You bought a commercial building. You’ve been depreciating it over 39 years. You’ve filed your tax returns. Then, one day, you realize you could have claimed much more depreciation. What do you do?
Fortunately, you can correct the issue without amending prior tax returns by using a look-back cost segregation study.
A look-back cost segregation study allows you to recover depreciation you were entitled to claim but never did. It does this through a Section 481(a) adjustment reported on IRS Form 3115 (Application for Change in Accounting Method). As a result, you can deduct the depreciation you should have claimed in prior years on your current year’s tax return.
For owners of commercial real estate or multifamily properties who never completed a cost segregation study, this current-year deduction can be substantial.
The Cost of Waiting Too Long
Suppose you purchased a commercial building with a depreciable basis of $3.9 million. Under standard depreciation, you would deduct about $100,000 each year over 39 years. However, a cost segregation study identifies building components that qualify for 5-, 7-, or 15-year recovery periods instead.
Typically, between 15% and 30% of a building’s depreciable basis qualifies for reclassification, although the exact percentage depends on the property.
If you’ve owned the building for several years without completing a cost segregation study, you likely missed valuable depreciation deductions. Fortunately, the IRS provides a process that lets you recover those missed deductions without revising prior returns.
How Does a Look-Back Cost Segregation Study Work?
Step 1: Complete a Cost Segregation Study
A cost segregation study identifies assets such as carpeting, decorative lighting, specialized electrical systems, cabinetry, landscaping, and paving. It then assigns those assets to the appropriate MACRS recovery periods.
Additionally, the IRS Cost Segregation Audit Techniques Guide, updated in February 2025, outlines the standards for a quality study. It explains the required qualifications, acceptable engineering methods, and documentation standards.
Importantly, you do not need to complete the study in the year the property enters service. Instead, you can perform it years later. That’s exactly where a look-back study provides value. It focuses on what you should have claimed, not what you actually claimed.
Step 2: Calculate the Section 481(a) Adjustment
Next, your CPA calculates the difference between the depreciation you claimed and the depreciation you should have claimed.
That difference becomes your Section 481(a) adjustment.
For example, suppose your study shows you should have deducted an additional $80,000 annually over the last six years. Your Section 481(a) adjustment would total approximately $480,000. Consequently, you could deduct that amount on your current-year return.
Step 3: File Form 3115
Finally, your CPA files Form 3115 with your current tax return to request the accounting method change and report the Section 481(a) adjustment.
In most cost segregation cases, the IRS allows taxpayers to use the automatic consent procedures. Therefore, you generally do not need advance IRS approval.
As a result, you avoid filing amended tax returns. Instead, you make one accounting method change and claim one current-year deduction.
Example
Suppose you purchased a medical office building seven years ago for $4.5 million. You allocated $500,000 to land, leaving a depreciable basis of $4 million. Since then, you’ve claimed about $102,500 in annual depreciation.
Later, you completed a cost segregation study. It determined that 22% of the depreciable basis, or $880,000, qualified for shorter recovery periods because of specialized electrical systems, separate HVAC zones, cabinetry, decorative finishes, parking lots, and landscaping.
The study also showed you should have claimed an additional $620,000 in depreciation over the past seven years. Therefore, the look-back study would generate a $620,000 current-year deduction. At a 35% effective tax rate, that deduction could reduce your taxes by approximately $217,000.
For additional guidance on depreciation methods and MACRS recovery periods, see IRS Publication 946.
When Should You Consider a Look-Back Study?
A look-back study may make sense if:
- You’ve owned commercial or multifamily property for at least two years and have never completed a cost segregation study.
- The property has at least $500,000 in depreciable basis.
- The building includes interior finishes, specialized systems, or site improvements.
- You have sufficient taxable income to benefit from the deduction, subject to applicable tax limitations.
- You have not previously filed Form 3115 for the same accounting method change on that property.
How Do You Choose the Right Provider?
The quality of the study matters, especially after the IRS updated its Audit Techniques Guide in 2025.
Look for a provider that offers:
- A licensed engineer who inspects the property.
- Studies designed to support Form 3115 and the Section 481(a) adjustment.
- Audit support as part of the engagement.
- Experience with your specific property type.
Property location is less important than methodology. Instead, make sure the study satisfies IRS documentation and engineering standards.
Questions to Ask Your CPA
A successful look-back study requires coordination between your CPA and the cost segregation provider.
Your CPA should help determine:
- Whether you qualify for an accounting method change.
- The amount of your Section 481(a) adjustment.
- How to prepare and file Form 3115 correctly.
- How the deduction interacts with passive activity rules, at-risk rules, and net operating loss limitations.
If your CPA hasn’t discussed a look-back study, ask whether one could benefit any of your properties.
Summary
A look-back cost segregation study does not create a new tax benefit. Instead, it helps you recover depreciation deductions you were already entitled to claim through an IRS-approved accounting method change.
Rather than amending multiple tax returns, you file Form 3115 with your current return and claim the entire Section 481(a) adjustment in one year. Consequently, eligible property owners may recover several years of missed depreciation in a single filing.
Schedule a Free Benefit Analysis
If you’ve owned commercial or multifamily property for at least two years without completing a cost segregation study, you may be leaving valuable depreciation deductions unclaimed.
A free benefit analysis estimates your potential asset reclassification and Section 481(a) adjustment. Then, you and your CPA can determine whether a cost segregation study makes financial sense.
Cost Segregation FAQ
Do I have to amend past tax returns?
No. Instead, Form 3115 allows your CPA to claim the full Section 481(a) adjustment on your current-year return without amending prior returns.
How far back can a look-back study go?
There is no deadline for performing a look-back study. However, many successful studies involve properties owned for three to fifteen years. Older properties may simply have fewer years of accelerated depreciation remaining.
Does filing Form 3115 increase my audit risk?
No. Form 3115 is an IRS-approved procedure for changing accounting methods. Moreover, a properly prepared engineering-based cost segregation study provides strong support if the IRS examines your return.
Can I file Form 3115 after claiming years of depreciation?
Yes. In fact, that’s the primary purpose of a look-back study. However, you generally may file Form 3115 for the same accounting method change on the same property only once.
Is a cost segregation study worth the cost?
Most cost segregation studies cost between $5,000 and $15,000, depending on the property’s size and complexity. In many situations, the resulting Section 481(a) deduction exceeds the cost of the study by a wide margin. Therefore, a benefit analysis is often the best first step.
