Skip to Content

Form 3115: Applying a Cost Segregation Study on a Tax Return

  • In this article we will discuss how to apply a cost segregation study on a tax return.
  • We will show the step-by-step process of applying a cost segregation study in the year a property is purchased. 
  • We will show the detail on applying a cost segregation study on property owned and placed in service prior to the current tax year.
  • Example filled-in Form 3115 and other tax return forms provided for reference. 
  • Depreciation adjustments and catch-up calculations discussed with examples provided.

This blog post is designed as an example on how to apply a cost segregation study on a tax return. It is recommended you bookmark this page for future reference if you prepare tax returns with a cost segregation study. Filled-in forms with examples are used as a reference to help you prepare an accurate return when a cost segregation study is involved.

All images enlarge in a second window by clicking on them. You may print out the images as a helpful tool in preparing your tax return. You can make calculations right on the printouts. This post will be updated when the rules change for cost segregation studies; refer back to this page anytime you deal with cost segregation. 2020 tax forms and the latest release of Form 3115 were used in the examples in this post. The tax forms will not be updated unless the reporting rules change.

If you want to learn more about how a cost segregation study works and how much it can save you in taxes you can review this post  and here if you want a very short review on how to apply a cost segregation study on a a tax return.


The Cost Segregation Study

A cost segregation study can run 30 pages or more. For tax preparation purposes, the pages you are interested in are the Cost Detail and Cost Summary pages. Depending on the property, there can be multiple pages in the cost segregation study that apply to these different area of the property. Example: there might be a Cost Summary and Cost Detail page for the apartments on the property and a summary and detail for a detached garage area. 

The example used here has just one Cost Detail and Cost Summary page. If multiple pages exist you just need to go through the process in this post for each detail/summary.

This is what a cost summary will look like in a cost segregation study. The summary will only show the depreciable assets; land is not depreciable and is therefore usually excluded.


The Cost Summary page in the cost segregation study is straight forward. It lists the total building cost with an allocation between class lives. 

This is enough information to complete an accurate tax return. However, the Cost Detail also plays an important role.


The Cost Detail breaks each class life down to each component. This is important information you will need if any component is taken out of service or replaced.


Some tax professionals like to use the depreciation adjustments used in this post on every item of each class life. This is helpful when a component is taken out of service or replaced.

Example: If a roof or flooring are replaced before the asset is fully depreciated the remaining basis is deducted at that time. If you entered each component separately the process will be easy. If not entered separately you will need to keep a note in your files, along with the Cost Detail, to handle the calculations of replacement when they occur. 

Many times replacing a roof or flooring is a repair expense instead of an improvement. This allows for a deduction for the current expense, plus the additional deduction for the remaining basis of the property replaced. This is another benefit of a cost segregation study.


Filled-in Form 3115

The biggest question I get from readers involves Form 3115. Few tax professionals have seen a cost segregation study or only a few over their career. Filling out Form 3115 to deal with the change in accounting method can be daunting. 

Form 3115 is 8 pages. The good news is that you only need to fill out four of them. 

Form 3115 is sent along with your tax return and the depreciation adjustments from the cost segregation study; the change of accounting method is automatic. The IRS will not respond when Form 3115 is filed unless there is an issue. You must attach a copy of the cost segregation study with the tax return. 


Form 3115, Page 1 filled in.


Page one of Form 3115 asks for basic taxpayer information at the top. My example involves an individual, but the same application applies to entities. Be sure to indicate if you are an individual, partnership, corporation or one of the other designations. On the right check the “Depreciation and Amortization” box.

Part I and II have questions you need to answer. You only need one DCN if the only issue is a cost segregation study — code 8 — because you are going from a permissible method to another permissible method.


Form 3115, Page 2 filled in.


Page 2 of Form 3115 contains more questions. My answers are the most common. Some questions do not apply. Adjust your answers to your personal situation as needed.


Form 3115, Page 3 filled in.

Page 3 of Form 3115 is also questions. As my example shows, only two questions need answering. Part III does not apply to cost segregation studies. 


Form 3115, Page 8 filled in.


Pages 4-7 are left blank on Form 3115 when a cost segregation is the only issue. 

The top of page 8 also does not need to be filled in for cost segregations. Schedule E on Form 3115 does need questions answered. I listed the most common answers. Pay attention to Question 4b. If you lived in the property before renting it you need to indicate so.

Question 4a requires a statement. My software generates this statement automatically. Attaching the cost segregation study probably is enough, but I always include the statement shown below.


Form 3115 filled in, statement.


Depreciation Adjustments When Applying Cost Segregation

I encourage you to print out the images in this section. They provide everything you need to complete an accurate tax return with adjustments reflecting a cost segregation study. It might also be helpful to print out the Cost Summary and Cost Detail presented at the beginning of this post. 

These are the facts used in our example.


We start with basic information. The property was purchased and placed in service at the beginning of 2014 and the cost segregation study will apply to tax year 2020. 

The tax return will look like this without the cost segregation study:


Schedule E without the cost segregation study applied.


And the depreciation schedule:


Depreciation schedule without the cost segregation applied.


Now we need to make adjustments to reflect the cost segregation study. Prior to the study the entire building was depreciated over 27.5 years, straight line. The cost segregation study allows us to depreciate $85,600 over 5-years and $6,893 over 15-years. These amounts reduce the amount of 27.5-year class life property to $266,816.


Adjusting the amounts depreciated in each class life.


This information is provided by the cost segregation study. See the Cost Summary and Cost Detail above.


Adjusting the original depreciation between class lives.


We need to know how much depreciation should have been used in each class life if cost segregation was applied from day one. Setting our example with a property purchased January 1st simplifies our example. You will need to adjust for depreciation based on months rather than our simplistic 6-years of ownership before the cost segregation study if any other date of purchase is involved.

Our accumulated depreciation would be as follows if cost segregation were applied from the beginning:

27.5-year Class Life:

$262,816 / 27.5 = $9,557

$9,557 x 6 years = $57,342

15-year Class Life:

$6,893 / 27.5 = $250.65

$250.65  x  6 = $2,502

Because I rounded numbers there is a small error that I account for in this class life. The difference is $2 and reconciles with the actual previous depreciation claimed.

5-year Class Life

$85,600 / 27.5 = $3,113 x 6 = $18,638


The new depreciation schedule will look like this:


The final depreciation schedule after cost segregation is applied.


We need these numbers to determine how much prior depreciation to apply to each class life and calculate our catch-up depreciation for the current year. 


The final adjustments to depreciation from a cost segregation study.


Our last step is determining how much additional depreciation to claim the year the cost segregation study is applied when cost segregation wasn’t applied in prior years.

The easiest part is the 5-year property since all the 5-year property should have been depreciated by this time. The remaining basis is a deduction:

$85,600 – $18,678 = $66,922

The $18,678 comes from our calculation above where we allocate depreciation from the 27.5 class life to the 5-year class life.

The $66,922 is added to the current year’s depreciation.

The 15-year property is only partially through its depreciation schedule.


Depreciation table for 3-, 5-, 7-, 10-, 15- and 20-year class lives.


As you can see, only 48.81% of the 15-year property should be depreciated out at this point, including the current year depreciation.  Note that we claim the current year of depreciation as well since we will use this number to override the depreciation calculated by the tax software The math is as follows:

$6,893 x 48.81% = $3,3433

$3,3433 – $1,502 = $1,931

The $1,931 includes the current year’s depreciation.

Your tax software will handle the depreciation for the 27.5-year class life. The depreciation schedule above listing cost segregation shows the current year’s depreciation deduction. 


Schedule E after the cost segregation catch-up depreciation is applied.


The tax savings can be substantial as the before and after Schedule E show. 

That is all there is to it. Follow this guide to simplify the application of cost segregation to a tax return.


If there is anything I can do to clarify the process, let me know. A comprehensive guide has been needed for a long time online. My goal is to have this page as the go-to resource when dealing with cost segregation on a tax return.





More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi pays high interest. (Currently 8%)

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.


Saturday 11th of March 2023

Thanks for sharing this Keith, Turbo Tax desktop does not allow me to attach the cost set, so thanks for sharing that you use the Drake Software. I am curious, can I just hire you to review mine when I am done?

Keith Taxguy, EA

Sunday 12th of March 2023

Carlos, I am unable to take on any additional clients. Reviewing a cost seg would require checking the calculations of the adjustments and that takes time, time I don't have. Sorry.

You may wish to check the Tax Pros Near Me page of this blog for tax professionals still accepting new clients.

Wesley Hunter

Friday 10th of March 2023

When you calculate your missed depreciation from previous years. What is put as “date placed in service”? So it reflects on the current years tax return in schedule E? The tax return online service I'm using wont add it to my current year Schedule E unless my placed in service date is within the current tax year. Thank you

Wesley Hunter

Thursday 16th of March 2023

@Keith Taxguy, EA,

Thank you I greatly appreciate the response. I have two other questions if you don’t mind. When I mail in the 3115 do also mail in the original tax return (say 2018) with the form and the cost segregation study. Also, when should I mail in the form for approval? The 1st of the year for 2022 tax filing? Thanks again

Keith Taxguy, EA

Saturday 11th of March 2023

Wesley, you will need to check with your software provider. My software has a Date Acquired box and lower on the page a Date Placed In Service field if different from the date acquired.

My software also has an Override Regular Depreciation field. This is where the cost seg adjustment goes. At least with my software (Drake Software).

Paul A

Monday 20th of February 2023

Keith, Thank you! You have done a great service by providing step by step guidance for a complex matter. In completing my 2022 Form 3115, I noticed a Part IV that wasn't included in your example above as it may have been an earlier year. Do I need to complete this section and, if so, it asks for a summary of the computation. Any clarification would be greatly appreciated. Regards, Paul

Keith Taxguy, EA

Monday 20th of February 2023

Paul, Part IV is required. Line 25 should be marked Yes. Line 26 is the amount of additional accumulated depreciation you will take in the current year for the cost segregation study. Line 27 is dependent on any prior §481(a) adjustments (I suspect most taxpayers will have not anything here, but verify because there might be other §481(a) adjustments to consider.) Line 28 is Yes. Check the de minimis election if under $50,000 and the eligible acquisition transaction election for larger amounts. Line 29 is taxpayer specific.

The accounting required is the same calculations illustrated in the text and in the video. All the IRS wants is an attachment showing how you arrived at your numbers.


Sunday 4th of September 2022

Thank you Keith! Been looking for something like this for days. My one question is in doing an example today with a property that's been in service for 2 years. I believe the only real difference would be 15 year and less property could be depreciated with 100% Bonus Depreciation on form 4562 as long as placed in Service After 2017 and before 2023. Still need to calculate what depreciation has been utilized on SL and then take the difference right?


Friday 21st of October 2022

@Keith Taxguy, EA, First of all, great video. Thank you. So Manny can file amended tax returns for open years 1 & 2 for a cost segregation study prepared in year three on property placed in service in year 1? It was my understanding that this would be considered a change in accounting method and would require a Form 3115 filing to pick up the additional deprecation in the year of the change. Guess I'm a little confused on when an amended return can be filed to take advantage of a cost segregation study in years after property has been placed in service and returns filed. Thank you.

Keith Taxguy, EA

Sunday 4th of September 2022

Correct. Also, since it is only two years you can amend prior returns, as they are not out of stat.

Jeff Restivo

Tuesday 30th of August 2022

Great video! Are you attaching the before and after depreciation schedules or any of the calculations you outline above (to the tax return or 3115 filing)?

Keith Taxguy, EA

Tuesday 30th of August 2022

I do not attach my working papers to the return. Whatever is reported on Form 4562 and #115 is all Revenue gets. Remember, the IRS is getting a copy of the cost segregation study, attached to the return.