Form 3115 for Cost Segregation Look-Back Studies
How a look-back cost segregation study claims missed depreciation without amending returns: Form 3115, DCN 7 under Rev. Proc. 2025-23, and the section 481(a) catch-up.
You bought a building in 2021 and have depreciated it as one 39-year asset since. A cost segregation study now would show that part of it was 5-, 7- and 15-year property all along. You do not have to amend five years of returns to fix that. A look-back study claims the missed depreciation in one year through an automatic change in accounting method on Form 3115.
Why it is a method change, not an amendment
Once you have depreciated an asset the same way on two or more filed returns, that treatment is your accounting method for it, even if it was wrong. Correcting it is a change in method of accounting, which needs IRS consent. For depreciation, consent is automatic under Rev. Proc. 2025-23, section 6.01, designated change number (DCN) 7: a change from an impermissible to a permissible method of depreciation. As of September 2026 Rev. Proc. 2025-23 is still the current list of automatic changes; Rev. Proc. 2026-32 modified only sections unrelated to depreciation.
Two consequences follow:
- The two-year rule. DCN 7 applies when you used the impermissible method for at least two years. If you have filed only one return with the building on it, you can generally amend that return or include the asset in the Form 3115 instead.
- No prior-change bar. The usual rule that blocks an automatic change if you made one for the same item in the past five years does not apply to DCN 7.
The section 481(a) catch-up
The Form 3115 computes a §481(a) adjustment: the difference between the depreciation you actually claimed and what you would have claimed under the correct classes, for every year before the year of change. For a look-back study that difference is almost always in your favor (a negative adjustment), and a negative adjustment is taken entirely in the year of change. A positive adjustment, which increases income, is spread over four years.
The catch-up uses the bonus rate of the year each asset was placed in service, unless you elected out for that class and year. A building bought under a 2022 contract and placed in service in 2023 gets 80% bonus on the reclassified components in the computation; one placed in service in 2021 gets 100%.
| Example (illustrative) | Amount |
|---|---|
| Office placed in service January 2023, $1,920,000 depreciable basis | |
| Reported reclassification range for offices | 16% to 29% |
| Bonus rate for 2023 placement, pre-2025 contract | 80% |
| Added first-year depreciation for 2023, illustrative range | $247,000 to $448,000 |
The full §481(a) figure adds the extra regular depreciation for each later year before the year of change. Our calculator shows the first-year piece; a study computes the whole adjustment asset by asset.
Filing the Form 3115
- The original Form 3115 is attached to your timely filed return, including extensions, for the year of change.
- A signed duplicate goes to the IRS separately, no earlier than the first day of the year of change and no later than when the original is filed. The instructions list the current address and fax number.
- One Form 3115 can cover multiple assets changed under the same DCN, with a net §481(a) adjustment.
- Filing generally gives audit protection for the prior years, with exceptions if the return is already under examination. Your preparer checks that first.
Ricerca prepares the §481(a) computation and the support schedules. Your CPA or tax preparer prepares, signs and files the Form 3115 with the return.
Related: replaced components
If you replaced a roof, HVAC unit or other component of a building you already depreciate, the partial disposition election lets you write off the remaining basis of what you removed. That election is made on a timely filed original return for the year of the disposition, and a cost segregation study is one accepted way to measure the disposed basis. Late elections and other disposition-related method changes have their own rules and change numbers; your preparer picks the right one.
Sources
- Rev. Proc. 2025-23, List of Automatic Changes: https://www.irs.gov/pub/irs-drop/rp-25-23.pdf
- Rev. Proc. 2026-32: https://www.irs.gov/pub/irs-drop/rp-26-32.pdf
- IRS Instructions for Form 3115: https://www.irs.gov/instructions/i3115
- IRS Notice 2026-11: https://www.irs.gov/pub/irs-drop/n-26-11.pdf
- Treas. Reg. §1.168(i)-8 (Cornell LII): https://www.law.cornell.edu/cfr/text/26/1.168(i)-8
- IRS Pub 5653, Cost Segregation Audit Techniques Guide: https://www.irs.gov/pub/irs-pdf/p5653.pdf