Bought your rental years ago? How a look-back study works

If your rental has been on your tax return for two or more years, you can still get a cost segregation study. Your CPA files Form 3115 to change your depreciation method, and all the depreciation you missed comes back as one deduction on this year’s return. You don’t amend old returns, and the bonus rate from the year you first placed the rental in service still applies.

This works on any rental placed in service after 1986, when the current MACRS system began. There’s no 10-year cutoff, though the benefit shrinks as a property ages.

Why it’s a method change, not an amendment

Depreciating the whole property over 27.5 years when parts of it should be on 5- and 15-year schedules is treated as an accounting method. Once you’ve used a method on two consecutive filed returns, you’ve adopted it. Changing an adopted method takes IRS consent, which you request on Form 3115. Amending old returns isn’t the right fix and is generally not allowed for this.

The change from too-slow depreciation to the correct method is an automatic change. Most practitioners file it under designated change number (DCN) 7. Automatic means you don’t wait for approval and there’s no IRS user fee. Your CPA attaches the form to your timely filed return for the year of change, extensions included, and sends a copy to the IRS office named in the instructions.

The two-return rule

The number of returns you’ve filed with the property on them decides which path you take.

Returns filed using the old method	What your CPA does
None yet	Uses the study on the first return. No Form 3115.
One	Amends that one return to use the study. No Form 3115.
Two or more	Files Form 3115 with the current year’s return. No amendments.

Say you placed a rental in service in 2025 and filed your 2025 return without a study. You’d amend the 2025 return. If you’ve filed 2024 and 2025 returns, you’d use Form 3115 on the 2026 return.

The catch-up deduction under section 481(a)

The catch-up is called the section 481(a) adjustment. It equals the depreciation you would have been allowed under the study’s schedules through the end of last year, minus the depreciation you actually took. When that number is positive, you deduct all of it in the year of change. You don’t spread it out.

You then depreciate on the new schedules going forward. Since the shorter-life parts were already deducted in the catch-up, the ongoing building deduction is a bit smaller than it was.

The original year’s bonus rate applies

The study treats the reclassified parts as if they’d been classified correctly from day one. That means they use the bonus rate in effect when you placed the rental in service, not the rate in the year you file Form 3115.

Placed in service	Bonus rate in the look-back
Sept 28, 2017 through 2022	100%
2023	80%
2024	60%
2025, acquired before Jan 20	40%

A 2023 rental gets 80% bonus on its 5- and 15-year parts, even if you catch it up in 2026 when the rate for new purchases is 100%. The other 20% goes on regular schedules, and most of it is also allowable by now. A rental bought used before late September 2017 generally got no bonus, but after this many years the 5-year parts are fully depreciated anyway, so the catch-up still captures them. The rate table is explained in bonus depreciation for rental property in 2026.

Worked example: a 2022 rental caught up in 2026

Illustration. An owner placed a rental in service in April 2022 with $400,000 of depreciable basis, land excluded. Their CPA has depreciated the full $400,000 over 27.5 years. A study done in 2026 finds that 25% of the basis, $100,000, is 5-year property. To keep the arithmetic readable, we’ll ignore 15-year property here, though a real study usually finds some.

Because 2022 was a 100% bonus year, the study says the full $100,000 was deductible in 2022. The building keeps $300,000.

For an April start, the mid-month convention gives 8.5 months in year one, so year-one building depreciation is basis × 8.5 ÷ 12 ÷ 27.5. A full year is basis ÷ 27.5.

Year	Taken (old method)	Allowable (study)
2022	$10,303	$107,727
2023	$14,545	$10,909
2024	$14,545	$10,909
2025	$14,545	$10,909
Total through 2025	$53,939	$140,455

Rows are rounded to the dollar. Totals and the adjustment below use unrounded figures.

Under the study, 2022 is $100,000 of bonus plus $7,727 on the $300,000 building. The full-year building amount is $300,000 ÷ 27.5 = $10,909.

The section 481(a) adjustment is $140,455 − $53,939 = $86,515.

In 2026 itself, the old method would have deducted $14,545. The new method deducts $10,909 on the building, because the 5-year portion is used up. So the 2026 regular depreciation is $3,636 lower.

2026 return	Amount
Section 481(a) catch-up	$86,515
Regular depreciation, new method	$10,909
Total 2026 depreciation	$97,424
What the old method would have given	$14,545
Extra deduction in 2026	$82,879

At a 35% federal rate, $82,879 is worth about $29,000 of tax, if the owner can use the loss this year. For a long-term rental, that usually means real estate professional status or passive income from other sources. Otherwise the loss is suspended and carries forward. It isn’t lost, but the timing changes. Check yours in the rental property depreciation calculator.

Unclaimed depreciation still gets recaptured

When you sell a rental, recapture is figured on depreciation “allowed or allowable.” That means the depreciation you were entitled to, whether or not you claimed it. An owner who never took the shorter-life deductions still pays recapture as if they had.

So skipping a look-back doesn’t protect you from recapture. It means you pay tax on depreciation you never got the benefit of. The recapture guide covers how that tax works.

When a look-back is less useful

The catch-up is largest in the first several years. Over time, the 27.5-year straight-line depreciation on the reclassified parts catches up with what the study would have allowed, so the gap narrows. A rental placed in service 20 years ago still produces a catch-up, just a smaller one. The same goes for a property you plan to sell soon, or a year where the loss would be suspended anyway.

What to do next

Gather your current depreciation schedule, your closing statement, and a list of improvements with dates. Then request a free proposal. We’ll estimate the catch-up and quote a fixed fee. For $450 on top of the study, our Form 3115 package prepares the form and the section 481(a) calculation for your CPA to review and file. Details are on the pricing page and in the FAQ.

This is general information, not tax advice. Your CPA should confirm how it applies to you.