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 2022 but did not do a cost segregation study that year, you have the option to do a look-back study in 2026. This study will allow you to claim a catch-up deduction for depreciation, resulting in significant savings on your tax return.
For properties acquired and placed in service after January 19, 2025, look-back studies can be especially valuable, as qualifying assets may be eligible for 100% first-year bonus depreciation when claimed through the appropriate accounting method change.
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.
It’s also important to note that the tax benefits available may vary depending on when the property was acquired and placed in service. Qualified property acquired and placed in service after January 19, 2025, may be eligible for 100% bonus depreciation, while property subject to earlier rules may be limited to lower bonus depreciation rates.
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 should include the cost segregation study and any required supporting statements when filing Form 3115.
Because tax rules and depreciation treatment can vary based on timing and elections, it’s important to work with a qualified professional to ensure the correct approach is applied when filing a look-back study.
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. And in many cases, you can capture substantial first-year deductions.
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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