How to file for a depreciation method change with the IRS for rental property owners?
Ask Blue J any tax question, then go deeper. Follow up, add client-specific context, and explore the sources behind every answer with Blue J’s generative AI solution for tax research.
To file for a depreciation method change with the IRS for rental property owners, you must follow specific procedures established by the IRS for requesting a change in accounting method. Changing the depreciation method, recovery period, or convention for property (including rental property) is considered a change in accounting method under IRC § 446(e) and requires IRS consent, typically by filing Form 3115, Application for Change in Accounting Method. Below is a comprehensive explanation of the process, legal requirements, and practical steps:
1. When Is a Change in Depreciation a Change in Accounting Method?
A change in the depreciation method, recovery period, or convention for property (including rental property) is a change in accounting method under Treas. Reg. § 1.446-1(e)(2)(ii)(d)(2)(i). This includes:- Changing from an impermissible to a permissible method (e.g., correcting a prior error).- Changing from one permissible method to another (e.g., switching from MACRS to ADS, or from 200% DB to straight-line).- Changing the recovery period or convention (e.g., from 27.5 years to 39 years, or from half-year to mid-month convention).
Exceptions:- A change in use of property (e.g., from personal to business use, or from residential to nonresidential) is not a change in accounting method for this purpose; it is handled under Reg. § 1.168(i)-4 and does not require Form 3115 unless the taxpayer fails to follow the prescribed rules or revokes an election.
2. When Is IRS Consent Required?
- If you have adopted a method (by using it in two or more consecutive returns, or by using a permissible method on your first return for the property), you must obtain IRS consent to change it.
- If you are correcting a mathematical or posting error, or making a change due to a change in use (as described above), you do not need IRS consent.
3. How to File for a Change: Form 3115
A. Automatic vs. Non-Automatic Change Procedures
- Automatic Change: Most depreciation method changes (including correcting impermissible methods) are eligible for the automatic change procedures under Rev. Proc. 2015-13 and the annual List of Automatic Changes (e.g., Rev. Proc. 2022-14, as updated).
- Non-Automatic Change: If your situation is not covered by the automatic procedures, you must file under the non-automatic procedures, which require a user fee and IRS approval.
B. Filing Requirements for Automatic Changes
- Complete Form 3115:
- Indicate the designated change number (DCN) for the type of change (see the List of Automatic Changes).
- Provide all required information, including a description of the property, the present and proposed methods, and the reason for the change.
- Attach a statement showing the computation of the IRC § 481(a) adjustment (the cumulative difference between the depreciation taken and what would have been taken under the new method).
- File the Form 3115:
- Attach the original Form 3115 to your timely filed (including extensions) federal income tax return for the year of change.
- File a signed copy of Form 3115 with the IRS National Office (Ogden, UT) no earlier than the first day of the year of change and no later than the date the original is filed with the return.
- No User Fee: For automatic changes, no user fee is required.
C. Filing Requirements for Non-Automatic Changes
- File Form 3115 with the IRS National Office during the tax year for which the change is requested.
- Pay the required user fee.
- Await a letter ruling from the IRS granting or denying the change.
4. Section 481(a) Adjustment
- When changing from an impermissible to a permissible method, you must calculate a § 481(a) adjustment to account for the difference in depreciation between the old and new methods for all prior years.
- A negative adjustment (resulting in a deduction) is taken entirely in the year of change; a positive adjustment (resulting in income) is generally spread over four years.
5. Special Considerations for Rental Property Owners
- Residential Rental Property: The default method is straight-line over 27.5 years (mid-month convention) under MACRS. If you have been using an incorrect method (e.g., wrong recovery period, wrong convention, or an accelerated method), you must file Form 3115 to correct it.
- Nonresidential Real Property: The default is straight-line over 39 years (mid-month convention).
- Change in Use: If the property changes from residential to nonresidential (or vice versa), follow Reg. § 1.168(i)-4. This is not a change in accounting method unless you fail to follow the prescribed rules or revoke an election.
6. Practical Steps for Rental Property Owners
- Identify the error or desired change (e.g., wrong recovery period, method, or convention).
- Determine if the change is eligible for the automatic change procedures (most are).
- Prepare Form 3115:
- Complete all required parts, including a detailed description of the property and the change.
- Calculate and attach the § 481(a) adjustment.
- File the original Form 3115 with your timely filed tax return for the year of change.
- File a signed copy with the IRS National Office.
- Retain all supporting documentation.
7. Summary Table of Steps
8. Key Points
- Most depreciation method changes for rental property require filing Form 3115.
- Use the automatic change procedures if eligible; otherwise, use non-automatic procedures.
- Calculate and report any § 481(a) adjustment.
- No user fee for automatic changes; user fee required for non-automatic changes.
- A change in use (e.g., from residential to nonresidential) is not a change in accounting method unless you fail to follow the prescribed rules or revoke an election.
In summary: To change the depreciation method for rental property, file Form 3115 under the automatic change procedures (if eligible), attach it to your timely filed tax return for the year of change, file a signed copy with the IRS National Office, and include a § 481(a) adjustment. This process is required by IRC § 446(e), Treas. Reg. § 1.446-1(e), and related IRS guidance.
Was this answer helpful?
What Blue J customers are saying
“We are excited to use Blue J to elevate the initial work product our team is able to produce."
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We’re incorporating Blue J to ensure our people are well-equipped with a research tool that delivers on both ease of use and quality of deliverable. It will save us a lot of time as a starting point, so we can focus our efforts on the analysis. Ultimately, it helps us get to the right answer, faster.”
"We had used Checkpoint for a long time but found it wasn’t particularly well-used in our practice."
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"A lot of our practitioners would have to turn to Google to find what they were looking for, which of course isn’t ideal. Blue J is a real game-changer when it comes to this, since it combines the efficiency of Google with the authoritative tax materials our people really need to serve their clients best. At ELO, we pride ourselves on providing services that are focused on value for clients and exceeding their expectations. Adding Blue J to our toolbox will enable us to do just that, as we continue to evolve our service offerings to better serve our clients’ needs.”
"We find this tool to be a game-changer for us and our clients.”
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“We had the opportunity to pilot some other AI solutions in the market, and found that the improvement over traditional search was limited - except in Blue J’s case, where the efficiency gain over traditional research methods is significant."
“Blue J is an exciting technology because it enables the practitioner to remain in the driver’s seat of the analysis."
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"Thoughtful functions are included to encourage and facilitate deeper analysis, not to replace or reduce it. We’ll continue to find new and impactful ways to leverage the technology, which has benefited our clients and staff alike. At RSM we strive to be compelling to our clients and to be digital by embracing new technologies to fulfill that promise.”
"We wanted to have a tool that people were using at all staff levels."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
"We wanted something that lived up on their third screen - something that would be available and helpful to them every day. What we've found is it's been easy to get people to get into the habit of using Blue J because it helps people. Blue J allows us to quickly respond to client questions in a way that they can understand it, which helps us deal with the volume of client questions that come in. We were up and running very quickly with Blue J - within 5 minutes, our staff understood how this will be helpful, and the rest of the training program is refining prompting skills and building use cases and best practices."
