Published by AE Tax Advisors Team • 2025-09-15

Form 3115 Catch-Up Depreciation Recovers $230,000 on 5-Year-Old Property

The Client

Catherine Brooks, a real estate investor in Minneapolis, Minnesota, had purchased a 20,000-square-foot office building five years earlier for $3.4 million. The building was fully leased to four tenants generating $272,000 in annual NOI. Catherine also held interests in two other rental properties producing $145,000 in combined income.

The Problem

For five years, Catherine's CPA had depreciated the office building straight-line over 39 years with no cost segregation study. She was generating only $69,700 per year in depreciation -- a total of $348,500 over five years. She was paying $108,000 annually in federal taxes on her combined real estate income.

Our Strategy

We performed a cost segregation study and then filed Form 3115 (Application for Change in Accounting Method) to claim all missed accelerated depreciation in a single tax year as a catch-up adjustment under IRC Section 481(a). The study identified $378,000 in 5-year property, $164,000 in 7-year property, and $310,000 in 15-year property. The Section 481(a) adjustment -- representing five years of missed accelerated depreciation minus what had already been claimed -- totaled $695,000 as a one-time deduction.

The Results

The $695,000 Section 481(a) adjustment eliminated Catherine's tax liability for the year and created a substantial carryforward loss. The one-time catch-up savings totaled $230,000. Going forward, Catherine will also benefit from the corrected depreciation schedule on her remaining depreciable basis.

Key Takeaway

It is never too late for cost segregation. Form 3115 allows property owners to claim all missed accelerated depreciation in a single year -- without amending prior returns -- regardless of how long they have owned the property.