Tax Logic™: Cost Segregation, Form 3115 & Section 481(a) Strategies for CRE Businesses

For commercial real estate (CRE) businesses, understanding and leveraging the tax code is crucial. At Tax Logic™, we help CRE developers, investors, and owners uncover significant savings through cost segregation, which accelerates depreciation deductions and improves cash flow.

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If you’re implementing cost segregation after a property is already in service, you’ll need to address two key IRS requirements: Form 3115 and Section 481(a). Here’s what every CRE professional should know.

What is Form 3115?

Form 3115 (Application for Change in Accounting Method) is the IRS form used to request or notify a change in how you report income or deductions. For CRE businesses, this typically comes into play when you conduct a cost segregation study on an existing property.

Instead of depreciating your property over 39 or 27.5 years, cost segregation identifies building components eligible for shorter depreciation schedules. Since this changes your accounting method, the IRS requires you to file Form 3115. Fortunately, most cost segregation changes qualify under the automatic consent procedures, making the process faster and simpler.

What is Section 481(a)?

When you change accounting methods, Section 481(a) ensures you account for the difference between what you previously deducted and what you should have under the new method.

This §481(a) adjustment means:

If you under-reported depreciation in prior years, you can deduct the full catch-up amount in the current year.
If taxable income increases (rare in cost segregation scenarios), you can spread the increase over up to four years.

Why This Matters for CRE Businesses

Many CRE owners delay cost segregation — often because they’re unaware it’s an option. Fortunately, the IRS allows you to catch up on missed depreciation without amending prior returns. Simply file Form 3115 with your current return and include the §481(a) adjustment.

Benefits:

✅ Substantial current-year tax savings
✅ No need to amend prior returns
✅ Enhanced cash flow for reinvestment

Best Practices for CRE Businesses

✔ Partner with a tax advisor and cost segregation specialist experienced in CRE
✔ Ensure the §481(a) adjustment is calculated accurately to avoid IRS issues
✔ Maintain detailed records of both the original and revised depreciation schedules

How Tax Logic™ Helps

For CRE businesses, cost segregation is an effective, IRS-approved way to reduce tax liability. Filing Form 3115 and calculating §481(a) correctly are critical steps.

At Tax Logic™, we guide CRE professionals through the process, helping you maximize savings and keep more of your capital working for you.

Ready to discover how cost segregation and Tax Logic™ can benefit your CRE business? Contact us today.