A §481(a) adjustment on Form 3115 is the cumulative adjustment §481(a) requires when a taxpayer changes a method of accounting; for missed cost segregation depreciation the change is from an impermissible to a permissible method of determining depreciation, designated change number (DCN) 7 under section 6.01 of Rev. Proc. 2025-23. A negative adjustment, which reduces income, is taken in full in the year of change, while a positive adjustment is generally spread over four taxable years (section 7.03(1) of Rev. Proc. 2015-13).
If you are using Form 3115 for cost segregation, the practical question is whether cost segregation changed the depreciation method for assets that were already being depreciated as 27.5-year residential rental property or 39-year nonresidential real property under §168(c), and whether section 6.01 of Rev. Proc. 2025-23 allows the catch-up to be reported on the return for the year of change under the procedures of Rev. Proc. 2015-13.
What is a §481(a) adjustment on Form 3115?
A §481(a) adjustment on Form 3115 is the cumulative depreciation correction required when a taxpayer changes from an impermissible or less accurate accounting method to the correct method. In a cost segregation context, the old method is often treating the entire depreciable building basis as 27.5-year residential rental property or 39-year nonresidential real property under §168(c), while the corrected method separates assets that qualify as 5-year, 7-year, or 15-year property under §168(e).
The adjustment is measured through the end of the tax year immediately before the year of change. If the depreciation allowable under the corrected method is more than the owner actually claimed, the §481(a) adjustment is negative, meaning it reduces taxable income in the year of change (section 7.03(1) of Rev. Proc. 2015-13). If the depreciation allowable under the corrected method is less than the owner actually claimed, the §481(a) adjustment is positive, and a positive adjustment is generally included in income over four taxable years (section 7.03(1) of Rev. Proc. 2015-13).
That timing is why Form 3115 matters. A cost segregation study does not create new basis; cost segregation accelerates deductions, and over the life of the building the same basis is recovered. The §481(a) adjustment decides how the missed timing difference is brought onto the current return.
How does cost segregation create a §481(a) catch-up for depreciation?
Cost segregation creates a §481(a) catch-up when a study identifies building components that should have been depreciated over shorter recovery periods than the owner’s original schedule used, on a property the taxpayer placed in service in an earlier tax year and depreciated under the old method on a filed return. The study commonly reclassifies portions of a rental or commercial property into 5-year, 7-year, and 15-year property under §168(e), while the building shell remains 27.5-year residential rental property or 39-year nonresidential real property under §168(c).
The dedicated cost segregation point is simple: reclassifying assets can change both the recovery period and the availability of bonus depreciation under §168(k). Bonus depreciation under IRC §168(k) is 100%, permanently, for qualified property acquired after January 19, 2025 (OBBBA, 2025-07-04), or, for self-constructed property, whose construction began after that date; qualified property acquired on or before that date stays on the TCJA phase-down (as does self-constructed property begun on or before it) by placed-in-service year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after that, with each rate one year later for long-production-period property and certain aircraft (all of these phase-down rates come from §168(k) as in effect before OBBBA, which the effective-date rule of OBBBA §70301(c)(1) keeps for property acquired on or before that date, and long-production-period property placed in service in 2027 gets 20% only on basis from work before 2027, under §168(k)(2)(B)(ii) as in effect before OBBBA). For that test the acquired date is not the closing date: under IRS Notice 2026-11 property bought under a written binding contract is acquired on the latest of the date the contract was signed, the date it became enforceable under state law, the end of any cancellation period and the date any contingency was satisfied, under a contract that is not binding (for example, one that limits damages to a specified amount) it is generally when more than 10 percent of the total cost, excluding land and preliminary activities, has been paid or incurred, and self-constructed property, including property built for the taxpayer under a written binding contract signed before construction began, is acquired when physical work of a significant nature begins (Treas. Reg. §1.168(k)-2(b)(5)); and used property qualifies only if the taxpayer had not used it at any time before acquiring it and the acquisition meets the §179(d) purchase rules that §168(k)(2)(E)(i) applies (for example, it was not acquired from a related party, by gift or inheritance, or with a carryover basis). Bonus depreciation applies only to qualified property with a recovery period of 20 years or less under §168(k), so it can apply to the 5-year, 7-year, and 15-year property identified by cost segregation, but not to land or to the 27.5-year or 39-year building shell under §168(c). In a look-back, the depreciation allowable for each earlier year includes the §168(k) allowance at the rate for that property’s acquired date and placed-in-service year unless the taxpayer made a timely valid election out, or a deemed election out, for that class of property (section 6.01(7)(e)(ii) of Rev. Proc. 2025-23), so a building acquired before January 20, 2025 and placed in service in 2023 or 2024 brings the 80% or 60% rate into the §481(a) adjustment, not 100%.
For more on the filing route, see our related guide to catch-up depreciation with Form 3115. If you are still deciding whether a study fits the property, you can also use the cost segregation qualifier to organize the basic facts before involving your tax advisor.
When can you use Form 3115 instead of amended returns for missed depreciation?
Under the automatic change procedures of Rev. Proc. 2015-13 and section 6.01 of Rev. Proc. 2025-23, the missed depreciation is claimed on Form 3115 with no amended returns when the property has been depreciated on two or more filed returns, or on one filed return if the taxpayer placed it in service in the tax year immediately before the year of change (the year of the return the Form 3115 is filed with), and the taxpayer still owned the property at the start of the year of change and meets the other eligibility rules. A property the taxpayer disposed of before the year of change is a separate change under section 6.07 of Rev. Proc. 2025-23, whose year of change is the year of disposition. Eligibility is explained on the Form 3115 page, and the filing steps are in Form 3115 instructions for cost segregation catch-up depreciation.
For a property the taxpayer placed in service in the tax year immediately before the year of change and still owned at the start of the year of change, both routes are open under section 6.01(1)(b) of Rev. Proc. 2025-23: Form 3115 with the year-of-change return under Rev. Proc. 2015-13, or an amended return (or, for a partnership, an administrative adjustment request under §6227) for the placed-in-service year, filed before the return for the following year (the year of change) is filed. A property the taxpayer placed in service in the tax year of the return the cost segregation study is for goes on that original return and needs no Form 3115; the year that counts is the year the taxpayer placed it in service, not the seller’s, so an older building bought and placed in service this year goes on this year’s original return.
The original Form 3115, with designated automatic change number (DCN) 7 on line 1a, is attached to the timely filed original federal return (including extensions) for the year of change, and a signed duplicate copy goes to the IRS at the Ogden, Utah address in the Instructions for Form 3115 no earlier than the first day of the year of change and no later than the date the original is filed; no user fee is required for an automatic change (section 6.01(9) of Rev. Proc. 2025-23; section 6.03(1) of Rev. Proc. 2015-13; Instructions for Form 3115).
Placed in service is not the same as closing. Property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function under Treas. Reg. §1.46-3(d)(1)(ii) and Treas. Reg. §1.167(a)-11(e)(1)(i). For a rental, that means ready and available to rent; a property bought with tenants in place is usually placed in service at acquisition, while a property that needs renovation before it can be rented usually is not placed in service until it is ready.
A prior election out of bonus depreciation cannot be undone through this change (section 6.01(1)(c)(vi) of Rev. Proc. 2025-23). That limitation matters because a cost segregation study can identify shorter-lived property, but the study does not reverse every election made on the original return.
How do you calculate a negative §481(a) adjustment from a cost segregation study?
The calculation compares depreciation actually taken through the year before the year of change with the depreciation allowable through that same date under the corrected cost segregation classifications. The difference is the §481(a) adjustment, and a negative adjustment generally reduces income in full in the year of change (section 7.03(1) of Rev. Proc. 2015-13).
In this example the taxpayer placed a residential rental building in service in 2022, a study reclassifies $250,000 of its cost to 5-, 7- and 15-year property ($100,000, $25,000 and $125,000), the filed returns depreciated that $250,000 as 27.5-year property, the taxpayer elected out of bonus depreciation for those classes in 2022 (so the corrected figure is MACRS only, and the election out cannot be undone), and 2025 is the year of change. The figures are rounded illustrations, not computed from the MACRS tables, and not a client result.
Through the end of 2024 the filed returns claimed about $22,000 on that $250,000, while the MACRS depreciation allowable on the reclassified components through 2024 is about $115,000. The §481(a) adjustment is therefore negative $93,000 ($115,000 minus $22,000), taken in full on the 2025 return.
Actual depreciation depends on placed-in-service dates under Treas. Reg. §1.46-3(d)(1)(ii), recovery classes under §168(e), conventions under §168(d), bonus depreciation under §168(k), and prior elections such as an election out of bonus depreciation under §168(k)(7).
How is the §481(a) adjustment reported on the tax return?
The net §481(a) adjustment is entered on Part IV, line 26 of Form 3115, and the preparer carries it onto the return for the year of change under that return’s own instructions. For a property the taxpayer placed in service in an earlier tax year, any bonus depreciation allowable for that earlier year sits inside the §481(a) adjustment, not on Part II of this year’s Form 4562, because Part II (line 14) is for qualified property placed in service during the tax year; this year’s MACRS depreciation on the reclassified components goes on Part III, Section A, line 17, whose cutoff year rolls forward with each form year (Instructions for Form 4562; section 6.01(7)(e)(ii) of Rev. Proc. 2025-23).
When does a §481(a) cost segregation adjustment not help?
A cost segregation study is worth it when three conditions hold together: the basis is large enough for the accelerated deductions to outweigh the cost of the study, the deduction is usable this year given the owner's passive-activity position, and the hold is long enough to survive recapture. All three, or the honest answer is no.
The passive-activity rules can limit the benefit even when the §481(a) adjustment is technically correct. A rental activity is a passive activity under §469(c)(2) unless an exception applies, and a passive loss that passive income does not absorb is disallowed under §469(a) and carried forward under §469(b). Under §469(i), an individual who actively participates in a rental real estate activity (a separate test from material participation, and one that requires an interest of at least 10% by value (a spouse’s interest counts) throughout the year) is exempt from the §469(a) disallowance for up to $25,000 of loss from the rental real estate activities in which the individual actively participates; the $25,000 is reduced by 50% of modified adjusted gross income above $100,000 and is gone at $150,000, and for a married individual filing separately it is $12,500, phasing out between $50,000 and $75,000, only if the spouses lived apart for the entire year, and zero if they lived together at any time during the year. Under §469(c)(7), a taxpayer is a real estate professional only if more than one-half of the personal services the taxpayer performs in trades or businesses during the year are performed in real property trades or businesses in which the taxpayer materially participates, and the taxpayer performs more than 750 hours of services during the year in real property trades or businesses in which the taxpayer materially participates (on a joint return, one spouse must meet both tests alone); the rental loss is then nonpassive only if the taxpayer also materially participates in that rental activity, with each rental tested separately unless the election under Treas. Reg. §1.469-9(g) to treat all interests in rental real estate as one activity was made. If a loss is nonpassive and can offset wages or other nonpassive income, the basis limits, at-risk limits under §465, and excess business loss limits under §461(l) still apply.
Recapture can also change the after-tax result. On a taxable sale at a gain, recapture applies, up to the amount of that gain, however long the property was held, outside the Opportunity Zone 10-year rule (a qualifying investment held 10 years with the IRC §1400Z-2(c) election, which applies when the investor sells the interest in the Qualified Opportunity Fund; if the fund instead sells the property after that hold, whether the investor can exclude the gain depends on how the fund is taxed (Treasury Regulation §1.1400Z2(c)-1(b)(2)(ii) and (e))): §1245 recapture on the 5- and 7-year property is ordinary income, as is §1250 recapture of the depreciation taken above straight-line (bonus included) on 15-year land improvements held more than one year, and the rest of the depreciation on those land improvements and on the 27.5- or 39-year structure is unrecaptured §1250 gain, taxed at up to 25% for a noncorporate taxpayer.
If you are comparing providers before preparing a filing package, review how the work is documented rather than focusing only on the headline deduction; our guide to the best cost segregation companies explains what to look for. If the property is inside a qualified Opportunity Zone structure, the interaction between depreciation and exit treatment should be reviewed separately with the rules summarized at Opportunity Zone cost segregation.
What records should support the §481(a) adjustment?
The strongest cost segregation file is built from records that tie the asset classifications to the property’s actual cost and placed-in-service facts. A cost segregation study typically uses the closing or settlement statement, construction costs and invoices or contractor pay applications, the current depreciation schedule, and a land-value source such as an assessor ratio or appraisal.
A document-driven, human-reviewed cost segregation study should reconcile those records to the owner’s depreciable basis, separate land from depreciable property, and identify the recovery classes used on the revised depreciation schedule. ClickDrag Finance studies are built on the methodology in the IRS Cost Segregation Audit Techniques Guide and are designed to help the owner and tax preparer review the depreciation change before the return is filed.
The study should also make the Form 3115 work easier by showing the old depreciation method, the corrected depreciation method, and the cumulative difference through the year before the year of change. That bridge is what turns cost segregation into a reportable §481(a) adjustment rather than a stand-alone estimate.
Related reading: Bonus Depreciation in 2026: What Real Estate Owners Need to Know, The January 19, 2025 Line: How the Acquired-Date Test Sets Your Bonus Depreciation Rate and Bonus Depreciation Phase-Down in 2026: The Rate for Property Acquired Before Jan. 20, 2025.
Frequently Asked Questions
Is a §481(a) adjustment the same as bonus depreciation?
A §481(a) adjustment is not the same as bonus depreciation because §481(a) is the catch-up for a method change, while bonus depreciation is an allowance for qualified property under §168(k). In cost segregation, bonus depreciation is part of the corrected depreciation calculation when the reclassified 5-year, 7-year, or 15-year property was qualified property under §168(k) for its placed-in-service year, at that year’s rate, unless the taxpayer made a timely valid election out, or a deemed election out, for that class of property (section 6.01(7)(e)(ii) of Rev. Proc. 2025-23).
Can cost segregation create a negative §481(a) adjustment?
Cost segregation can create a negative §481(a) adjustment when the corrected depreciation through the year before the year of change is greater than the depreciation actually taken. That negative adjustment is generally taxpayer-favorable and taken in full in the year of change under Rev. Proc. 2015-13.
Can Form 3115 claim missed depreciation with no amended returns?
Form 3115 can claim missed depreciation with no amended returns when the property has been depreciated on two or more filed returns, or on one filed return if the taxpayer placed it in service in the tax year immediately before the year of change (the year of the return the Form 3115 is filed with), and the taxpayer still owned the property at the start of the year of change and meets the other eligibility rules, under section 6.01 of Rev. Proc. 2025-23 (the IRS’s list of automatic changes) and the procedures of Rev. Proc. 2015-13. Your tax advisor should confirm the route before the return is filed.
Where does depreciation from a cost segregation study show up on the return?
For a look-back cost segregation study on a property the taxpayer placed in service in an earlier tax year, the missed depreciation, including any bonus depreciation allowable for that earlier year, is the net §481(a) adjustment on Part IV, line 26 of Form 3115, and this year’s MACRS depreciation on the reclassified components goes on Part III, Section A, line 17 of Form 4562. Part II and Part III, Section B of Form 4562 are for property placed in service during the tax year, and for an individual’s rental the Form 4562 depreciation generally carries to Schedule E.
Does a §481(a) adjustment make cost segregation worth it?
A §481(a) adjustment can make cost segregation more useful when the deduction is usable, the property basis supports the study, and the expected hold period supports the recapture tradeoff. The adjustment accelerates recovery of basis; it does not create new basis or remove the need to evaluate §469, §465, §461(l), §1245, and §1250.