If you didn't perform a cost segregation study the year you acquired your property, you can still cash in on depreciation with a cost segregation look-back study.
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Conducting a cost segregation study the same year a property is put into service is best practice. But if you waited, you aren’t too late — you can still cash in on accelerated depreciation with a cost segregation look-back study.
If you own a commercial or investment property but haven’t conducted a cost segregation study, here’s what you need to know about retroactively claiming depreciation from cost segregation.
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While you should generally do a cost segregation study in the same year a property is purchased, built, or remodeled, this doesn’t always occur. Property owners who do not do a study in the same year that the property was put into service can still do a cost segregation look-back study.
A cost segregation look-back study is a cost segregation study that is performed on a property that was put into service in a previous tax year. For example, if you purchased a property in 2020 but did not do a cost segregation study that year, you have the option to do a look-back study in 2024. This study will allow you to claim a catch-up deduction for depreciation, resulting in significant savings on your tax return.
To find out if a cost segregation study is a good idea for your business, use our cost segregation calculator to see how much your business could save.
Based on IRS guidelines, a cost segregation look-back study can be performed on commercial or investment property that was put into service beginning on January 1, 1987.
You can claim missed depreciation following a cost segregation look-back study by completing and filing IRS Form 3115, Application For Change In Accounting. You do not need to file an amended tax return.
The form is a total of eight pages but for cost segregation purposes, you won’t have to complete every section. Some of the information required to fill out Form 3115 includes personal information including your name and identification number (EIN or SSN), designated automatic accounting method change number (DCN), NAICS code, and signatures of the filer/applicant and the preparer (if applicable).
Calculations for the catch-up depreciation must be added to the appropriate form (such as Schedule E).
The IRS provides detailed instructions for filling out Form 3115. You will also need to submit a copy of the cost segregation study with Form 3115.
The tax forms and calculations can get confusing, and errors can be costly. This is why we recommend having your accountant or tax preparer do the heavy lifting for you.
Whether you just found out about cost segregation or you didn’t have the upfront funds to pay for a study, you can still take advantage of the benefits of cost segregation with a look-back study.
If you own a commercial or investment property, start by understanding what properties qualify for cost segregation. If you meet the basic requirements, find a reputable cost segregation company that can give you a no-cost analysis to estimate your tax benefits, starting with our list of the best cost segregation services.
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