Missed Depreciation on Rentals? Amend vs. Form 3115
If you bought rentals in 2022–2024 and didn’t take bonus depreciation or cost segregation, you’ve got two ways to fix it:
Amend a prior year (cash refunds potential), or
File Form 3115 for an accounting method change (a big current‑year catch‑up, not a prior‑year refund).
This article breaks down how each path works, how to tell which one you’re allowed to use, and a practical playbook to maximize cash and stay audit‑ready.
The two key rules (plain English)
One missed filed year → you can usually amend that year.
Two or more consecutive filed years missed → the IRS treats your approach as an adopted method. You fix it with Form 3115 and a Sec. 481(a) catch‑up deduction in the change year (no refund for those earlier years via amendment).
Why this matters: Amendments target cash refunds from what you already paid. 3115 moves the benefit into the current year and forward.
Quick context: bonus percentages by year
2022: 100% bonus
2023: 80% bonus
2024: 60% bonus
(Phases down further after 2024 unless law changes.)
This means 2022 amendments can be especially valuable if eligible, while 2024 still delivers meaningful refunds (just at 60% bonus).
How to tell which path applies to each property
Ask, for each property and each entity:
Placed‑in‑service year?
How many filed returns went by without the right depreciation/cost seg?
If only one filed year missed for that property → Amend.
If two or more filed years missed → 3115 with Sec. 481(a) catch‑up.
Mechanically, Form 3115 is typically per entity (e.g., one for a partnership, separate ones for any disregarded SMLLCs, if applicable).
What 3115 actually does (and doesn’t)
Does: Switch you from an impermissible method to the correct one and books the difference as a Sec. 481(a) catch‑up in the change year. This can be a very large deduction.
Doesn’t: Create prior‑year refunds. It reduces tax this year; any excess generally becomes an NOL carryforward under current rules (carrybacks are very limited).
Passive vs. non‑passive: can I use the deduction now?
Your ability to use the 481(a) catch‑up (or a big amended‑year deduction) hinges on passive loss rules:
Short‑term rentals (STRs) may be non‑passive if average stays are short enough and you materially participate.
Long‑term rentals are generally passive unless you qualify as a Real Estate Professional and meet material participation.
Why it matters:
Non‑passive = deduction can offset ordinary income in the year you claim it.
Passive = unused losses carry forward until you have passive income or dispose of the activity.
We always test these facts up front so your plan targets usable deductions.
Example (illustrative numbers)
You bought 15 properties between 2022–2024 and didn’t do cost seg.
2022 & 2023: missed in both years → 3115 in the current year creates a $600,000 481(a) catch‑up.
2024: first missed year → Amend 2024 and generate a $180,000 deduction that may yield a refund (depending on what you paid in 2024).
If the $600,000 481(a) creates an NOL, it carries forward to offset future income (subject to the usual limits).
Statute of limitations (refund clock)
Refund claims are generally 3 years from the return’s due date or filing date (whichever is later).
If a year is getting tight, consider a protective claim while you finalize the numbers.
Partnerships: the BBA wrinkle
If you have a 1065 (partnership) return and did not elect out of the centralized partnership audit regime, amendments can be costly/complex (AAR, push‑out, etc.).
Practical tip: In some cases it’s cleaner to avoid amending those years and use 3115 instead.
Your action plan (the practical playbook)
Inventory the portfolio (property, entity, placed‑in‑service date, method actually used).
Sort properties:
Amend: only one filed year missed (e.g., many 2024 assets).
3115: two+ filed years missed (common for 2022–2023 assets).
Model cash: estimate refunds from amendments and current‑year tax savings from the 481(a) catch‑up.
Validate usage: test STR/REP/material participation so deductions are usable (non‑passive if eligible).
Execute: order cost seg (engineer‑backed or vetted software), file 3115 per affected entity, and amend the targeted years.
Document: keep depreciation schedules, cost seg reports, service logs (for STR), ownership docs, and your decision memo.
FAQs
Can I both amend and file 3115?
Yes—by property/year.
Is 3115 one per property?
Usually per entity. You can list multiple assets on a single entity’s change.
Will 3115 give me cash back for prior years?
No. It creates a current‑year deduction; prior‑year refunds come from amendments.
Do I need an engineer for cost seg?
Engineer‑backed studies are the gold standard (especially for audits). Good software outputs can be used with care; we balance cost, speed, and audit risk.
Bottom line
Refunds are most likely from amending a single missed year.
Big current‑year deductions come from Form 3115 for properties with two+ missed filed years.
Confirm passive vs. non‑passive so you actually use the deductions.
If you want a done‑for‑you roadmap, we start with a quick assessment: we map properties by year/entity, show exactly what to amend vs. change, and deliver a clear refund + deduction plan with fixed pricing.
Joe is a Certified Public Accountant (C.P.A.) and a Certified Valuation Analyst (C.V.A.). Joe’s professional career in public accounting began in 2012 with one of the “Big 4” international accounting firms. Since 2012, the focus of his professional engagements has been primarily in the area of business tax planning, cash flow planning and management, business valuations, and small business financial consulting.
