Look-Back Cost Seg for a 2018 Rental: a Walkthrough
How a 2018 purchase qualifies for 100% bonus on the §481(a) catch-up, the Form 3115 mechanics, and a worked example computed across 8 years on the wrong schedule.
Look-Back Cost Seg for a 2018 Rental: a Walkthrough
This tutorial covers a single mechanic: the §481(a) catch-up adjustment for a 2018 purchase brought on a current-year Form 3115. The 2018 purchase year is interesting because it falls inside the TCJA 100% bonus window (acquisitions after September 27, 2017 through December 31, 2022) — the entire reclassified personal-property basis becomes year-1 deduction in the year-of-change return, even though the property has been depreciating on a 27.5-year straight-line schedule for eight years.
Why this is a method change, not an amended return
Once a property has been depreciated under one method on two or more consecutive returns, IRC §446(e) locks the method in. Switching from 27.5-year straight-line to MACRS-and-bonus on a reclassified basis is a method change under Treas. Reg. §1.446-1(e)(2)(ii)(d)(2)(i). The vehicle is Form 3115, the procedural rules live in Rev. Proc. 2024-23, and the change number is DCN 7 (change in depreciation for property held at the beginning of the year of change). The §481(a) adjustment lands entirely in the year of change — no amended returns, no statute-of-limitations risk on the open years, no per-year refund claims.
The attractive feature of this path is that the bonus rate that applies is the rate in effect in the original placement-in-service year, not the rate in effect in 2026 when the Form 3115 is filed. A 2018 acquisition was 100% bonus property under TCJA §168(k). The catch-up rolls all the year-1 bonus from 2018 forward into 2026 — eight years' worth of unclaimed accelerated depreciation arrives at once.
Worked example — 2018 LTR, study in 2026
A property owner purchased a long-term rental in May 2018 for $475,000. The county appraisal allocated $95,000 to land and $380,000 to improvements. Through 2025 the property was depreciated 27.5-year straight-line on the full $380,000 with mid-month May placement. In 2026 the owner brings the property to a CPA to file a Form 3115 with a §481(a) adjustment.
The screening calculator allocates (illustratively, at base LTR percentages with no per-item upgrades): 10% to 5-year, 0.5% to 7-year, 7% to 15-year, leaving 82.5% on the 27.5-year building. Numerically:
- 5-year: $380,000 × 10% = $38,000
- 7-year: $380,000 × 0.5% = $1,900
- 15-year: $380,000 × 7% = $26,600
- 27.5-year building: $380,000 × 82.5% = $313,500
What was actually claimed (2018-2025)
Straight-line on $380,000 at 27.5 years with mid-month May placement.
- 2018: $380,000 / 27.5 × 7.5/12 = roughly $8,640
- 2019-2025 (7 full years): $380,000 / 27.5 = $13,818 per year, total $96,727
- Total actually claimed through 2025: ~$105,400
What should have been claimed under cost-seg
2018 is inside the TCJA 100% bonus window. The full $66,500 of accelerable basis ($38,000 + $1,900 + $26,600) becomes a 2018 bonus deduction. The 27.5-year building portion drops to $313,500 and depreciates straight-line on the smaller amount.
| Year | 100% bonus on accelerable | Building S/L on $313,500 | Total "should have" | |------|--------------------------:|-------------------------:|--------------------:| | 2018 | $66,500 | ~$7,130 (mid-month May) | ~$73,630 | | 2019-2025 (7 yrs) | $0 | $11,400/yr × 7 = $79,800 | $79,800 | | Total | $66,500 | ~$86,930 | ~$153,430 |
§481(a) catch-up
Catch-up = should have − actually claimed = $153,430 − $105,400 = roughly $48,000. That number lands on the 2026 return as a §481(a) adjustment, reducing 2026 taxable income by approximately $48,000.
At a 32% marginal federal bracket, the year-1 federal tax effect on the catch-up alone is roughly $15,400 — well above the $5,000 screening floor the calculator uses to flag the estimate as "above threshold." The screening tool also adds a small ongoing benefit from the smaller building S/L going forward.
Try a 2018 LTR look-back estimate →
What the §481(a) bullet does not include
The catch-up captures depreciation that would have been claimed but was not. It does not include refunds or interest on the open prior years — there are no amended returns. It does not change the original purchase basis or the original land allocation. And it does not exempt the property from §1245 recapture on disposition: every dollar of accelerated depreciation eventually comes back as ordinary income when the property is sold, unless deferred through a §1031 exchange and tracked on the carryover basis.
What the CPA actually files
The Form 3115 is one form with several attachments. The procedural backbone for an automatic-consent change under Rev. Proc. 2024-23 is:
- 1. The form itself, identifying DCN 7 in Part I and the §481(a) adjustment amount in Part IV.
- 2. The asset-detail attachment, listing each reclassified component with its basis and recovery period.
- 3. A copy filed with the IRS National Office (Ogden) by the due date of the year-of-change return, plus the original with the return.
A property owner can run the screening calculator to test whether the catch-up math would clear the typical $5,000 floor at which CPAs and engineering firms recommend pursuing the change. A full study is a separate engagement; the calculator does not produce a study and cannot be relied on for return positions under Treasury Circular 230.
Estimate the catch-up on a different 2018-2022 acquisition →
Citations
- IRC §446(e), §481(a) — accounting-method changes and the catch-up rule.
- Treas. Reg. §1.446-1(e)(2)(ii)(d)(2)(i) — depreciation as a method of accounting.
- IRC §168(k) (TCJA-era) — 100% bonus depreciation 2017-2022.
- Rev. Proc. 2024-23 §6.01 + Appendix — automatic-consent procedures and DCN list.
- IRS Publication 946 — recovery periods and conventions.
Disclaimer. This tutorial describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.