IRS Form 4562: The Real Estate Investor’s Guide to Depreciation

Depreciation can reduce taxable income from real estate. But many investors never review the form that reports those deductions.

IRS Form 4562 reports depreciation, amortization, Section 179 expensing, bonus depreciation, and listed property deductions. The IRS titles the form “Depreciation and Amortization (Including Information on Listed Property).” It helps determine how your property’s depreciable basis is deducted over time.

According to IRS guidance on the One Big Beautiful Bill, 100% bonus depreciation is available again for eligible property. That means many real estate investors should pay closer attention to how depreciation is reported on Form 4562. Under the One Big Beautiful Bill Act, qualified property acquired and placed in service after January 19, 2025, may qualify for 100% bonus depreciation, subject to transition rules and taxpayer-level limits.

A cost segregation study can change how depreciation appears on Form 4562. Instead of depreciating an entire rental building over 27.5 or 39 years, eligible components may move into 5-year, 7-year, or 15-year recovery periods. 

As per IRS Publication 527, residential rental property generally uses a 27.5-year recovery period, while as per IRS Publication 946, nonresidential real property generally uses a 39-year recovery period.

This guide breaks down Form 4562 section by section. You’ll see how cost segregation flows through the form, where investors often make mistakes, and what to ask your CPA before filing.

This article is educational and should not be treated as tax advice. R.E. Cost Seg provides cost segregation services, but your CPA should apply these rules to your specific facts.

Key Takeaways: Form 4562 for Real Estate Investors

• Form 4562 reports depreciation, amortization, Section 179, bonus depreciation, and listed property deductions.
• Cost segregation can move eligible building components from 27.5- or 39-year recovery periods into 5-, 7-, or 15-year classes.
• Eligible shorter-life property may qualify for 100% first-year bonus depreciation under current federal law.
• A look-back cost segregation study often uses Form 3115 and a Section 481(a) adjustment instead of amended returns.
• Tax savings depend on passive activity, basis, at-risk, state conformity, and recapture rules.

What Is IRS Form 4562?

IRS Form 4562 is the official IRS form for claiming depreciation, amortization, Section 179 expensing, bonus depreciation, and listed property deductions.

If you own rental property and claim depreciation, Form 4562 may appear with your return. It is especially relevant when you place new property or new assets in service.

According to the IRS Instructions for Form 4562, taxpayers generally file Form 4562 to report depreciation or amortization, make a Section 179 election, claim a special depreciation allowance, or report listed property.

You may need Form 4562 when:

• You place a new depreciable asset in service during the tax year
• You claim Section 179 expensing on eligible property
• You claim bonus depreciation on qualified assets
• You report depreciation on listed property, such as vehicles or mixed-use equipment
• You claim amortization on certain intangible costs

Many Schedule E filers encounter Form 4562 when they place rental property, improvements, or other depreciable assets in service. The form helps translate depreciable basis into deductions reported on the tax return.

Who Needs to File Form 4562?

Several categories of taxpayers may need Form 4562. If any of the following apply, ask your CPA whether the form is required for your return:

• Rental property owners reporting depreciation on newly placed-in-service property or improvements
• Business owners with depreciable equipment, furniture, vehicles, or other tangible property
• Investors who completed a cost segregation study and are claiming accelerated depreciation
• Taxpayers claiming Section 179 expensing on eligible business property
• Taxpayers claiming bonus depreciation on qualified assets placed in service during the year
• Taxpayers reporting listed property with business and personal use

For individual investors, Form 4562 often supports deductions that flow to Schedule E. For partnerships and S corporations, depreciation is calculated at the entity level and affects each owner’s Schedule K-1. Confirm the reporting details with the entity return instructions and your CPA.

A common misconception is: “My CPA handles this, so I do not need to understand it.” That approach can make it harder to spot missed deductions or ask informed questions.

Certain land improvements may qualify for shorter recovery periods. For example, a warehouse may include site improvements, such as parking, site lighting, or landscaping, that could qualify for 15-year treatment if properly identified and supported.

Do I need to file Form 4562 every year?

You generally file Form 4562 in the first year you place certain assets in service. It is also commonly required when you claim Section 179, claim bonus depreciation, report listed property, or claim amortization.

In later years, tax software or your preparer may carry forward the depreciation schedule without generating a new Form 4562. The form may become relevant again when you add assets, make improvements, or reclassify components through cost segregation.

Form 4562 Section-by-Section Breakdown

Form 4562 has six parts. Each one serves a different purpose.

Part I: Section 179 Expensing

Section 179 allows taxpayers to deduct the cost of certain business property in the year it is placed in service, subject to annual limits and phase-out thresholds.

For tax years beginning in 2025, the maximum Section 179 deduction is $2,500,000. The deduction is reduced dollar-for-dollar when the cost of Section 179 property placed in service during the year exceeds $4,000,000 (indexed for inflation after 2025).

For real estate investors, Section 179 requires care. It generally does not apply to the residential rental building itself. It may apply to certain business-use tangible property, and commercial real estate has additional rules for qualified improvement property. Ask your CPA before assuming Section 179 applies to any real estate-related asset.

Part II: Special Depreciation Allowance

Part II reports bonus depreciation, also called the special depreciation allowance.

According to IRS guidance on the One Big Beautiful Bill and Notice 2026-11, bonus depreciation generally applies to qualified property with a recovery period of 20 years or less. That can include eligible 5-year, 7-year, and 15-year property identified through a cost segregation study.

Under current law, 100% bonus depreciation generally applies to qualified property acquired and placed in service after January 19, 2025. Transition rules may apply.

You may be able to deduct 100% of eligible shorter-life property in Year 1. Your ability to use the resulting loss depends on passive activity, basis, at-risk, state conformity, and other tax rules.

Part III: MACRS Depreciation

Part III reports MACRS depreciation for assets placed in service during the tax year.

Real property generally uses the mid-month convention. Personal property generally uses the half-year convention unless the mid-quarter convention applies.

The mid-quarter convention may apply if more than 40% of the year’s depreciable personal property is placed in service during the final quarter.

These conventions affect first-year depreciation based on the placed-in-service date. That means simplified annual examples may differ from the actual first-year deduction on a tax return.

Part IV: Summary

Part IV totals depreciation claimed across the form.

These totals flow to Schedule E, Schedule C, Form 1120-S, Form 1065, or another relevant return section.

Part V: Listed Property

Listed property includes assets with potential business and personal use, including certain vehicles.

This section is less common for pure real estate investors. It matters when an asset has mixed-use potential.

Listed property reporting depends on qualified business-use percentage. Poor records can reduce, defer, or disallow deductions.

Part VI: Amortization

Part VI covers amortization of certain intangible costs.

Some loan costs, lease acquisition costs, and startup costs may be amortized over applicable periods. The correct period depends on the cost type and tax treatment.

Ask your CPA how each intangible cost should be classified.

Quick Reference: Form 4562 Parts for Real Estate Investors

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Example: How a Cost Segregation Study Appears on Form 4562

Illustrative only. This example ignores first-year convention tables, state taxes, passive loss limitations, financing structure, transaction costs, and future recapture.

Assume an investor buys a commercial property for $1.5 million in 2025.

As per IRS Publication 527, land is not depreciable. If the investor allocates $225,000 to land, the remaining depreciable basis is $1,275,000.

A cost segregation study identifies $380,000 of eligible 5-year, 7-year, and 15-year property.

Using a simplified full-year illustration:

• Part II may report $380,000 in bonus depreciation, assuming all $380,000 qualifies for 100% bonus depreciation and the taxpayer does not elect out
• Part III reports the remaining $895,000 on a 39-year MACRS schedule
• $895,000 ÷ 39 years = $22,949 of annual depreciation before first-year convention adjustments

That produces approximately $402,949 of first-year depreciation in this simplified example.

At a 37% federal marginal tax rate, that deduction could reduce federal tax by up to about $149,091, assuming the investor can currently use the loss.

Without cost segregation, the full $1,275,000 depreciable basis would remain on a 39-year schedule.

• $1,275,000 ÷ 39 years = $32,692 of annual depreciation
• $32,692 × 37% = $12,096 of potential federal tax reduction

In this example, cost segregation produces approximately $136,995 of additional first-year federal tax reduction.

Actual results depend on the placed-in-service month, tax rate, passive activity rules, at-risk limits, basis limits, state tax rules, and future recapture.

How Cost Segregation Results Flow Through Form 4562

A cost segregation study separates a building into component asset classes. The study identifies components that may qualify for shorter recovery periods.

Without cost segregation, a rental building is often depreciated as one asset:

• 27.5 years for residential rental property
• 39 years for commercial property

With cost segregation, eligible components may move into shorter asset recovery periods:

• 5-year property
• 7-year property
• 15-year land improvements

These shorter-life assets may appear in Parts II and III and produce larger early deductions.

According to the IRS Cost Segregation Audit Techniques Guide, a quality study should classify assets into property classes, explain the methodology, and provide documentation that supports the classifications and cost allocations. Our IRS audit guide explains how that documentation is reviewed in practice.

A defensible study should include cost allocations, asset descriptions, recovery periods, methodology, placed-in-service support, and land allocation support.

Before and After Example: $2.5 Million Apartment Building ($2 Million Depreciable Basis)

Assume an apartment building has a $2.5 million purchase price.

The investor allocates $500,000 to land. That leaves a depreciable building basis of $2 million.

Without cost segregation

Using a simplified full-year estimate:

• Depreciable basis: $2,000,000
• Recovery period: 27.5 years
• Annual depreciation: $72,727
• Federal tax reduction at 37%: $26,909

With cost segregation

Assume a study reclassifies $500,000 into eligible shorter-life components.

Using a simplified full-year estimate:

• Bonus depreciation on reclassified components: $500,000, assuming the full amount qualifies for 100% bonus depreciation and the taxpayer does not elect out
• Remaining 27.5-year basis: $1,500,000
• Standard annual depreciation: $54,545
• Total first-year depreciation: $554,545
• Federal tax reduction at 37%: $205,182

The cost segregation study produces approximately $178,273 more first-year federal tax reduction in this example.

If the study cost is less than the added tax benefit, the first-year cash-flow benefit may exceed the study fee.

Again, these numbers are simplified. Actual first-year depreciation depends on the placed-in-service month and applicable conventions.

Can I Do a Cost Segregation Study on a Property I Already Own?

Yes. A look-back cost segregation study may let you claim missed depreciation from prior years.

IRS Form 3115 is the IRS application for a change in accounting method and includes a schedule for changes in depreciation or amortization. In many cases, you do not amend old returns. Instead, your CPA may file Form 3115 with your current-year return.

According to 26 U.S.C. § 481 and IRS Internal Revenue Manual 4.11.6, a depreciation method change may require a Section 481(a) adjustment. Section 481(a) generally prevents income or deductions from being duplicated or omitted when a taxpayer changes an accounting method.

That adjustment can allow you to claim cumulative missed depreciation in the year of change.

This treatment depends on the facts. Some errors may require amended returns or another correction method. Your CPA should determine the proper approach.

Going forward, the depreciation schedule should reflect the corrected recovery periods. Future Form 4562 reporting depends on the year’s filing requirements.

Bonus Depreciation and Form 4562

Bonus depreciation directly affects Part II of Form 4562.

The Tax Cuts and Jobs Act of 2017 expanded 100% bonus depreciation for qualified property. The percentage then began phasing down under prior law.

Under prior law, the schedule was generally:

• 2022 and prior: 100%
• 2023: 80%
• 2024: 60%
• Early 2025 under prior law: 40%

For certain qualified property acquired before January 20, 2025, and placed in service in 2025, the special depreciation allowance was limited to 40%.

The One Big Beautiful Bill Act restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, subject to transition rules.

For investors placing eligible property in service today, qualified 5-year, 7-year, and 15-year property may be eligible for immediate bonus depreciation.

Eligibility depends on:

• Acquisition date
• Placed-in-service date
• Binding contract date
• Property type
• Recovery period
• Related-party rules
• Used-property rules
• Listed property rules
• Whether the taxpayer elects out of bonus depreciation
• Passive activity, basis, and at-risk limitations
• State conformity rules

According to IRS guidance on the One Big Beautiful Bill, some taxpayers may make elections related to bonus depreciation. Electing out may help manage taxable income, state tax differences, future recapture, or investor-specific planning goals.

Some states do not follow federal bonus depreciation rules. That means federal and state depreciation schedules may differ.

Example: How Bonus Rates Affect the Same Property

Assume a cost segregation study identifies $380,000 of eligible shorter-life property.

Looking only at the bonus depreciation portion:

• At 100% bonus, the Year 1 bonus deduction is $380,000
• At 60% bonus, the Year 1 bonus deduction is $228,000
• At 40% bonus, the Year 1 bonus deduction is $152,000

The difference between 40% and 100% bonus is $228,000 of additional first-year bonus depreciation.

At a 37% federal marginal tax rate:

• $228,000 × 37% = $84,360

That equals up to $84,360 of additional first-year federal tax reduction, assuming the deduction is currently usable.

This example compares bonus depreciation only. The remaining basis may still receive regular MACRS depreciation in Year 1, subject to applicable conventions.

Common Mistakes Investors Make on Form 4562

Depreciation errors can either understate deductions or create audit risk.

Here are five common mistakes to review with your CPA.

1. Using the wrong recovery period

As per the IRS Cost Segregation Audit Techniques Guide, many land improvements, such as certain parking lots, fencing, and landscaping, may qualify for 15-year depreciation if properly identified and supported.

If those costs are incorrectly included in the 27.5-year or 39-year building class, deductions may be delayed.

2. Missing bonus depreciation eligibility

Qualified assets placed in service during the tax year may be eligible for bonus depreciation.

If bonus depreciation is available and you do not elect out, failing to apply it can delay deductions.

3. Using the wrong correction method

Many depreciation method changes require Form 3115. Some errors may require amended returns or another correction method.

Do not assume every depreciation issue uses the same fix.

4. Overlooking listed property rules

Part V requires business-use documentation for listed property.

If you cannot substantiate business use, the deduction may be reduced, deferred, or disallowed.

5. Depreciating land

As mentioned, land is not depreciable.

You must separate land from depreciable building basis on every property purchase. A reasonable allocation may rely on an appraisal, purchase agreement, county assessment, or another supportable method.

Incorrect land allocation can overstate depreciation and increase audit risk.

What Happens If My CPA Has Been Depreciating My Property Incorrectly?

Many depreciation method errors can be corrected by filing Form 3115.

According to IRS Form 3115, the form allows a taxpayer to request or report a change in accounting method. According to 26 U.S.C. § 481, a method change may require an adjustment to prevent income or deductions from being duplicated or omitted. In a cost segregation context, this may allow the taxpayer to claim missed depreciation through a Section 481(a) adjustment.

This can produce a significant deduction in the year of change.

But Form 3115 is not the answer for every issue. Some errors may require amended returns or a different correction method.

Ask your CPA which correction method applies before making changes.

Form 4562 vs. Other Depreciation-Related Forms

Form 4562 does not operate alone. It connects to several other tax forms.

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According to IRS Publication 544, Form 4797 reports dispositions and helps calculate gain, loss, and recapture. Form 4562 reports current-year depreciation. Schedule E reports rental income and expenses. Form 3115 reports certain accounting method changes and Section 481(a) adjustments.

When a cost segregation study identifies replaced components, investors should also ask their CPA about partial asset disposition opportunities.

Passive Loss Rules Matter

Large depreciation deductions do not always create immediate tax savings.

IRS Publication 925 and 26 U.S.C. § 469 state that rental losses are often passive. Passive activity loss rules may limit whether you can use those losses against non-passive income.

Accelerated depreciation may be more valuable when the investor has:

• Passive income from other activities
• Real Estate Professional Status and material participation
• A short-term rental that meets the relevant participation and average-stay rules
• Sufficient basis and at-risk amount
• A tax plan that accounts for state conformity and recapture

Investors who qualify for Real Estate Professional Status and materially participate may treat qualifying rental real estate losses as non-passive. The result depends on the investor’s full tax profile.

According to Treas. Reg. § 1.469-1T(e)(3)(ii), short-term rentals may follow different passive activity rules when average guest stays and material participation tests are met. The regulations exclude certain short-term rental arrangements from the definition of a rental activity when the average customer use period is seven days or less, or 30 days or less with significant personal services.

What Happens When You Sell?

Depreciation affects the sale of a property.

According to IRS Publication 544, depreciation can trigger recapture when you sell property. Section 1245 property is generally recaptured as ordinary income to the extent of depreciation allowed or allowable.

Depreciation recapture can include unrecaptured Section 1250 gain taxed at a maximum 25% federal rate. In addition to Section 1245 recapture, straight-line depreciation on the building itself creates unrecaptured Section 1250 gain, taxed at a maximum 25% federal rate.

Cost segregation can increase Section 1245 recapture exposure because it identifies more personal property and shorter-life assets.

This does not automatically make cost segregation a bad strategy. In many cases, the time value of earlier deductions can outweigh later recapture. The outcome depends on holding period, tax rates, sale price, reinvestment strategy, and exit plan.

A like-kind exchange may still trigger current income when boot, non-like-kind property, or recapture rules apply. A properly structured 1031 exchange may defer some or all gain and recapture when the investor meets the exchange rules.

Investors should model recapture before listing or exchanging a property, especially if a cost segregation study created significant Section 1245 property.

Questions to Ask Your CPA About Form 4562

Before filing, ask your CPA these questions:

1. Did we separate land from depreciable basis?
2. Did we identify eligible 5-year, 7-year, and 15-year property?
3. Are we claiming bonus depreciation or electing out?
4. Do passive activity rules limit my current-year benefit?
5. Do basis or at-risk rules limit my deduction?
6. Does my state follow federal bonus depreciation rules?
7. Would a look-back study require Form 3115?
8. Are any replaced components eligible for partial asset disposition treatment?
9. How will depreciation recapture affect a future sale?
10. Does my depreciation schedule match the cost segregation study?

These questions help investors understand whether Form 4562 reflects the full depreciation strategy.

Final Takeaway

Form 4562 is more than a tax attachment. It is the form that reports how your depreciation strategy appears on your return.

For real estate investors, the most important sections are usually:

• Part II for bonus depreciation
• Part III for MACRS depreciation
• Part IV for summary totals

Cost segregation can move eligible components into shorter recovery periods. Under current federal law, many of those components may qualify for 100% bonus depreciation.

But deductions are not the whole story. Tax savings depend on passive loss rules, basis, at-risk limits, state conformity, documentation, and recapture.

Accurate depreciation can improve after-tax cash flow. It also gives investors better information for acquisition planning, hold-period decisions, and exit strategy.

Want to compare your current depreciation schedule against a cost segregation scenario? Get a free cost segregation estimate from R.E. Cost Seg.

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