The 5, 7 and 15-year components are section 1245 property. The IRS recaptures the depreciation you took on them as ordinary income, at rates reaching 37%, with no cap. Where you took bonus depreciation down to a zero basis, you bring the whole allocated amount back that way.
• The building.The IRS caps the rate on unrecaptured section 1250 gain at 25%, and you pay less where your ordinary rate is lower. Investors above the net investment income tax threshold pay that tax on top, at an effective rate of 28.8% on this portion.

You should weigh this on a property you intend to sell within a few years, and you can largely set it aside on one you intend to hold.

What a Form 3115 depreciation correction costs

We price this on the reconstruction work, and the size of your refund does not change the fee. What we quote against:

• How many years have to be recomputed and how complete the records are
• Whether a cost segregation study is part of the same job
• Number of properties and whether they sit in an entity
• Whether the year of change is still open

Send us your schedule and we will quote against it.

Why use us for a Form 3115 correction

Someone has to rebuild what you claimed each year and what you should have claimed, and that reconstruction is the part we do. We then file the form that reports the difference.

People that own real estate and have rental properties, absolutely take a look at cost segregations. This can save tens of thousands of dollars, in some cases even hundreds of thousands of dollars.

George Dimov, CPA · Founder, Dimov Tax

This is the 6th year I have worked with Dimov Tax Specialists… I always feel confident in my final returns which include out of state rental properties.

Kristi · Google review

Form 3115 depreciation FAQs

Do I have to amend my prior returns?

No, where you used the wrong treatment for two or more years. You report the whole catch up on the current year return through the section 481(a) adjustment.

How far back can I go?

To the year the property went into service. The three year limit on amended returns does not apply.

Do I file one form for each property?

You file one Form 3115 for each applicant, not for each property. You cover several properties on one form where the same applicant makes the same change for all of them, and you file separately for properties you hold in separate LLCs.

Can I file it myself?

You can. The IRS does not require a preparer for an automatic change. You carry any error in the section 481(a) computation through to your basis at sale, where the IRS recaptures against it. Send us the schedule and we will tell you which route to take.

This page is general information rather than advice for your circumstances. Outcomes turn on facts specific to you, so speak to a CPA before acting on anything here.