There is a particular kind of phone call a CPA gets every spring. Someone bought a rental five or six years ago, has been reporting the rent and the expenses faithfully, and has never once claimed depreciation. Sometimes nobody told them. Sometimes the software asked a question they answered wrong. Either way the question is the same: can I still get that back?
Usually yes — and not through amended returns. The mechanism is Form 3115, and for a taxpayer who has been under-depreciating for years it can produce a single very large deduction in one year rather than a string of small refunds.
But the reason to act is sharper than the refund. If you do nothing, that depreciation does not sit and wait for you. It disappears, and the IRS still charges you for it when you sell.
Part of our work for real estate investors — see real estate CPA services in Houston for scope and fees.
Depreciation you never claimed still reduces your basis
This is the part that surprises people, and it is the whole reason the fix is worth doing.
Under Internal Revenue Code §1016(a)(2), your basis in a property is reduced by depreciation “allowed or allowable” — whichever is greater. Allowed means what you actually deducted. Allowable means what you were entitled to deduct, whether you took it or not.
So the owner who never depreciated does not have a higher basis than the owner who did. Both have the same reduced basis at sale. One of them got years of deductions for it. The other got nothing and will still pay the same tax on the gain.
Skipping depreciation does not defer the deduction. It forfeits it — while keeping every dollar of the eventual tax consequence.
The test that decides your route: one year, or two?
Before anything else, count how many filed returns carry the mistake. This single question determines whether you file an amended return or a Form 3115, and getting it backwards wastes months.
The IRS position, stated plainly in its own examiner training material, is that “a taxpayer adopts an impermissible method for a material item by treating the item in the same way on two or more consecutively filed returns.”
- One return. You have not adopted a method — you made an error. Fix it with an amended return (Form 1040-X) for that year. Form 3115 is not available.
- Two or more consecutive returns. You have adopted an impermissible method of accounting. Now amended returns are not the right tool. You change the method going forward on Form 3115 and true up the past in one adjustment.
Most missed-depreciation situations are the second kind, because the mistake repeats itself automatically once it is in the depreciation schedule.
What the §481(a) adjustment actually does
When you change a method of accounting, you cannot simply start doing it correctly and pretend the earlier years never happened — that would let income fall through the cracks permanently. So the code requires a catch-up calculation under §481(a): the cumulative difference between what you deducted and what you should have deducted, computed as of the first day of the year of change.
The direction of that number decides how you take it, and the rules are asymmetric in the taxpayer’s favour here:
- Negative adjustment (you under-deducted — the missed-depreciation case): taken into account entirely in one tax year, the year of change.
- Positive adjustment (you over-deducted and now owe): spread over four tax years, which softens the hit.
That asymmetry is why the missed-depreciation fix lands as one large deduction rather than a trickle.
A worked example
A Houston investor buys a single-family rental in January 2019 for $340,000. The county allocates $70,000 to land, leaving a depreciable basis of $270,000. Residential rental property is depreciated straight-line over 27.5 years using the mid-month convention.
They report rent and expenses every year from 2019 through 2025. They never enter the building as an asset. Depreciation claimed: zero.
In 2026 the error is found. The catch-up looks like this:
| Year | MACRS rate | Allowable depreciation |
|---|---|---|
| 2019 (placed in service January) | 3.485% | $9,409.50 |
| 2020–2025 (six years) | 3.636% each | $58,903.20 |
| §481(a) adjustment at 1 Jan 2026 | −$68,312.70 |
That $68,313 is deducted in full on the 2026 return. At a 24% marginal rate it is roughly $16,400 of tax; at 32%, closer to $21,900. Depreciation of about $9,817 a year then continues normally for the remaining life of the property.
No amended returns. No refund claims for closed years. One form, one adjustment.
The caveat most articles leave out
A $68,000 deduction against a rental is a passive loss, and passive losses do not automatically offset your salary or your business income. Under §469 they are generally suspended and carried forward until you have passive income or you dispose of the property.
There are three common ways the deduction becomes usable now rather than later:
- Other passive income. Profitable rentals or other passive activities absorb it directly.
- The $25,000 special allowance. Available to active participants, but it phases out between $100,000 and $150,000 of modified AGI and is gone above $150,000 — which excludes many of the people most likely to own several rentals.
- Real estate professional status. If you qualify under §469(c)(7), rental losses are not passive and the deduction is available against ordinary income. It turns on hours and it requires contemporaneous records — see what a time log actually has to show.
Suspended is not lost; the losses carry forward and free up on a fully taxable disposition. But anyone promising you a five-figure refund cheque without asking about your income and your hours is skipping the step that decides whether you get the money this year or in 2031.
How the form is actually filed
A depreciation method change of this kind is an automatic change — it falls under section 6.01 of the List of Automatic Changes, currently Rev. Proc. 2025-23, which superseded Rev. Proc. 2024-23 and applies to Forms 3115 filed on or after 9 June 2025 for years of change ending on or after 31 October 2024. The general procedures still live in Rev. Proc. 2015-13.
Automatic means no advance IRS consent and, usefully, no user fee. The mechanics:
- The current form is Form 3115 (Rev. December 2022).
- The original is attached to a timely filed federal return for the year of change — including extensions.
- A duplicate signed copy goes to Internal Revenue Service, Ogden, UT 84201, M/S 6111, or by fax to 844-249-8134.
- The duplicate must be filed no earlier than the first day of the year of change and no later than the date the original is filed with the return.
Two practical notes. The change applies to property you still own at the beginning of the year of change — once a property is sold, the opportunity to recover that depreciation through a method change has passed, though the basis reduction has not. And you cannot pick the year opportunistically: the adjustment is computed as of the first day of the year you file for.
Where cost segregation comes in
The same form is the mechanism behind cost segregation on a building you have owned for years. A study reclassifies parts of the building into 5, 7 and 15-year property that should have been depreciating faster all along. The difference between the depreciation you took and what a correct classification would have produced is, again, a negative §481(a) adjustment claimed in one year on Form 3115.
That is why cost segregation is not only a purchase-year decision. A property bought in 2020 can still have a study done in 2026, with the entire catch-up landing on the 2026 return. See how cost segregation works on a property you already own.
What Form 3115 will not fix
- A single year’s error. One return means an amended return, not a method change.
- Property already sold. The method change operates on property you still hold.
- A wrong basis. If land and building were split incorrectly at purchase, that is a basis problem, not a method problem, and it is corrected differently.
- Deciding whether the deduction is usable. The form produces the number. §469 decides what you can do with it this year.
Getting it right
Form 3115 is eight pages, most of which do not apply to a depreciation change, and the section that matters asks for a computation the software will not produce for you. The failure modes are ordinary: the duplicate copy never reaches Ogden, the adjustment is computed as of the wrong date, or the return is filed late and the automatic change is no longer available for that year.
If you own Houston-area rental property and suspect depreciation has been missed or understated, the first step is small: pull the depreciation schedules from the last three returns and see whether the building is on them at all. That answers most of it.
Book a 30-minute call and bring the last two returns. If a method change is worth filing, you will know on that call, along with the realistic answer on whether the deduction helps you this year or carries forward.
Common questions
What is Form 3115?
Form 3115, Application for Change in Accounting Method, is how a taxpayer changes from one method of accounting to another with IRS consent. For depreciation corrections it is filed under the automatic change procedures, which means no advance approval and no user fee. The current revision is December 2022.
Can Form 3115 recover depreciation I never claimed at all?
Yes, provided the property was treated the same incorrect way on two or more consecutively filed returns and you still own it. The cumulative missed depreciation becomes a negative section 481(a) adjustment, deducted in full in the year you file the form.
Do I have to amend prior year returns as well?
No — and generally you should not. Once an impermissible method has been used on two or more consecutive returns it is an adopted method of accounting, and a method change is the correct route rather than amended returns. If the mistake appears on only one return, the opposite is true: amend that year instead.
How far back can the catch-up go?
There is no lookback limit the way there is with refund claims. The section 481(a) adjustment covers the entire period the property was depreciated incorrectly, even years that are closed for amending. That is precisely why the method change is more powerful than amended returns here.
Is there a fee to file Form 3115?
Not for an automatic change. A depreciation method change under section 6.01 of the List of Automatic Changes carries no user fee. Non-automatic changes, which require advance IRS consent, do.
What if I already sold the property?
The method change applies to property held at the beginning of the year of change, so a sold property cannot be corrected this way. The basis reduction still applied at sale under the allowed-or-allowable rule, which is why the situation is worth catching before a disposition rather than after.
Sources: Instructions for Form 3115 (Rev. 12/2022); IRS practice unit, Claims and Changes in Accounting Method; Rev. Proc. 2025-23; Rev. Proc. 2015-13; IRC §§446, 469, 481 and 1016. This article is general information, not advice for a specific situation.