Look-Back Cost Segregation studies: how to claim Depreciation you missed

What is a Look-Back Study?

A Look-Back Study is a Cost Segregation study on a property that has already been placed in service in an earlier tax year. The engineering work is the same: identify the building's components, assign each a supportable cost, and reclassify qualifying items from 27.5- or 39-year property into 5-, 7- and 15-year property.

The difference is how the result is claimed. Rather than amending old returns, you make an automatic change in accounting method and claim the cumulative missed Depreciation in the current year.

How Form 3115 works

• Automatic consent: changing from an impermissible to a permissible Depreciation method for misclassified property is an automatic accounting method change, so you don't need advance permission from the IRS.
• Section 481(a) catch-up: the difference between the Depreciation you claimed and the Depreciation you were entitled to is taken as a single adjustment. When it's in your favor, it's generally deducted entirely in the year of change.
• No amended returns: prior years stay closed. The catch-up is reported on the current-year return.
• Filing: the original Form 3115 is attached to a timely filed return (including extensions), with a signed copy sent to the IRS separately.

Illustrative example

Which Bonus Depreciation rate applies?

In a Look-Back Study, Depreciation is generally recalculated using the rules that applied in the year the property was placed in service. Property placed in service between late September 2017 and the end of 2022 was generally eligible for 100% Bonus Depreciation, so reclassified components from those years can produce a particularly large catch-up. Later years use the phase-down rates in force at the time (for example 80% in 2023 and 60% in 2024), and the shorter recovery periods still accelerate the rest.

Renovated since you bought?

If you've replaced roofs, HVAC, lighting or flooring since acquisition, the old components may still be sitting on your Depreciation schedule. A study puts a value on them, which can support a Partial Disposition so their remaining basis is written off rather than depreciated for decades. Timing rules apply, so it's worth reviewing renovations as part of the study.

Is a Look-Back Study right for you?

• The building cost (excluding land) was roughly $1 million or more.
• It was placed in service in the last 15 or more years and you still own it.
• You expect to hold it for a few more years, or to exchange it under Section 1031.
• You have income the catch-up deduction can offset this year, or you can carry the benefit forward usefully.

Frequently asked questions

This article is general information, not tax, legal or accounting advice. Tax rules change and outcomes depend on your specific facts; speak with a qualified tax professional before acting.