Forms 3115 & Depreciation

[Semi]

Hello... I did a Cost Segregation Study on all four of my rentals recently. I have been depreciating the properties over the last two years but after doing some research, I've realized I have to use Form 3115  to claim the bonus depreciation?, but that's how much I know in this department... Since I've previously depreciated the property (normally), now I have more questions than before like:  Do I have to file (create) forms 4562 for every allocated component of the Cost Segregation Study?.. Or can I just do a "Lump Sum" of the over all dollar amount the Cost Segregation Study generated?.. Or is it a "Lump Sum" per Class Year (5, 7, 15,or 20)?  And last but not definitely least... which method will I be using for accelerating the depreciation?.. (Sec 179, Bonus Depreciation, Special Depreciation)?... OR DO I EVEN NEED FORM 4562 WHITH MY COST SEGREGATION STUDY?  Furthermore, does the Cost Segregation Study Report needs to be submitted (attached) to my 1040?  I know... too many questions.. but some how I feel they are all in one if I wanted to file Form 3115 this year with my taxes... Thank you very much and sincerely appreciate your help...   SEMI

[Mike9241]

For one thing generally 179, bonus special depreciation must be elected in the year you place the asset into service. You did a cost seg 2 YEARS AFTER PUTTING THE PROPERTY INTO SERVICEand now want to take them retroactively which is not allowed. 

however:

1. Section 179 Deduction:

   • The Section 179 deduction allows small businesses to immediately deduct the entire cost of qualifyin...¹².
   • It’s particularly useful for major purchases of property, equipment, or machinery.

2. Cost Segregation:

   • Cost segregation is a tax strategy where you reclassify certain components of a property (such as a building) into shorter depreciation periods.
   • This allows you to accelerate depreciation and potentially claim larger deductions in the earlier years.

3. Scenario:

   • You put the property into service in Year 1.
   • In Year 2, you perform a cost segregation study and identify components that would have qualified for the Section 179 deduction in Year 1.

4. Considerations:

   • If the components identified through cost segregation would have qualified for the Section 179 deduction in Year 1, you can amend your tax return for that year.
   • By doing so, you can claim the Section 179 deduction for those components in the correct year.

5. Important Points:

   • Ensure that the components meet the Section 179 eligibility criteria (e.g., tangible personal proper...¹.
   • Consult with a tax professional to navigate the specifics of your situation and ensure compliance.

[Semi]

Thank you for your response Mr. Mike... I don't mean to disrespect your answer, but I guess I did not explain myself in my original post...

I understand the concept of Sec 179 and NO .. I did not make a Sec 179 election when I depreciated my Rental Properties a couple of years ago when I placed them in service.. They were depreciated the simple way (SL).. but later (recently actually) I found out about using a Cost Segregation Study to depreciate my rental properties much faster and since I did not apply any Bonus Depreciation in Year 1 (when I placed the properties in service); I would like to make that correction on this year's tax return BUT I DON'T KNOW WHERE TO APPLY THE CORRECTION.  I know I have to attach Form 3115 to my return, BUT THE ADJUSTMENT, ... that's my problem... where do I input the corrected (catch-up) depreciation?.. and What method do I use?...  Do I still need Form 4562?... Thank you once again for your cooperation... SEMI

[AmeliesUncle]

You enter the "Section 481(a) Adjustment" as an "other" deduction for each rental property.

Unless you elected OUT of Bonus depreciation for the prior year, you are required to use Bonus Depreciation.

Form 4562 would not be used if the asset was "placed in service" in a prior year.

You would need to amend your prior returns to correct/reduce the Basis and depreciation of the building.

[Semi]

Do I really need to amend my prior years?... Can I just use form 3115 and make the adjustment on my taxes for the current year?... and if so... WHERE ON MY 1040 (and/or schedules) do I enter that adjustment amount?... 

[luckey22330]

Hey Mike,

Super helpful, thank you.

My question is where in TurboTax do I place the data I received from the Cost Segregation Study?

Side note: Purchased in 2023, Study conducted in 2023.

Please advise.

Brian

[AmyC]

Enter the missed depreciation as a miscellaneous expense and it will show under Other Expenses. 

The Form 3115 rules changed recently so be sure to file it with your return Filing it separately now has an extra charge. 

Only the desktop version supports the form.

[luckey22330]

Thanks Amy.

Just want to confirm, this is not "missed depreciation" since it is the first year of this expense and I have not filed the return yet. Do I still need to file a 3115 if I haven't filled for the first year yet?

You also mentioned that I would add as a miscellaneous expense, but what exactly do I add?

• I have the home as an asset now with a depreciation of $2,683.  Do I remove that or keep it?
  • Cost = $375,000
  • Land Cost = $16,300
• What do I add for the Misc expense?
  • The Cost segregation has the "total included in study is equal to purchase price less land value" as $262,058.35 (73%)

Thanks in advance,

Brian

[luckey22330]

Following up.  Can someone please provide some direction on my questions above?

Best,

Brian

[DianeW777]

Let's take this one question at a time.

1. Just want to confirm, this is not "missed depreciation" since it is the first year of this expense and I have not filed the return yet. Do I still need to file a 3115 if I haven't filled for the first year yet?
   1. No, a Form 3115 is not used unless you missed depreciation in prior years and want to capture it all in one year instead of amending returns, or the amendment time frame has passed,   
2. You also mentioned that I would add as a miscellaneous expense, but what exactly do I add?
   1. This is the category you would use if you actually needed and used the Form 3115 for prior depreciation.

 @luckey22330 

[luckey22330]

Great, thank you @DianeW777 

With those answered, my original question remains.

My question is where in TurboTax do I place the data I received from the Cost Segregation Study?

• Purchased in 2023, Study conducted in 2023, first time filing for this business
• The Cost segregation has the "total included in study is equal to purchase price less land value" as $262,058.35 (73%) (15-year accelerated depreciation)

Additionally, within in TurboTax now, in Schedule C, I have the home as an asset with a depreciation of $2,683 (39.5 years).  Do I remove that or keep it once I place the accelerated appreciation in above)

• Cost = $375,000
• Land Cost = $16,300

Thanks,

Brian

[DianeW777]

Enter the assets only once.  Enter each asset at the cost indicated in the cost segregation study since this is the first year. You don't have to remove it, just change the amounts based on the study.

You have said this is the first year filing for this business so start out with the basis from the study.

@luckey22330 

[luckey22330]

@DianeW777 

Not sure that provides the end result.

House assets on schedule C automatically calculate at 39.5 years with no way of changing it in the interface. If I replace $375,000 with $262,058.35, it is still calculating the asset at 39.5 years but now at a lower purchase price, which then reduces the expense for the asset by ~$1,000.  The expense for the asset should increase with accelerated appreciation, not decrease.

[AmeliesUncle]

Deleted.  I didn't realize the current questions were from an add-on person, rather than the original person.

[AmeliesUncle]

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@luckey22330 wrote:

in Schedule C, I have the home as an asset with a depreciation of $2,683 (39.5 years). 

---

Schedule C?  Is this home being rented out?  Are you providing "services" to the tenants (for example, maid service or meals)?  A rental generally belongs on Schedule E unless you provide "services" to the tenants.

It is not 39.5 years.  I think you mean 39 years.