Form 3115 Explained: How to Claim Years of Missed Depreciation

Form 3115 — officially titled "Application for Change in Accounting Method" — is one of the most valuable and least understood tools in a real estate investor's tax toolbox. When used correctly with a cost segregation study, it lets you recover years of missed depreciation in a single tax year without touching your prior returns.

What Is an Accounting Method?

The IRS requires taxpayers to use a consistent method for calculating income and deductions. Your depreciation method is a type of accounting method. When you buy a rental property and depreciate it straight-line over 27.5 years, that's your method. When you want to switch to accelerated MACRS depreciation via cost segregation, you're changing your method.

The tax code distinguishes between method changes (which use Form 3115) and corrections of errors (which use amended returns). Depreciation method changes are treated as method changes — you don't need to amend anything.

The Two Types of Method Changes

Automatic consent changes are listed in Rev. Proc. 2023-24 (updated annually). Depreciation method changes via cost segregation fall into this category. You don't need prior IRS approval — you simply file Form 3115 with your return and attach a duplicate to the IRS service center.

Non-automatic changes require advance IRS approval and a user fee (currently $11,500+). Virtually no STR investor will ever file one of these. Stick to automatic consent changes.

Key Sections of Form 3115

• Part I: Identifies the type of method change (you'll cite the applicable DCN — Designated Change Number — for MACRS depreciation)
• Part II: General information — taxable year, method being changed from, method being changed to
• Part IV: Section 481(a) adjustment calculation — this is where the catch-up amount is computed
• Schedule E: Depreciation-specific supplemental information showing each asset class and the recomputed depreciation

The Section 481(a) Adjustment in Detail

The 481(a) adjustment is the heart of Form 3115 for real estate investors. Here's how it's calculated: the engineer recomputes all depreciation on your property from the placed-in-service date using the correct MACRS lives for each component. The difference between what you should have taken and what you actually took is the 481(a) adjustment.

For a negative 481(a) adjustment (where you're claiming additional deductions, which is always the case with cost segregation look-backs), the entire amount is deductible in the year you file Form 3115. You don't spread it over 4 years as you would with a positive adjustment.

Timing: When to File

Form 3115 is filed with your timely filed tax return (including extensions). You cannot file it as a standalone document. If you want to claim the catch-up for tax year 2025, you file Form 3115 with your 2025 Form 1040 (due April 15, 2026, or October 15, 2026 with an extension).

You also mail a signed duplicate copy of Form 3115 to the IRS Ogden, UT service center by the date your original return is filed. Your CPA handles this — just make sure it doesn't get overlooked.

What Documentation Does the IRS Expect?

The Form 3115 itself doesn't require you to attach the full cost segregation report to your return. However, the engineering study is your substantiation if the IRS ever questions the deduction. It needs to: (1) be prepared by a qualified professional (typically an engineer or CPA with engineering support), (2) follow IRS cost segregation audit technique guidelines, and (3) identify and document each reclassified component with its assigned recovery period and depreciation method.