Simplified IRS Form 3115 Preparation

Real estate investors need to file IRS Form 3115, Application for Change in Accounting Method, when they're changing how they depreciate their property, most commonly after completing a cost segregation study on a property they've owned for more than one tax year. If you've already filed tax returns using straight-line depreciation and now want to implement accelerated depreciation based on a cost segregation study, Form 3115 formally notifies the IRS of this accounting method change. The form allows you to claim all previously unclaimed depreciation through a Section 481(a) adjustment in the current year, effectively catching up on years of missed accelerated depreciation without the need to amend prior returns.

This is particularly valuable because amending returns can trigger additional scrutiny, has statute of limitations restrictions, and requires significantly more paperwork. Form 3115 also helps correct past depreciation errors, such as using the wrong recovery period or failing to claim depreciation altogether. The automatic consent procedures for many common changes mean you don't need IRS pre-approval, making the process relatively straightforward. Filing this form ensures full compliance with IRS regulations while maximizing your legitimate tax deductions, protecting you from potential penalties or disputes during an audit.

Absolutely. Form 3115 is the essential bridge that allows you to implement cost segregation benefits when you've already been depreciating your property using standard straight-line methods. After completing a cost segregation study that identifies components eligible for shorter depreciation periods, Form 3115 enables you to formally change your depreciation method from straight-line to the accelerated method identified in the study. This change allows you to reclassify various building components into 5-, 7-, and 15-year property categories rather than the standard 27.5 or 39 years.

The most powerful aspect of Form 3115 is the Section 481(a) adjustment, which captures all the additional depreciation you would have claimed in prior years had you used cost segregation from the beginning. This means if you've owned a property for five years and just completed a cost segregation study, you can claim five years' worth of missed accelerated depreciation in the current tax year. This front-loading of deductions can create significant tax savings and improved cash flow, making Form 3115 an invaluable tool for maximizing the benefits of your cost segregation study.

The form essentially allows you to correct your depreciation method going forward while catching up on past benefits, all without the complexity of amending previous returns.

Failing to file Form 3115 when required can have several negative consequences for your tax situation and long-term financial strategy. If you implement a cost segregation study without properly notifying the IRS through Form 3115, you risk having the accelerated depreciation deductions disallowed during an audit, potentially resulting in back taxes, interest, and penalties. The IRS views unauthorized accounting method changes as non-compliance, which can trigger increased scrutiny of your returns.

Without filing Form 3115, you also miss the opportunity to claim the Section 481(a) adjustment that captures all prior years' missed depreciation in one year, essentially leaving significant tax benefits on the table. Additionally, if the IRS discovers the inconsistency between your depreciation methods across years, they may require you to file the form anyway, but under examination procedures rather than automatic consent, which is more complex and potentially costly.

You might also face accuracy-related penalties if the IRS determines you should have known about the filing requirement. Perhaps most importantly, without proper documentation through Form 3115, you lack the clear paper trail demonstrating IRS compliance, which could complicate future property sales, refinancing, or additional tax planning strategies.

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R.E. Cost Seg provides comprehensive Form 3115 preparation services as an optional add-on to your cost segregation study. Our service includes completing the entire Form 3115 with all required attachments, preparing the necessary supporting statements that explain the accounting method change, and calculating the Section 481(a) adjustment that captures your cumulative catch-up depreciation. We ensure all technical requirements are met and the form is properly formatted according to IRS specifications.

Once we've prepared the form, you and your tax preparer must sign it and follow the specific filing procedures. The original Form 3115 must be attached to your timely filed federal income tax return for the year of change, including any extensions. Additionally, a duplicate copy must be filed with the IRS National Office no earlier than the first day of the year of change and no later than when the original is filed with your tax return.

We provide detailed instructions on the filing process and can coordinate with your tax preparer to ensure proper submission. While we prepare all the technical aspects of the form, the ultimate responsibility for signing and filing remains with you and your tax professional, ensuring proper authorization and compliance with IRS requirements.

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Our Form 3115 preparation service is offered as an optional add-on for $600 per property requiring the form under standard timelines, rather than being automatically included in the base cost segregation study fee. This separate pricing structure recognizes that not all clients need Form 3115 particularly those who acquire properties and implement cost segregation in the same tax year. Leading up to tax deadlines, Form 3115 preparation may carry a rush premium fee due to the intensive resources required for expedited processing.

The Form 3115 preparation includes all necessary calculations, the completion of the form itself, required attachment statements, and the Section 481(a) adjustment calculation that captures your catch-up depreciation. When you request a proposal for your property, we'll identify whether Form 3115 is needed based on when your property was placed in service and whether you've already filed tax returns using straight-line depreciation.

Many clients find that having our team prepare Form 3115 saves their CPA time and ensures the technical aspects of the depreciation method change are handled by specialists familiar with cost segregation reporting requirements.

‍Request a free proposal or contact us for more detailed information on your properties.

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While there's technically no limit to how far back you can perform a look-back study, practical considerations apply. You can capture depreciation from all open tax years, typically the most recent three years, and can even capture benefits from closed years through a Section 481(a) adjustment on Form 3115. However, documentation availability tends to decrease over time, making older studies more challenging.

The cost-benefit analysis becomes less favorable for older properties since depreciation already taken reduces the remaining benefit. The recommended approach is to focus on properties placed in service within the last 15 years, prioritizing higher-value properties first. You should evaluate the remaining depreciable life of the property and confirm that adequate documentation is available before proceeding with older properties.